AURA SYSTEMS INC (Form: 10-K, Received: 09/18/2017 17:15:08)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

(Mark One)

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

For the fiscal year ended February 28, 2015

☐ 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

Former name, former address and former fiscal year, if changed since last report:

4000 Redondo Beach Ave.

Redondo Beach, CA 90278

Name of each exchange on which registered: None
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☐ No ☒

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “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	☐ (Do not check if a smaller reporting company)	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, 2015 the aggregate market value of the voting stock held by non-affiliates of the Registrant was $5,086,864. The aggregate market value has been computed by reference to the last sale price of the stock on August 31, 2015.

On August 30, 2017, the Registrant had 126,608,391 shares of common stock outstanding.

TABLE OF CONTENTS

PART I
	ITEM 1. BUSINESS	1
	ITEM 1A. RISK FACTORS	10
	ITEM 1B. UNRESOLVED STAFF COMMENTS	14
	ITEM 2. PROPERTIES	14
	ITEM 3. LEGAL PROCEEDINGS	15
	ITEM 4. MINE SAFETY DISCLOSURES	15

PART II
	ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES	16
	ITEM 6. SELECTED FINANCIAL DATA	16
	ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	17
	ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	24
	ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA	24
	ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE	24
	ITEM 9A. CONTROLS AND PROCEDURES	25
	ITEM 9B. OTHER INFORMATION	25

PART III
	ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE	26
	ITEM 11. EXECUTIVE COMPENSATION	29
	ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS	31
	ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE	33
	ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES	33

PART IV
	ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES	36
	ITEM 16. FORM 10-K SUMMARY	38
	SIGNATURES	39

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,” “forcasts,” “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 may 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:

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Our ability to generate positive cash flow from operations;

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Our ability to obtain additional financing to fund our operations;

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

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The impact of unfavorable results of legal proceedings;

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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;

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Our ability to compete effectively against competitors offering different technologies;

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Our business development and operating development;

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Our expectations of growth in demand for our products; and

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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 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, reference to “fiscal 2014” refers to the fiscal year ended February 28, 2014, reference to “fiscal 2013” refers to the fiscal year ended February 28, 2013 and reference to “fiscal 2018” refers to the fiscal year ending February 2018.

PART I

ITEM 1. BUSINESS

Introduction

The Company, a Delaware corporation, was founded in 1987. Prior to experiencing severe financial pressures that started in the second half of 2014 and which are further described below under “—Business Arrangements”, the Company designed, assembled, tested and sold our proprietary and patented Axial Flux induction machine (“AF”) known as the AuraGen ^® for industrial and commercial applications and the VIPER for military applications. Our patented system when applied as a generator uses the engine of a vehicle or any other prime mover to create mechanical energy and the AuraGen converts the mechanical energy to electric power. Our patented 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. Operations during the second half of fiscal 2016 were sporadic. During fiscal 2017, the Company suspended its engineering, manufacturing, sales, and marketing activities to focus on renegotiating numerous financial obligations with several Note holders.

Traditional induction machines are Radial Flux (“RF”) machines and are the workhorse of industry due to their robustness, attractive cost, and easy control. However, they are relatively heavy and bulky. Axial flux induction machines on the other hand, have all of the advantages of the radial flux machines, but with the advantage of higher energy density resulting in smaller, lighter machines 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. Modern techniques show that all of the historical objections for axial flux machines can be addressed with recent 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 expires 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 issues of fabrication difficulties and the high cost involved in manufacturing of the laminated stator cores were resolved years ago by Aura Systems using a technique involving punching the slots while rolling the steel. This approach creates a continuous punched steel ribbon at a cost that is lower than the traditional punched laminates because less material is wasted. The equipment required uses a closed loop control system that controls a precision step-motor and a punching press. Over the past 10 years, we have delivered thousands of units of our induction axial flux machines in the 5-16kW range and have not encountered technical issues that would appear to affect the use of the same techniques in any other size induction axial flux machines.

Many manufacturers of PM axial flux machines, as well as Aura Systems with its induction axial flux machines, have resolved the issues regarding difficulties in assembling the machine and maintaining a uniform air gap. Therefore this is no longer an issue.

Aura Systems Inc. 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.

As described above, Aura Systems developed the technology and manufacturing processes to overcome the traditional objections to axial flux machines. Once Aura Systems resolved the historical issues relating to the axial flux approach as described above, the next step was to develop a smart control system that provided for a total variable speed solution. A complete power generation system based on Aura’s axial flux generator and Aura’s unique smart controller is disclosed in Aura’s U.S. Patent 6,700,214 (March 2, 2004). Finally, Aura’s U.S. Patent 6,700,802 (March 2, 2004) disclosed a method where power from multi sources can be added to handle sudden power spikes such those that occur when a compressor, motor, pump, etcetera are turned on. In addition, patent 6,700,802 provides a very unique method (bi-directional Power supply) for uninterrupted seamless transition from generator power to battery pack power and back to generator power.

The AuraGen ^® /VIPER system is composed of three primary subsystems (i) the patented axial flux design 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 patented 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).

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) and in fiscal 2010 introduced the TanGen system that combines two 8,000 watts systems on a single output shaft (two rotors on a single shaft). The Company is currently developing a 30,000-watt system consisting of two rotors on a single shaft (each one with 15,000 watts’ capability). As described above, the focus is on mobile power applications and thus requires an interface kit to the prime mover. Many of our applications are such that the AuraGen/VIPER is driven directly from a truck or SUV engine. The Company now has configurations available for more than 90 different engine types, including a majority of models of General Motors and Ford, some Chrysler models and numerous other engine models made by International, Isuzu, Nissan, Hino (Toyota), Mitsubishi, Caterpillar, Detroit Diesel, Cummins, and Freightliner. In addition, the Company has interface kits for numerous model of military HMMWV, as well as other military vehicles. Also, starting in fiscal 2008, the AuraGen/VIPER was installed on a number of U.S. Navy boats and on a number of the U.S. Coast Guard 44 ft. patrol boats. In addition to the usage of the vehicle engine as the prime mover, the Company has also developed numerous Power-Take-Off (“PTO”) interface kits for many different vehicle platforms and is also working with a number of customers on integrating our AuraGen/VIPER power solution with stand-alone engines known as Auxiliary-Power-Unit (“APU”) to be used in emergency rescue and electric vehicle applications.

Since March 2017, the Company has started to reexamine the market and identified key areas upon which to initially focus as the Company plans to restart operations. A key element of our business plan is focused on all-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. The market for new20-k BTU/hr midsize trucks is for approximately 15,000 new trucks per year and a significant retrofit market of the existing over 100,000 operating systems across North America. The market for new 50-k BTU/hr trailers is approximately 40,000 new units per year and also a significant retrofit market for the over 400,000 operating systems in North America. Another key element is the acceptance of our mobile power solution in military applications around the globe. Our near-term focus is marketing efforts in the U.S., South Korea, Israel and China.

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, the Company suspended 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. Based on informal discussions with various customers and vendors, management believes that many of the canceled or terminated agreements could be reinstated once the Company commences operating again. In March 2017, the Company signed a joint venture agreement with a Chinese company to build, service and distribute the AuraGen patented products in China. The Chinese partner owns 51% of the joint venture and the Company owns 49%. The Chinese partner contributed approximately $9.75 million for facility, equipment, and working capital of the joint venture and the Company is required to contribute $250,000. The joint venture is required to purchase the rotor and control software from the Company.

The AuraGen ^® /VIPER

The AuraGen ^® is composed of three basic subsystems. The first subsystem is the AF 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.

Currently the Company has power solutions for three continuous power levels, (a) 5,000 watts AC/DC, (b) 8,000 watts AC/DC and (c) 16,000 watts AC/DC. 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 240 VAC and in some application 480 VAC. In addition, the power generated on all models can be partitioned to provide simultaneous AC and 14 or 28 volts of DC or only DC, if required by the user. 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, and (vii) provides programming of load prioritization and load shedding.

Mobile and Remote (not power grid connected) Power Industry

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 and electric vehicles. The military market place is also divided between mobile and stationary applications.

According to the U.S. Census Bureau, in 2007 the U.S. motor and generator industry, for larger than one horsepower applications, recorded more than $9.5 billion in sales ( U.S Census Bureau Industry Statistical Sampler).

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 C ⁴ I functions (command, control, communication, computers and information). Currently, most on board power is provided by 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 are 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.

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

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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 derated in the presence of harmonics in the loads and (v) require significant scheduled maintenance and service. Genset technology has been utilized since the 1950s.

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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.

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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.

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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 (200 ^o F) active cooling must be added, since the magnets are demagnetized at approximately 176 ^o F. There are other issues that require an active control system that will add and subtract magnetic field strength as the engine RPM increases. Currently, the vast majority of the magnets used for electric machines come from China.

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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 cost about $2,000 per kilowatt.

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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 . Over the last several years there have not been new significant developments in this industry.

Gensets AKA APU - Portable generators meet a 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 auxiliary power generation. There are 44 registered genset-manufacturing companies in the U.S. with many more through Asia and, particularly, within China.

High Output Alternators - There are many high output alternator manufacturers and the prices vary from hundreds to thousands of dollars per unit. Some well-known manufacturers include: Delco-Remy, Bosh, Nippon Densu, Hitachi, Mitsubishi, Prestolite, EMP and Neihoff. Alternators provide 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. The AuraGen/VIPER system (including mechanical linkages and belt) is over 80% efficient at the low RPM range and is approximately 75% efficient at the very 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 $500 per kilowatt plus the cost of a high output alternator ($650) and a good throttle controller ($250).

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 (200 ^o F+). In order to apply such devices for automotive applications one must add expensive and cumbersome active cooling since the magnets are demagnetized at approximately (176 ^o F). 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. A 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. In addition, in PM alternators as the machine size grows, the magnetic loses increase proportionally. Finally, PM machines are more expensive than induction machines.

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 cost about $1,500 per kilowatt.

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. When the system was tested in November 2006 the adaptive algorithm or table calculations were performed offline and then input to the controller.

The Symetron controller is a potential competitor to variable speed motor controllers provided by such companies as of ABB, or Baldor-Electric Co. The Symetron technology is not a new form of motor/generator.

There are a number of companies that advertise a “secret” approach for higher performance of inductive machines. Typically, these claims are not proven and are based on changing the winding connections from Y to D or D to Y.

Axco in Finland briefly introduced axial flux machines similar to Aura’s. However, Axco stopped its pursue of patent protection in the U.S. when they discovered Aura’s patents. Furthermore, one of Axco scientist cites Aura’s approach in his PhD dissertation. Axco business is currently focused on large permanent magnets applications mostly related to large windmills.

Evans electric in Australia has recently 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.

The economic and environmental benefits of the AuraGen solution are greatly amplified in transport refrigeration applications where a separate diesel engine is eliminated. An analysis of our solution for large refrigeration trucks (117,000 trucks across the nation) shows potential annual savings in excess of 26,000 tons of NMHC+NOx, 23,000 tons of CO and over to 1,400 tons of PM . The diesel fuel savings exceed 100,000,000 annual gallons . The above numbers are very conservative since they reflect: (i) the assumption that all refrigeration diesel engines already meet the Tier 4 EPA requirements and (ii) that there are no additional savings from idle reductions. Both assumptions are used as a lower bound for the anticipated savings.

Most of our competitors have 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 ^® aggressively.

The AuraGen ^® uses new 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.

Targeted Markets

It is only recently that the Company has started to reexamine and identify key markets upon which to initially focus as the Company plans to restart operations.

(i) A key element of our business plan is focused on All-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 of our mobile power solution for military applications around the globe.

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

Facilities, Manufacturing Process and Suppliers

As part of downsizing due to financial distress experienced by the Company as further described in “--Business Arrangements”, our current facilities consist of approximately 20,000 square feet in Stanton California and an additional storage facility for existing inventory. The Stanton facility is currently used for some assembly and testing of AuraGen/VIPER systems. The facility is rented on a month-to-month basis. The rent for the Stanton facility is $10,000 per month and the storage facility is additional $5,000 per month. The current Stanton facility is not sufficient to support the expected operations should the Company’s operations return to pre-2014 production levels. Accordingly, the Company is currently looking for a new facility of approximately 45,000 square feet that would be used for production, testing, and engineering for AuraGen/VIPER mobile power solution as well as needed office space for support staff. Prior to May 2015, we occupied a 69,000 square foot facility in Redondo Beach, California. The Redondo Beach facility was used for assembly and testing of products, as well as for general offices, engineering and warehousing. The rent for the Redondo Beach facility was approximately $60,000 per month.

As the Company is gearing up operations again, we need to renew relationships and contracts with our suppliers or locate suitable new suppliers for subassemblies and other components. Recently, the Company entered into discussions with several of its prior suppliers and is in the process of negotiating settlements of old payables and arranging new supply contracts.

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, to develop additional products and additional uses for existing products, to stay current with changes in vehicle manufacture and design and to maintain an ongoing advantage over potential competition. Our engineering, research and development costs for fiscal 2015 were approximately $0.8 million compared to approximately $1.3 million in fiscal 2014.

We stopped practically all research and development in the last two years due to severe cash shortfall, however we did redesign all the Electronic Control Unit (“ECU”) to the latest state of the art in power electronics and processors. It is expected that once the Company restarts operations, we will initially set a modest budget of $400,000 for research and development during the first year after restart. We believe that ongoing research and development is important to the success of our product in order to utilize the most recent technology, to develop additional products and additional uses for existing products, to stay current with changes in vehicle manufacture and design and to maintain an ongoing advantage over potential competitors.

Patents and Intellectual Property

Our intellectual property portfolio consists of trademarks, proprietary know-how 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; with expiration dates in 2018, 2020, 2024 and 2024 respectively. A provisional patent for a water-cooled AuraGen was granted in March 2013. Application 61/516,071 was filed January 2012 and claims allowed in March 2015, with an expiration date of March 2032.

The following applications are pending: Application 13/849,464 filed in March 2013; and Application 13/781,749 filed in March 2013.

Induction Machine

The basic patent covers a new form of induction machine with superior performance in a much smaller size than conventional machines. The solid cast rotor, the shaped magnetic field, the secondary conduction path through the steel and the axial magnetic orientations are key components of this innovation.

Control System

This system separates the power generation from the power delivery by introducing a 400 VDC buss. For each cycle of each phase, part of the cycle power is drawn from the bus to run the electronics and energize the coils, while during the other part of the cycle, power is delivered to charge up the buss. The control system must balance all the timing to effect zero voltage change to the buss under dynamic variations of frequency and loads. The ability to optimize in real time the slip frequency is a key innovation in motor and generator control for variable speed, variable frequency, and variable load systems.

Bi-Directional Power Supply (“BDP”)

The patented ICS system developed by Aura provides a new capability in power systems. The BDP allows a system to use multiple sources of power simultaneously. It is a key component in providing the ability to deliver both AC and DC power simultaneously, as well as the ability to handle large power surges without the need for a throttle controller.

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, other than our CEO Mr. Gagerman, the Company has no employees. However there are four independent contractors two of which are working to support the outside independent auditor, one who is working on redesigning the Electronic Control Unit for the AuraGen/VIPER and one who is helping dealing with the JV Agreement, and other technical matters. The independent contractors are used on an as need basis.

Significant Customers

During the year ended February 28, 2015, we conducted business with two major customers whose sales comprised 31.6%, and 16.4% of net sales, respectively. As of February 28, 2014, these customers accounted for 39.5% of net accounts receivable. During the year ended February 28, 2014, we conducted business with five major customers whose sales comprised 27.1%, 25.8%, 8.9%, 7.8% and 5.4% of net sales, respectively. As of February 28, 2014, these customers accounted for 97.7% of net accounts receivable.

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 and deliverable during fiscal 2018 to a joint venture partner to support their marketing efforts as the joint venture facilities are being readied. Management believes that once the Company is operating again, a significant backlog will develop. No assurances, however, can be given how long it will take the Company, if at all, to develop a significant backlog. For additional information, see “Certain Subsequent Events—China Joint Venture.”

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.

Certain Subsequent Events

Subsequent to the end of fiscal 2017, certain material developments have occurred relating to the business of the Company.

China Joint Venture - On January 27, 2017, we entered into a Sino-Foreign Cooperative Joint Venture Agreement (the “JV Agreement”) with Jiangsu AoLunTe Electrical Machinery Industrial Co., Ltd. (“AoLunTe”) pursuant to which the parties will establish a joint venture company (the “JV”) for the purposes of manufacturing and distributing our patented mobile power solution in the Peoples Republic of China (“PRC”). The business of the JV is limited to the manufacturing, marketing and sale, repair and maintenance of selected mobile power products for commercial and military use in the PRC only.

Pursuant to the JV Agreement, AoLunTe will own 51% of the JV and we will own 49%, and profits will be distributed based on the ownership interest of each party. AoLunTe will contribute the RMB equivalent of $500,000 US dollars in cash within 30 days after the Establishment Date (as defined), as well as tangible and intangible assets (including but not limited to equipment, land and facilities of the site for the JV) not later than 180 days after the Establishment Date valued at 9.25 million in US Dollars. The “Establishment Date” is the first business day after the JV’s receipt of the certificate of approval issued by the PRC governmental authority responsible for approving the JV Agreement and the Articles of Association of the JV. Such approval was granted in March 2017. Pursuant to the JV Agreement, we are required to contribute the RMB equivalent of $250,000 in US dollars within 45 days after the Establishment Date, as well as an exclusive, non-assignable, and royalty-free license in the PRC to use our intellectual property. We have made the required payment.

The JV shall be governed by a Board of Directors, consisting of three directors nominated by AoLunTe and three directors nominated by us. All “Major Decisions” of the Board, which are specified in a schedule to the JV Agreement, require the vote of two-thirds of the directors, including at least one director nominated by us and one director nominated by AoLunTe. All other decisions of the Board require the approval of a simple majority of directors. A general manager appointed by the Board upon the nomination by AoLunTe shall be responsible for the day-to-day operation and management of the JV, while quality control as well as the financial controller are to be managed by individuals to be appointed by the Board upon our nomination, under the supervision of the Board.

The term of the JV Agreement is 30 years from the Establishment Date, subject to extension by mutual written agreement of the parties. The JV Agreement may be terminated sooner by the written agreement of the parties or in the event of certain specified events, including without limitation a material breach of the JV Agreement which is not remedied (if capable of remedy) within 30 days after written notice of such breach is provided to the other party.

Pursuant to the JV Agreement, AoLunTe will purchase from us $1,250,000 of product, payable in four payments after the Establishment Date in the amounts of $500,000, $250,000, $250,000, and $250,000. The fourth payment will be offset against a prior advance for products paid by AoLunTe to us.

AoLunTe is required by the JV Agreement to purchase 10 million shares of our Common Stock (such number being prior to a contemplated 1-for-7 reverse stock split by us, the “Reverse Split”) for an aggregate of $2,000,000 pursuant to a Securities Purchase Agreement, the form of which is attached to the JV Agreement. Pursuant to the terms of the Securities Purchase Agreement, the first installment of $1,000,000 was paid into a mutually-agreed escrow account and subsequently released from escrow in March 2017. The second installment of $1,000,000 was also paid into a mutually-agreed escrow account and is scheduled to be released to us following approval by our stockholders of resolutions electing a new board of directors and approving an amendment to our Certificate of Incorporation to effect the above-referenced 1-for-7 reverse stock split of our Common Stock. The shares of Common Stock to be sold to AoLunTe are being sold pursuant to Regulation S under the Securities Act of 1933, as amended, and will not be offered or sold to any U.S. person or for the account or benefit of any U.S. person prior to the end of the restricted period provided by Regulation S and any other applicable law.

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 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 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 2017, the Company suspended its engineering, manufacturing, sales, and marketing activities to focus on renegotiating numerous financial obligations. 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, the Company suspended its engineering, manufacturing, sales, and marketing activities to focus on renegotiating numerous financial obligations. 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 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 anticipate that 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.

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. 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 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. 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 are currently party to litigation with one of our directors relating to approximately $5.4 million and approximately 22 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 effect our stock price.

The Company is presently engaged in a dispute with one of its directors, Robert Kopple, relating to approximately $5.4 million and approximately 22 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 other 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®/VIPER 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.

Many 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). Many 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 early 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.

If we are successful in executing our business plan, we expect our business to grow. Our failure to efficiently manage our growth could have an adverse affect 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 have a limited capability to manufacture most of the AuraGen®/VIPER components on a commercial scale. Therefore, we rely extensively on subcontracts 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 have written agreements with our 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®/VIPER 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®/VIPER. There is no assurance that our suppliers can or will supply the components to us on favorable terms or at all.

In order to meet demand for AuraGen®/VIPER systems, we will need to renew contracts with our prior manufacturers and suppliers or locate other suitable manufacturers and suppliers. 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. We do not currently have the required funds to acquire such tooling 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 we may not be able to expand our product line to meet industrial and commercial needs.

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, and increasing interest rates, may continue to cause inconsistent and unpredictable customer spending while increasing our own input costs. In addition, this downturn has had, and may continue to have, an unprecedented negative impact on the global credit markets. Credit has tightened significantly in the last several months, 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 entering into 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.

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 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.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None

ITEM 2. PROPERTIES

As part of downsizing due to financial distress experienced by the Company as further described in “Business—Business Arrangements”, our current facilities consist of approximately 20,000 square feet in Stanton California and an additional storage facility in Canyon Country, California for existing inventory. The Stanton facility is currently used for some assembly and testing of AuraGen/VIPER systems. The facility is rented on a month-to-month basis. The rent for the Stanton facility is $10,000 per month and the storage facility is additional $5,000 per month. The current Stanton facility is not sufficient to support the expected operations should the Company’s operations return to pre-2014 production levels. Accordingly, the Company is currently looking for a new facility of approximately 45,000 square feet that would be used for production, testing, and engineering all related to the AuraGen/VIPER mobile power solution as well as needed office space for support staff. Prior to the middle of 2015, we occupied a 69,000 square foot facility in Redondo Beach, California. The Redondo Beach facility was used for assembly and testing using components that are produced by various suppliers as well as for general offices, engineering and warehousing. The rent for the Redondo Beach facility was approximately $60,000 per month.

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 2016, the Company was sued by a former employee for a work-related injury. The plaintiff is seeking $45,000. The Company has made the plaintiff a settlement offer which, as of the date of this filing, has not been accepted.

In November 2016, the Company was sued by a former customer for approximately $111,712 relating to an alleged failure by the Company to partially deliver against an advanced payment. In connection with its claims, the plaintiff has asserted that by virtue of the Company’s failure to fully deliver upon the contracted order, the plaintiff has obtained a perpetual worldwide license to utilize the Company’s actuator technology. The Company disputes the plaintiff’s claims and believes that it holds various claims against the plaintiff. In April 2017, the plaintiff’s action was involuntarily dismissed by the court although plaintiff sought to have the dismissal set aside on the grounds of attorney error. In June 2017, the court granted plaintiff’s motion and the Company intends to oppose this action and file a counterclaim.

Subsequent to year end, the Company’s former COO has been 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 but granted plaintiffs leave to amend. In response to the plaintiffs’ second amended complaint, both the Company and Mr. Gagerman intend to further demurrer seeking dismissal of this action.

In June 2015, the landlord of the Compan’y primary facility in Redondo Beach, California initiated litigation against us seeking to terminate the Company’s lease and require the Company to vacate the premises prior to the scheduled lease end. As a result of that litigation, the Company was forced to vacate its primary facility and relocate to its present facility in Stanton, California. To date, no action seeking damages or any other amount has been filed against the Company by the landlord, nor does the Company believe it has any further liability to the landlord.

The Company is presently engaged in a dispute with one of its directors, Robert Kopple, relating to approximately $5.4 million and approximately 22 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 Directors Mr. Gagerman and Mr. Diaz-Verson together with former Directors Mr. Breslow and Mr. Howsmon in connection with these allegations. The Company believes that it has valid defenses in these matters and 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.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

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 OTC Bulletin Board 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. We had 6,279 stockholders of record as of August 21, 2017.

Period	High		Low
Fiscal 2014
First Quarter ended May 31, 2013	$	0.49	$	0.31
Second Quarter ended August 31, 2013	$	0.38	$	0.15
Third Quarter ended November 30, 2013	$	0.30	$	0.18
Fourth Quarter ended February 28, 2014	$	0.25	$	0.12

Fiscal 2015
First Quarter ended May 31, 2014	$	0.22	$	0.05
Second Quarter ended August 31, 2014	$	0.45	$	0.085
Third Quarter ended November 30, 2014	$	0.32	$	0.08
Fourth Quarter ended February 28, 2015	$	0.18	$	0.04

Fiscal 2016
First Quarter ended May 31, 2015	$	0.13	$	0.045
Second Quarter ended August 31, 2015	$	0.07	$	0.034
Third Quarter ended November 30, 2015	$	0.078	$	0.0039
Fourth Quarter ended February 29, 2016	$	0.18	$	0.0382

Fiscal 2017
First Quarter ended May 31, 2016	$	0.19	$	0.051
Second Quarter ended August 31, 2016	$	0.12	$	0.055
Third Quarter ended November 30, 2016	$	0.10	$	0.035
Fourth Quarter ended February 28, 2017	$	0.21	$	0.015

On August 30, 2017, the reported closing sales price for our common stock was $0.08

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 year ended February 28, 2015, we issued 2,800,000 shares of Common Stock for services rendered valued at $420,000, 17,334,533 shares of common stock upon the exercise of warrants for proceeds of $1,773,453 and we sold 3,992,000 shares of common stock for proceeds of $631,460. 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 2015.

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 many 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

The Company, a Delaware corporation, was founded in 1987. Prior to experiencing severe financial pressures that started in the second half of fiscal 2015, the Company designed, assembled, tested and sold our proprietary and patented Axial Flux induction machine (“AF”) known as the AuraGen ^® for industrial and commercial applications and the VIPER for military applications.

In fiscal 2017, the Company has been successful in restructuring its secured debt and has reached an agreement with its secured creditors whereby all defaults and penalties have been waived and 80% of the secured debt will be converted into shares of the Company’s common stock as soon as the Company holds an annual meeting of stockholders to elect a new board of directors. The balance (the remaining 20%), is to be paid to the secured creditors in cash if the Company raises at least $4.0 million in proceeds through new equity offering. Upon conversion, the converting secured creditors will receive approximately 3.9 million new common shares in exchange for approximately $5.73 million of converting debt.

The Company has also been successful in restructuring approximately $27.5 million of unsecured debt. Various unsecured creditors have agreed to waive all defaults and penalties, to forgive an aggregate of approximately $9.3 million in debt, and convert an aggregate of approximately $15.2 million of unsecured debt into approximately 10.2 million common shares. As of the date of this filing, Robert Kopple, the Company’s 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 million on terms significantly preferable to other similarly-situated unsecured creditors. Mr. Kopple has not accepted the Company’s offer to restructure this debt to-date.

Reverse Stock Split – The Company intends to file a proxy statement and hold an annual meeting of stockholders during 2017 seeking, among other things, stockholder approval of the Reverse Split. Currently the aggregate number of shares of our common stock outstanding, when combined with the number of shares of our common stock issuable upon the exercise of outstanding warrants or options or upon the conversion of convertible debt exceeds the authorized number of shares of our common stock provided for in our certificate of incorporation. Since the Reverse Split would not affect the authorized number of shares of our common stock, all outstanding warrants, options and convertible debt could be exercised or converted, as applicable, and we could also issue additional shares of common stock in the future.

The Company is planning to restart operations with a new board of directors and a new management team as soon as the Company holds its stockholders meeting to elect the new board and approve the Reverse Split. The Company has a contractual agreement for $1.25 million of orders for the AuraGen/VIPER product to fill during fiscal 2018 and anticipates that is may receive significant additional orders once the Company is back in operation.

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

(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 engineering support for the sales activities described above. The engineering support consists of the introduction of new features for our AuraGen/VIPER 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 engineering, manufacturing, sales, and marketing activities to focus on renegotiating numerous financial obligations in fiscal 2017, we expect modest engineering activities budgeted at approximately $400,000 during the fiscal 2018 year.

(iii) The third component of our business model is customer service. In fiscal 2018, we expect 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.

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.

Revenue Recognition

The Company’s revenue recognition policies are in compliance with Staff accounting bulletin (SAB) 104. Sales revenue is recognized at the date of shipment to customers when a formal arrangement exists, the price is fixed or determinable, the delivery is completed, no other significant obligations of the Company exist and collect-ability is reasonably assured. Payments received before all of the relevant criteria for revenue recognition are satisfied are recorded as unearned revenue.

We recognize revenue for product sales upon shipment and when title is transferred to the customer. When Aura performs the installation of the product, revenue and cost of sales are recognized when the installation is complete. We have in the past earned a portion of our revenues from license fees and recorded those fees as income when we fulfilled our obligations under the particular agreement.

Terms of our sales generally provide for Shipment from our facilities to customers free on board (FOB) point of shipment. Title passes to customers at the time the products leave our warehouse.

The Company does not offer a general right of return on any of its sales and considers all sales as final. While some sales are for evaluative purposes, such sales are deemed final by the Company. The customers’ evaluation is for such customers to determine if there is a benefit to them to outfit additional vehicles in their fleets.

The only potential post-delivery obligation the Company might have is for the installation of the unit. However, the unit is typically delivered at the time of installation, and the billing is done when the installation is complete. The Company does not utilize bill and hold. The Company does provide customers with a warranty; however, due to the low sales volume to date, the amount has not been material and is expensed as incurred.

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 not operated and therefore has not produced product since late 2015. As a result, while the Company believes that a significant portion of the inventory has value, we are unable to substantiate it's demand and market value and as a result have elected to reserve it in its entirety as of February 28, 2015.

Valuation of Long-Lived Assets

Long-lived assets, consisting primarily of property and equipment, and patents and trademarks, comprise a small portion of our total assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying values may not be recoverable. Recoverability of assets is measured by a comparison of the carrying value of an asset to the future net cash flows expected to be generated by those assets. Net cash flows are estimated based on expectations as to the realize-ability of the asset. Factors that could trigger a review include significant changes in the manner of an asset's use or our overall strategy.

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.

Research and Development

Research and development costs are expensed as incurred.

Specific asset categories are treated as follows :

Accounts Receivable: We record an allowance for doubtful accounts based on management's 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.

Patents and trademarks: As our business depends on using new technology to create new products, impairments in patents can be triggered by changed expectations regarding the foreseeable commercial production of products underlying such patents.

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

Fiscal 2015 compared to Fiscal 2014

Revenues

Net revenues in fiscal 2015 decreased $1,161,541 to $1,155,811 from $2,317,352 in fiscal 2014, a decrease of 50%. The decrease is attributable to a lack of financial resources causing us to substantially curtail activities.

Cost of Goods

Cost of goods sold in fiscal 2015 decreased $418,843 to $490,379 from $909,222 in fiscal 2014, a decrease of 46% The decrease is attributable to the curtailment of our activities as noted above.

Engineering, Research and Development

Engineering, research and development costs decreased $449,484 to $ 845,135 in fiscal 2015 from $1,294,619 in fiscal 2014. While we had planned for an increase in engineering, research and development in the current fiscal year, the lack of resources noted above prevented us from implementing our plan.

Selling, General and Administrative Expense

Selling, general and administrative decreased $201,064 to $8,898,166 in fiscal 2015 from $9,099,230 in fiscal 2014. The decrease is due to the curtailment of activities as noted above.

Non-Operating Income and Expense

Net interest expense decreased $776,193 to $3,214,963 in fiscal 2015 from $3,991,156 in fiscal 2014.

Net Income/Loss

The decrease in our net loss of $436,906 to $12,287,252 in fiscal 2015 from $12,724,158 in fiscal 2014 is primarily a result of the curtailment of corporate activities as noted above.

Fiscal 2014 compared to Fiscal 2013

Revenues

Net revenues in fiscal 2014 decreased $400,094 to $2,317,352 from $2,717,446 in fiscal 2011, a decrease of 14%. With the small customer base, we have our sales can vary substantially from period to period.

Cost of Goods

Cost of goods sold in fiscal 2014 decreased $3,002,620 to $909,222 from $3,911,842 in fiscal 2013. The decrease is attributable to the curtailment of our activities as noted above.

Research and Development

Engineering, research and development costs decreased $19,197 to $1,294,619 in fiscal 2014 from $1,313,816 in fiscal 2013. The decrease is primarily attributable to a decrease in the number of employees resulting in lower payroll and payroll related costs.

Selling, General and Administrative Expense

Selling, general and administrative expenses decreased $4,106,713 to $8,916,895 in fiscal 2014 from $13,023,608 in fiscal 2013. The decrease is primarily due to a decrease in stock option compensation expense of $2,537,566, a decrease in salaries of approximately $272,000 due to decreased personnel and a decrease in legal expense of approximately $1 million primarily associated with our sale of convertible debt in the prior year third quarter. Stock option compensation expense included in selling, general and administrative expense decreased to $430,456 in fiscal 2014 from $2,968,022 in fiscal 2013, a decrease of $2,537,566, as a result of the non-cash charges for the issuance of employee stock options.

Non-Operating Income and Expenses

Net interest expense increased to $3,991,156 in fiscal 2014 from $3,874,328 in fiscal 2013, an increase of $112,828 due to our increased debt levels. Other income decreased to $49,607 in fiscal 2014 from $2,114,089 in fiscal 2013 due to a legal settlement in the prior year of $2,095,000.

Net Income/Loss

Our net loss in fiscal 2014 decreased to $12,724,158 from $17,291,464 in fiscal 2013, a decrease of $4,567,306. The decrease is primarily a result of the decreased stock option and warrant expense of $2,537,566 as noted above, a decrease in legal expenses of approximately $1 million associated with the legal settlement in the prior year, partially offset by the income from the legal settlement of $2,095,000 in the prior year and the increase in the inventory reserve of approximately $2.4 million.

Liquidity and Capital Resources

In fiscal 2015, we incurred losses of approximately $12.3 million and had negative cash flows from operations of $4.4 million. As of February 28, 2015, the total amount owing to Mr. Kopple, a Board member, is $4,387,585 plus accrued interest of $613,546. We also owe $14.2 million plus accrued interest of $6.22 million to Mr. Breslow, another board member. If the Board members were to demand repayment, we do not currently have the resources to make the payment.

At February 28, 2015, we had cash of approximately $35,000, compared to cash of approximately $41,000 at February 28, 2014. Working capital at February 28, 2015 was a negative $34.7 million as compared to a negative $29.1 million at the end of the prior fiscal year. Accrued expenses increased $1.1 million due to an increase of approximately $0.4 million in unpaid salaries from the prior year end and an increase in accrued interest of approximately $0.7 million. At February 28, 2015, we had accounts receivable, net of allowance for doubtful accounts, of approximately $59,000 compared to approximately $156,000 at February 28, 2014. In fiscal 2015 we made no acquisitions of property and equipment.

During the year ended February 28, 2015, we issued 2,800,000 shares of common stock for services rendered valued at $420,000, 17,334,533 shares of common stock upon the exercise of warrants for proceeds of $1,773,453, and we sold 3,992,000 shares of common stock for proceeds of $631,460.

In the year ended February 28, 2014, $1,127,002 of notes payable and accrued interest were converted into 2,660,225 shares of common stock, 1,833,333 shares of common stock and 916,666 7-year warrants to purchase our stock with an exercise price of $0.75 were issued to re-price a prior issuance of stock in December 2012, 4,254,250 shares of common stock were issued in exchange for the cancellation of warrants to purchase 5,005,000 shares of common stock at an exercise price of $0.75 per share which would have expired on September 22, 2016, and 3,562,118 shares of common stock were issued for services valued at $974,726.

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 require additional debt or equity financing to fund ongoing operations. We have binding commitments from third parties to provide $2.1 million in financing in the form of equity as soon as the stockholders meeting is held. We cannot assure you that additional financing will be available at the times or in the amounts required. Based on a cash flow analysis performed by management, we estimate that the Company will need an additional $2.5 million to support the Company’s operations for the fiscal year ending February 28, 2018. 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.

Amendment to 2013 Securities Purchase Agreement – On January 30, 2017, the Company entered into an agreement with five of our secured creditors (the “Signatories”), pursuant to which a Securities Purchase Agreement dated May 6, 2013 (the “2013 Purchase Agreement”) among the Company, the Signatories, and two other parties was amended (the “Amended Agreement”).

Pursuant to the 2013 Purchase Agreement, we offered and sold convertible notes (the “Original Notes”) and warrants (the “Original Warrants”) to the Signatories and the two other parties (collectively, the “Buyers”). The Buyers purchased an aggregate of approximately $4.9 million principal amount of convertible notes and warrants to purchase shares of common stock. As part of the 2013 transaction, we entered into a security agreement dated on or about May 7, 2013 (the “Original Security Agreement”) with the Buyers pursuant to which the Buyers were granted a security interest in all of Company’s assets except for its patents and other intellectual properties in order to secure performance of the convertible notes.

The 2013 Purchase Agreement, as well as the related transaction documents can be amended by a written instrument signed by the Company and those Buyers holding or having the right to acquire at least 75% of the shares of Company’s common stock issuable upon conversion of the convertible notes and exercise of the warrants and any such amendment is binding equally on all Buyers. The Amended Agreement amends the 2013 Purchase Agreement and the Original Security Agreement, replaces the convertible notes with “Amended Notes” and replaces the warrants with “Amended Warrants.” Pursuant to the Amended Agreement, the Company is obligated to file with the SEC a preliminary proxy statement for a stockholders meeting at which the Company will seek stockholder approval of resolutions to (i) elect a new board of at least five directors, (ii) approve a reverse stock split of up to 1-for-7 (the “Reverse Split”), and (iii) if, and to the extent required by applicable law, to approve the issuances granted to the Buyers under the Amended Agreement. The Company is obligated to use its best efforts to solicit stockholder approval of these resolutions, and must hold the stockholder meeting promptly following the mailing of the definitive proxy statement. In addition, the Amendment waives any and all events of default under the 2013 Purchase Agreement and related transaction documents existing on or prior to January 30, 2017 and amends the defaults and remedies section of the 2013 Purchase Agreement.

The Amended Notes provide that all accrued and unpaid interest on the Original Notes through October 31, 2016 be added to the principal amount of the Amended Notes. The Amended Notes bear interest at the rate of 0% until May 1, 2017 and 5% per annum thereafter, subject to reduction to comply with applicable law, and mature in 60 months from the effective date of the Reverse Split. Upon certain financings, the Company is obligated to make a payment to the holders of the Amended Notes in the amount of 20% of the outstanding Notes. Immediately upon the effectiveness of the Reverse Split, there shall be a mandatory conversion of 80% of the then-unpaid principal of and all of the then accrued but unpaid interest on the Amended Notes. After the effectiveness of the Reverse Split, and so long as any portion of the Amended Notes are outstanding, the holders thereof may voluntarily convert the unpaid principal and interest thereon into the Company’s common stock at the conversion price of $1.40 per share.

The Signatories hold or have the right to acquire at least 97% of the shares of Company’s common stock issuable upon conversion of the Original Notes and exercise of the Original Warrants. Two secured creditors, who together hold or have the right to acquire less than 3% of the Company’s common stock issuable upon conversion of the Original Notes and exercise of the Original Warrants, did not sign the amendment and have named the Company and the Company’s Chief Executive Officer among several defendants in a lawsuit demanding repayment of loans totaling $125,000 plus accrued interest and exemplary damages. However, in that secured creditors holding in excess of 97% of the shares of Company’s common stock issuable upon conversion of the Original Notes and exercise of the Original Warrants under the 2013 Purchase Agreement have executed the amendment, the 2013 Purchase Agreement provides that the Amendment is binding on all of the secured creditors, including the two plaintiffs in the lawsuit. Management believes that the two plaintiffs have no valid claim against the Company or our Chief Executive Officer. In March 2017, plaintiffs moved for partial summary adjudication against the Company and our Chief Executive Officer; however, the Court denied plaintiffs’ motion. Both the Company and Mr. Gagerman have filed demurrers seeking dismissal of this action, which remain pending at this time. See “Item 3. Legal Proceedings” above.

Establishment of the Special Committee of the Board - In September 2016, our Board of Directors appointed a special committee comprised of disinterested directors to negotiate with Mr. Breslow and Mr. Kopple, who at the time were both interested board members, in an effort to reach a settlement on the obligations that Messrs. Breslow and Kopple claim are due to them, as discussed in more detail below. The Special Committee was granted full power and authority to act in the name of the entire Board in negotiating with Mssrs. Breslow and Kopple in the best interest, and for the benefit of, the Company’s stockholders, and in approving (or rejecting) the terms of any proposed transactions with these individuals.

Breslow Debt Refinancing Agreement - Warren Breslow served as a director of the Company from 2006 to 2017. He resigned his position on our board in March 2017. During the period from 2006 through 2016, Mr. Breslow and his affiliates made various temporary advances to the Company of $15,930,041 aggregate amount advanced over the years (the “Original Advances”). Interest on the Original Advances was at a rate of 10% per annum. As of January 24, 2017, there was an outstanding balance of $23,603,852 which represents outstanding principal in the amount of $14,930,041 together with accrued and unpaid interest in the amount of $8,673,811.

On January 24, 2017, the Special Committee approved, and the Company entered into, a Debt Refinancing Agreement (the “Breslow Refinancing Agreement”) with Warren Breslow and the Survivor’s Trust under the Warren L. Breslow Trust (collectively, the “Breslow Parties”), and issued an unsecured convertible promissory note (the “Breslow Note”). At the time of the Original Advances and the entering into of the Breslow Refinancing Agreement and at all times in between, Breslow was a director of the Company and, in addition, beneficially owns approximately 6% of Company’s common stock. Mr. Breslow is also a trustee of the Survivor’s Trust under the Warren L. Breslow Trust.

Pursuant to the Breslow Refinancing Agreement, the parties agreed that, as of the date thereof, the Company owed the Breslow Parties outstanding principal in the amount of $14,930,041, together with accrued and unpaid interest in the amount of $8,673,811, or a total of $23,603,852.

Pursuant to the Breslow Refinancing Agreement, the Breslow Parties have canceled and forgiven all accrued interest through the date of the Breslow Refinancing Agreement, have waived all existing events of default relating to the outstanding indebtedness, and have agreed that all instruments or other agreements evidencing or pertaining to the outstanding indebtedness shall be cancelled and shall be superseded and replaced in their entirety by a new promissory note (the “New Breslow Note”) issued by the Company concurrently with, and as a condition of, the Breslow Refinancing Agreement. The New Breslow Note was issued in the principal amount of $14,930,041 (the “Restructured Principal”), bears interest on the Restructured Principal at a rate equal to 0% for the first six months, and 5% per annum thereafter. However, in the event of an event of default (as defined in the New Breslow) Note, the interest rate shall become 18% per annum. The entire unpaid balance of the Note is due on the 60 ^th month anniversary of the date of issuance, and may be prepaid or redeemed in whole or in part without premium or penalty. With certain exceptions, if an event of default occurs and is continuing, the holder of the New Breslow Note may, without notice, declare the outstanding Restructured Principal and accrued and unpaid interest thereon to be immediately due and payable.

If stockholder approval of the Reverse Split and, if required, the transactions with the Breslow Parties, are not obtained within twelve months after the date of the Breslow Refinancing Agreement, the Breslow Refinancing Agreement and the New Breslow Note shall be rescinded and shall be of no further force or effect; provided however, that if the Breslow Parties fail to vote all of the voting securities of the Company beneficially owned by them in favor of such proposals such rescission will not apply.

Immediately upon the Reverse Split becoming effective, $11,930,041 of the Restructured Principal shall automatically be converted into 7,948,097 shares of the Company’s common stock. In addition, at any time after the effective date of the Reverse Split, and so long as any portion of the New Breslow Note remains outstanding, the holder thereof shall be entitled to convert any portion thereof then outstanding (together with accrued and unpaid interest) into shares of our common stock, at a conversion price of $1.40 per share, subject to adjustment from time to time in the event of any stock split, reverse stock split or similar subdivision or combination, other than the Reverse Split. To date, the shareholders have not approved the Reverse Stock Split.

Kopple Debt - Robert Kopple, who has been a director of the Company since September 2013, claims that the Company owes him and certain affiliated parties an aggregate of approximately $3.46 million in principal and interest, in excess of $1.57 million in accrued interest, and warrants to purchase 22,917,200 shares of our common stock at a price of $0.10 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. Mr. Kopple has served as Vice Chairman of the Board since his appointment in 2013.

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 $2,915,206 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 5.8 million shares of our common stock at an exercise price of $0.10 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 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 2,915,206 shares of our common stock, up to a maximum aggregate of approximately 17.5 million shares of our common stock, at $0.10 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.

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 - During the period from 2013 through 2015, a number of investors made various temporary advances to the Company in the aggregate amount of $3,273,057 (the “Original Advances”). Interest on the Original Advances was at a rate of 10% per annum. As of February 28, 2017, there was an outstanding balance of $3,940,444 which represents outstanding principal in the amount of $3,273,057 together with accrued and unpaid interest in the amount of $667,387. Subsequent to fiscal year end, the Company entered into several Debt Refinancing Agreements (collectively, the “Refinancing Agreements”) with debt holders holding $2,811,520 outstanding principal, plus accrued interest in the amount of $612,888, or a total outstanding obligation in the amount of $3,424,408. The Refinancing Agreements waive all events of default, cancel and forgive all accrued interest and provide for new five-year 5% convertible notes (the “Refinancing Notes”) in the aggregate principal amount of $2,811,520, with no interest for first six months and 5% per year thereafter. Upon the approval of the Reverse Split by the stockholders the Refinancing Notes will be converted into 1,940,415 shares of our common stock. The Refinancing Notes also contain various default provisions related to the timely payment of the principal and interest when due, and in case of the Company filing for bankruptcy protection. The default provisions call for default interest rate of 18% per annum and acceleration of the Notes.

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

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, 2015.

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.

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. For the last 2 fiscal years, these controls and procedures were insufficient 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 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 these controls and procedures were ineffective for the last 3 fiscal years 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 were no changes in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended February 28, 2015, 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 29, 2016. 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, due to the material weaknesses identified below, the Company’s internal control over financial reporting was ineffective as of February 28, 2015.

A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements would not be prevented or detected on a timely basis. The specific material weaknesses identified by our management relate to limited resources and inadequate number of personnel in our accounting and financial reporting group due to insufficient capital to maintain such resources. Management has determined that our internal audit function is also significantly deficient due to insufficient resources to perform internal audit functions. This was further evidenced by our inability to timely file our annual reports on Form 10-K for the fiscal years ended February 28, 2015, and February 29, 2016 and our quarterly reports on Form 10-Q for the fiscal quarters ended May 31, 2015, August 31, 2015, November 30, 2015, May 31, 2016, August 31 2016, November 30, 2016 and May 31, 2017.

Management plans to remediate these weaknesses by prioritizing the allocation of financial and personnel resources to ensure that the Company’s accounting and financial reporting groups are sufficiently able to effectuate information requiring disclosure being recorded, processed, summarized and reported within the time periods specified by the SEC’s rules and forms. Since February 28, 2017, the Company has engaged a registered public accounting firm to complete the required audit of the Company’s financial statements and is in the process of filing all outstanding periodic reports with the SEC.

ITEM 9B. OTHER INFORMATION

None

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors and Executive Officers

The following table sets forth the names, ages and offices of all of our directors and management. 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	74	Chief Executive Officer, Chief Financial Officer, and Chairman of the Board of Directors

Warren Breslow*	74	Director, Chairman of the Audit Committee, Member of the Nominating Committee and Compensation Committee

Salvador Diaz-Verson, Jr.	61	Director, Chairman of the Compensation Committee, Member of the Audit Committee and Nominating Committee

Robert Kopple*	72	Director

Mr. Breslow resigned as a director in March 2017

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

Melvin Gagerman . Mr. Gagerman is a CPA and has been a director and our Chief Executive Officer and Chief Financial Officer since we emerged from Chapter 11 proceedings on January 31, 2006. As Chief Executive Officer Mr. Gagerman formulates policies, defines our values, directs the operations of the business and defines our corporate culture. He is also responsible for overseeing our other executive officers. 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. As the Chairman of the Board, Mr. Gagerman’s background and experience provides the Board with a solid understanding of the business issues and financial planning and execution required by the business. Mr. Gagerman is currently serving as our Chief Financial Officer while we search for a permanent candidate for that position.

Warren Breslow . Mr. Breslow is a CPA and has been a director and Chairman of the Audit Committee since we emerged from Chapter 11 bankruptcy proceedings on January 31, 2006. Mr. Breslow is the General Partner and Chief Financial Officer of Goldrich & Kest Industries (“G & K Industries”). He joined G & K Industries in 1972 as controller and assumed his current position as General Partner and Chief Financial Officer in 1974. As General Partner and Chief Financial Officer of G & K Industries, Mr. Breslow oversees the financial aspects of its construction activity, as well as its management operations and information systems center. He is also the past president and a lifetime member of the board of directors of the Stephen S. Wise Temple, and supports numerous charitable and civic organizations. Prior to his association with G & K Industries, Mr. Breslow was a manager with the international accounting firm of Laventhol & Horwath. Mr. Breslow resigned from the Board of Directors in March 2017.

Salvador Diaz-Verson, Jr . Mr. Diaz-Verson has served as a director since June 2007. He previously served as one of our directors from 1997-2005. Mr. Diaz-Verson 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 served as President and member of the board of directors of American Family Corporation (AFLAC, INC.) from 1976 until 1992. Mr. Diaz-Verson served as Executive Vice 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 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 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 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.

Robert Kopple. Mr. Kopple is an investor, businessman, and lawyer. He is a founding partner in a law firm based in Los Angeles, California specializing in taxation and business law. Mr. Kopple manages interests in real estate and operating companies and has provided equity and debt financing for a number of companies. Mr. Kopple has served as a director since September 2013 and is a significant investor in Aura.

Section 16(a) Beneficial Ownership Reporting Compliance

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, 2015.

Code of Ethics

We have adopted a Code of Ethics applicable to the Company’s Chief Executive Officer, Chief Financial Officer and all other members of the Company’s Finance Department. This Code of Ethics is posted on the Company’s website within a broader Code of Business Conduct and Ethics at www.aurasystems.com in the Investor Relations section. We intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding an amendment to, or a waiver from, the provision of our Code of Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions and that relates to any element of such provision of our Code of Ethics by posting such information on our website within four business days of the date of such amendment or waiver. In the case of a waiver, the nature of the waiver, the name of the person to whom the waiver was granted and the date of the waiver will also be disclosed.

Family Relationships

None of our directors or executive officers is related to one another.

Legal Proceedings

To the best of our knowledge, none of our executive officers or directors other than Robert Kopple is a party to any material proceedings adverse to the Company, have any material interest adverse to the Company or have, during the past ten years:

	●	been convicted in a criminal proceeding or been subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);

	●	had any bankruptcy petition filed by or against him/her or any business of which he/she was a general partner or executive officer, either at the time of the bankruptcy or within two years prior to that time;

	●	been subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his/her involvement in any type of business, securities, futures, commodities or banking activities;

	●	been found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;

	●	been subject to, or party to, any judicial or administrative order, judgment, decree , or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of (i) any Federal or State securities or commodities law or regulation, (ii) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order or (iii) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or been the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

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 members of the Audit Committee for fiscal 2016 were Mr. Warren Breslow, (Chairperson) and Mr. Salvador Diaz-Verson. Our Board determined that Mr. Breslow was an “audit committee financial expert” as such term is defined by the rules and regulations of the Securities and Exchange Commission. Mr. Breslow resigned as a director in March 2017.

Compensation Committee . The Compensation Committee does not have a formal charter however the committee 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 2006 Stock Option Plan. The Compensation Committee is currently comprised of Mr. Diaz-Verson (Chairperson) and Mr. Breslow. Mr. Breslow has provided loans to us in the amount of $14,235,960. For a discussion about Mr. Breslow’s loans to us, please see “Management’s Discussion and Analysis of Results of Operations – Liquidity” and “Certain Relationships and Related Party Transactions”.

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 shareholders. The Nominating Committee currently consists of Mr. Diaz-Verson.

Special Committee . In September 2016, the Board of Directors appointed Messrs. Gagerman and Diaz-Verson to a Special Committee to seek to negotiate restructuring agreements with each of Mr. Breslow and Mr. Kopple, to review the Company’s relationships with each of Mr. Breslow and Mr. Kopple, to independently assess the transactions with each of Mr. Breslow and Mr. Kopple, and to undertake such other inquiries and investigations, and make such recommendations, as the Special Committee considers in the best interests of the Company and its stockholders as a whole. 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.

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. 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 summarizes all compensation earned for the fiscal years ended February 29, 2016 and February 28, 2014, to the individual who served as our chief executive officer during fiscal 2017. We had no other officers who would qualify as “named executive officers” as such term is defined in Item 402 of Regulation S-K and serving in such capacity at any time during the year ended February 28, 2015 (the "Named Executive Officers").

2015 Summary Compensation Table

Name and Principal Position	Fiscal Year	Salary ($)		Option Awards ($) (2)		Non-Equity Incentive Plan Compensation		All Other Compensation ($)			Total ($)

Melvin Gagerman (1)	2015		360,000		-		-		50,770	(3)		404,961	(4)
Chief Executive Officer,	2014		360,000		-		-		24,767	(4)		384,767
Chief Financial Officer

(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.
(2)	Reflects the fair market value amount at the date of grant using the assumptions set forth in Note 9 to the financial statements included elsewhere in this Annual Report.
(3)	Represents $24,000 in automobile allowance, $11,865 for the cost of life and long term care insurance premiums, and $14,905 in medical expense reimbursements. No bonuses or stock awards were granted to the above individuals for the 2015 fiscal year. No bonuses or stock awards were granted to the above individuals for the 2015 fiscal year.
(4)	Mr. Gagerman salary of $360,000 for 2015 was not paid but was accrued.
(5)	Represents automobile allowance, the cost of life insurance premiums, and medical expense reimbursement. No bonuses or stock awards were granted to the above individuals for the 2014 fiscal year.

Outstanding Equity Awards at 2015 Fiscal Year-End

The following table summarizes certain information regarding the number and value of all options to purchase our common stock held by the individuals named in the Summary Compensation Table at February 28, 2015. No stock awards or equity incentive plan awards were issued or outstanding during fiscal 2015.

2015 OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END

	Option Awards
	Number of Securities Underlying Unexercised Options (#)		Number of Securities Underlying Unexercised Options (#)		Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)		Option Exercise Price ($)		Option Expiration Date
Name	Exercisable		Un-exercisable

Melvin Gagerman		1,100,000		0		--	$	0.75	2/28/20
Melvin Gagerman		1,400,000		0		--	$	0.75	6/2/21
Melvin Gagerman		1,000,000		0		--	$	1.00	8/25/16

Option Exercises and Stock Vesting During 2015

No stock options were exercised during fiscal 2015 by the individuals named in the Summary Compensation Table. No stock awards were issued or outstanding during fiscal 2015.

Employment Contracts, Termination of Employment Contracts and Change in Control Arrangements

In November 2006, we entered into a written employment agreement with Melvin Gagerman (the “Gagerman Agreement”) regarding the terms and conditions of his employment as CEO. The Gagerman Agreement originally was in effect through February 28, 2010, and was terminated as of February 28, 2014. We do not currently have any employment agreements with any of our Named Executive Officers.

Under the terms of the Gagerman Agreement, Mr. Gagerman was entitled to a base salary of $360,000 per year. Additionally, the Gagerman Agreement provided Mr. Gagerman with options to purchase 300,000 shares of common stock at an exercise price of $2.00 per share, of which 50,000 options are designated for tax purposes as “incentive stock options” and the remaining options are non-qualified options. The Gagerman Agreement originally provided for an option term of three years, which was subsequently extended to five years. The options vest at the rate of 25,000 per month and all options vested as of November 2007. In June of 2009, all outstanding options granted to Mr. Gagerman were cancelled with his agreement, and 1,400,000 new five year options exercisable at $1.50 were granted. Mr. Gagerman’s options were extended until 2020. The Gagerman Agreement further required the Company to pay life insurance premiums on Mr. Gagerman’s private life insurance policy, up to $7,500 per year. Mr. Gagerman was also entitled to receive $2,000 per month as an automobile allowance and country club dues, and reimbursement of country club initiation fee of up to $8,000. In addition to health and dental insurance generally available to all of our employees, Mr. Gagerman was also entitled to receive reimbursement of up to $15,000 per year for all non-covered medical and dental expenses for himself and his spouse, including deductibles and co-payments. The Gagerman Agreement also entitled Mr. Gagerman to reimbursement for the cost of long term care insurance.

In fiscal 2016, Mr. Gagerman was entitled to a base salary of $360,000 per year, which was accrued by the Company but not paid to Mr. Gagerman due to the Company’s inability to pay Mr. Gagerman any salary. It is expected that the Company will pay Mr. Gagerman the amount he is due for prior services when and if the Company generates sufficient revenue to do so. There is no agreement to pay Mr. Gagerman for his services in fiscal 2017; however, the Board has the discretion to pay Mr. Gagerman for services he renders to the Company if the Company generates sufficient revenue to do so.

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.

Director Compensation During Fiscal 2015

The following table summarizes all compensation paid to directors other than named executive officers during fiscal 2015.

2015 DIRECTOR COMPENSATION TABLE

Name

Fees

Earned

or Paid

in Cash

($)

Stock

Awards

($)

Option

Awards

($) (1)

Non-Equity
Incentive Plan
Compensation

($)

All Other
Compensation

($)

Total

($)

Warren Breslow (2)

Salvador Diaz-Verson, Jr. (3)

Robert Kopple (4)

	(1)	Reflects the fair market value amount at the date of grant using the assumptions set forth in Note 9 to the financial statements included elsewhere in this Annual Report.
	(2)	The director had 5,350,000 director options outstanding as of February 28, 2015.
	(3)	The director had 350,000 director options outstanding as of February 28, 2015.
	(4)	The director had no director options outstanding as of February 28, 2015

Although we do not currently compensate our directors for this service as members of our Board of Directors, the Board may, at its discretion, compensate directors for attending board and committee meetings and reimburse the directors for out-of-pocket expenses incurred in connection with attending such meetings. Our directors are also eligible to receive stock option grants under our 2006 employee stock option plan and Director Warrants authorized under our Chapter 11 Plan of Reorganization.

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 August 30, 2017 (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	Number of Shares of Common Stock		Percent of Common Stock (1)
Melvin Gagerman (2)		7,796,801		6.1	%
Warren Breslow (3)		6,287,966		4.9	%
Salvador Diaz-Verson, Jr. (4)		790,934		*
Robert Kopple (5)		25,349,089		20.0	%
All current executive officers and Directors as a group (three) (6)		33,936,824		26.1	%

5% Stockholders
None other than the Directors named above

* 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 126,608,391 shares of common stock outstanding on August 30, 2017. In computing the number of shares beneficially owned by any shareholder and the percentage ownership of such shareholder, shares of common stock which may be acquired by a such shareholder upon exercise or conversion of warrants or options which are currently exercisable or exercisable within 60 days of August 30, 2017, 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 shareholder 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.

(2)

Includes 5,675,258 warrants and options exercisable within 60 days of August 30, 2017.

(3)

Includes 4,923,901 warrants and options exercisable within 60 days of August 30, 2017. Mr. Breslow resigned as a director in March 2017.

(4)

Includes 723,489 warrants and options exercisable within 60 days of August 30, 2017.

(5)

Based on a Schedule 13D filed by Mr. Kopple with the SEC on September 11, 2013. 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 22.9 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. 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.

(6)

Excludes Mr. Breslow, who resigned from the Board of Directors in March 2017.

The mailing address for the officers and directors is c/o Aura Systems, Inc., 10541 Ashdale St., Stanton, CA 90680.

Securities Authorized for Issuance Under Equity Compensation Plans as of February 28, 2017

Equity Compensation Plan Information as of February 28, 2017

	Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights		Weighted-average Exercise Price of Outstanding Options, Warrants and Rights		Number of Securities Remaining Available for 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)		7,224,000	$	0.76		11,767,258
Equity compensation plans not approved by security holders		15,550,000	$	0.75		3,441,258

(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, 2017.

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.

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.

Director Independence

Using the definition of “independence” included in the listing rules of The Nasdaq Stock Market, our Board has determined that director Mr. Diaz-Verson is independent.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND DISCLOSURES

The following table sets forth the aggregate fees billed to us by Kobani and Company for the year ending on February 28, 2014 audit and KSP Group, Inc. for the years ended February 28, 2015.

	Year Ended February 28,
	2015		2014
Audit Fees	$	40,000	$	82,500
Audit-related fees		-		-
Tax fees		-		-
All other fees		-		-

Total	$	40,000	$	82,500

As defined by the SEC, (i) “audit fees” are fees for professional services rendered by our principal accountant for the audit of our annual financial statements and review of financial statements included in our Form 10-K, or for services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years; (ii) “audit-related fees” are fees for assurance and related services by our principal accountant that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “audit fees;” (iii) “tax fees” are fees for professional services rendered by our principal accountant for tax compliance, tax advice, and tax planning; and (iv) “all other fees” are fees for products and services provided by our principal accountant, other than the services reported under “audit fees,” “audit-related fees,” and “tax fees.”

Audit Fees

Services provided to us by Kabani and Company 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 included in our quarterly reports on Form 10-Q for the first three quarters of the year ended February 28, 2014.

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 included in our quarterly reports on Form 10-Q for the first three quarters of the year ended February 28, 2015

Audit Related Fees

Kabani and Co did not provide any professional services to us during fiscal 2015 or fiscal 2015 which would constitute “audit related fees”.

KSP Group, Inc. did not provide any professional services to us during fiscal 2015 or fiscal 2015 which would constitute “audit related fees”.

Tax Fees

Kabani and Company. did not provide any professional services to us during fiscal 2015 or fiscal 2015 which would constitute “tax fees”.

KSP Group, Inc. did not provide any professional services to us during fiscal 2015 or fiscal 2015 which would constitute “tax fees”.

All Other Fees

KSP Group, Inc. did not provide any professional services to us during fiscal 2015 or fiscal 2015 which would constitute “other fees”.

On February 8, 2017, Kabani & Company, Inc. (“Kabani”) resigned as the Company’s independent registered public accounting firm, effective as of February 8, 2017.

Kabani served as the Company’s independent registered public accounting firm for the Company’s fiscal years ended February 28, 2014, and February 28, 2013. The reports of Kabani on the Company’s financial statements for the years ended February 28, 2014, and February 28, 2013 did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles.

During the fiscal years ended February 28, 2014, and February 28, 2013 and through September 18, 2017, there were no disagreements with Kabani on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements if not resolved to the satisfaction of Kabani would have caused it to make reference to the subject matter of the disagreements in connection with its reports. During the fiscal years ended February 28, 2014, and February 28, 2013 and through September 18, 2017, there have been no reportable events (as defined in Item 304(a)(1)(v) of Regulation S-K).

The Company requested that Kabani review the disclosures contained herein and asked Kabani to furnish the Company with a letter addressed to the U.S. Securities and Exchange Commission containing any new information, clarification of the Company’s expression of Kabani’s views, or the respects in which Kabani does not agree with the statements contained herein. A copy of the letter is filed as Exhibit 16.1 hereto.

In February 2017, the Company engaged KSP Group, Inc. ("KSP") as the Company's independent registered public accounting firm for the fiscal years ending February 28, 2015, February 29, 2016 and February 28, 2017. The decision to appoint KSP was approved by the Audit Committee of the Board of Directors.

During the two most recent fiscal years and during the subsequent interim period from March 1, 2017 through September 18, 2017, neither the Company nor anyone on its behalf consulted KSP regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's financial statements, and neither a written report nor oral advice was provided to the Company that KSP concluded was an important factor considered by the Company in reaching a decision as to any accounting, auditing or financial reporting issue, or (ii) any matter that was either the subject of a “disagreement” or a “reportable event,” each as defined in Regulation S-K Item 304(a)(1)(v), respectively.

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 2017 and 2016 and 2015 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

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)
3.2		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		Demand Promissory Note dated July 5, 2011 by Aura Systems, Inc. in favor of Warren Breslow in the original principal amount of $250,000 (Incorporated by reference to Exhibit 10.59 to Aura Systems, Inc.’s Form 10-Q filed October 17, 2011)
10.4		Demand Promissory Note dated August 4, 2011 by Aura Systems, Inc. in favor of Warren Breslow in the original principal amount of $100,000 (Incorporated by reference to Exhibit 10.60 to Aura Systems, Inc.’s Form 10-Q filed October 17, 2011)
10.5		Demand Promissory Note dated August 12, 2011 by Aura Systems, Inc. in favor of Warren Breslow in the original principal amount of $225,000 (Incorporated by reference to Exhibit 10.61 to Aura Systems, Inc.’s Form 10-Q filed October 17, 2011)
10.6		Demand Promissory Note dated August 25, 2011 by Aura Systems, Inc. in favor of Warren Breslow in the original principal amount of $250,000 (Incorporated by reference to Exhibit 10.62 to Aura Systems, Inc.’s Form 10-Q filed October 17, 2011)
10.7		Demand Promissory Note dated September 16, 2011 by Aura Systems, Inc. in favor of Warren Breslow in the original principal amount of $250,000 (Incorporated by reference to Exhibit 10.63 to Aura Systems, Inc.’s Form 10-Q filed January 17, 2012)
10.8		Demand Promissory Note dated September 23, 2011 by Aura Systems, Inc. in favor of Warren Breslow in the original principal amount of $250,000 (Incorporated by reference to Exhibit 10.64 to Aura Systems, Inc.’s Form 10-Q filed January 17, 2012)
10.9		Demand Promissory Note dated December 16, 2011 by Aura Systems, Inc. in favor of Warren Breslow in the original principal amount of $250,000 (Incorporated by reference to Exhibit 10.65 to Aura Systems, Inc.’s Form 10-K filed on May 29, 2012)
10.10		Demand Promissory Note dated January 15, 2012 by Aura Systems, Inc. in favor of Warren Breslow in the original principal amount of $450,000 (Incorporated by reference to Exhibit 10.66 to Aura Systems, Inc.’s Form 10-K filed on May 29, 2012)
10.11		Demand Promissory Note dated February 23, 2012 by Aura Systems, Inc. in favor of Warren Breslow in the original principal amount of $250,000 (Incorporated by reference to Exhibit 10.67 to Aura Systems, Inc.’s Form 10-K filed on May 29, 2012)
10.11		Securities Purchase Agreement dated September 26, 2011 by and between Aura Systems Inc. and certain institutional investors (Incorporated by reference to Exhibit 10.1 to Aura Systems, Inc.’s Form 8-K filed on September 27, 2011)
10.12		Registration Rights Agreement dated September 26, 2011 by and between Aura Systems Inc. and certain institutional investors (Incorporated by reference to Exhibit 10.2 to Aura Systems, Inc.’s Form 8-K filed on September 27, 2011)
10.13		Security Agreement dated September 26, 2011 by and between Aura Systems Inc. and certain institutional investors (Incorporated by reference to Exhibit 10.3 to Aura Systems, Inc.’s Form 8-K filed on September 27, 2011)
10.14		Guaranty dated September 26, 2011 (Incorporated by reference to Exhibit 10.4 to Aura Systems, Inc.’s Form 8-K filed on September 27, 2011)
10.15		Subordination and Intercreditor Agreement dated September 26, 2011 by and between Aura Systems Inc., Warren Breslow and certain institutional investors (Incorporated by reference to Exhibit 10.5 to Aura Systems, Inc.’s Form 8-K filed on September 27, 2011)
10.13		Demand Promissory Note dated March 22, 2012 by Aura Systems, Inc. in favor of Warren Breslow in the original principal amount of $300,000 (Incorporated by reference to Exhibit 10.68 to Aura Systems, Inc.’s Form 10-Q filed on July 13, 2012)
10.14		Demand Promissory Note dated March 23, 2012 by Aura Systems, Inc. in favor of Warren Breslow in the original principal amount of $200,000 (Incorporated by reference to Exhibit 10.69 to Aura Systems, Inc.’s Form 10-Q filed on July 13, 2012)

10.15		Demand Promissory Note dated April 5, 2012 by Aura Systems, Inc. in favor of Warren Breslow in the original principal amount of $200,000 (Incorporated by reference to Exhibit 10.70 to Aura Systems, Inc.’s Form 10-Q filed on July 13, 2012)
10.16		Demand Promissory Note dated April 23, 2012 by Aura Systems, Inc. in favor of Warren Breslow in the original principal amount of $400,000 (Incorporated by reference to Exhibit 10.71 to Aura Systems, Inc.’s Form 10-Q filed on July 13, 2012)
10.17		Demand Promissory Note dated May 3, 2012 by Aura Systems, Inc. in favor of Warren Breslow in the original principal amount of $400,000 ((Incorporated by reference to Exhibit 10.72 to Aura Systems, Inc.’s Form 10-Q filed on July 13, 2012)
10.18		Demand Promissory Note dated May 24, 2012 by Aura Systems, Inc. in favor of Warren Breslow in the original principal amount of $300,000 (Incorporated by reference to Exhibit 10.73 to Aura Systems, Inc.’s Form 10-Q filed on July 13, 2012)
10.19		Demand Promissory Note dated June 1, 2012 by Aura Systems, Inc. in favor of Warren Breslow in the original principal amount of $300,000 (Incorporated by reference to Exhibit 10.74 to Aura Systems, Inc.’s Form 10-Q filed on October 15, 2012)
10.20		Demand Promissory Note dated June 22, 2012 by Aura Systems, Inc. in favor of Warren Breslow in the original principal amount of $300,000 (Incorporated by reference to Exhibit 10.75 to Aura Systems, Inc.’s Form 10-Q filed on October 15, 2012)
10.21		Demand Promissory Note dated August 24, 2012 by Aura Systems, Inc. in favor of Warren Breslow in the original principal amount of $300,000 (Incorporated by reference to Exhibit 10.76 to Aura Systems, Inc.’s Form 10-Q filed on October 15, 2012)
10.22		Demand Promissory Note dated August 27, 2012 by Aura Systems, Inc. in favor of Warren Breslow in the original principal amount of $150,000 (Incorporated by reference to Exhibit 10.77 to Aura Systems, Inc.’s Form 10-Q filed on October 15, 2012)
10.23		Convertible Promissory Note dated August 10, 2012 by Aura Systems, Inc. in favor of Peter Dalrymple in the original principal amount of $1,000,000 (Incorporated by reference to Exhibit 10.78 to Aura Systems, Inc.’s Form 10-Q filed on October 15, 2012)
10.24		Demand Promissory Note dated September 6, 2012 by Aura Systems, Inc. in favor of Warren Breslow in the original principal amount of $500,000 (Incorporated by reference to Exhibit 10.79 to Aura Systems, Inc.’s Form 10-Q filed on January 14, 2013)
10.25		Demand Promissory Note dated September 27, 2012 by Aura Systems, Inc. in favor of Warren Breslow in the original principal amount of $300,000 (Incorporated by reference to Exhibit 10.80 to Aura Systems, Inc.’s Form 10-Q filed on January 14, 2013)
10.26		Demand Promissory Note dated October 19, 2012 by Aura Systems, Inc. in favor of Warren Breslow in the original principal amount of $250,000 (Incorporated by reference to Exhibit 10.81 to Aura Systems, Inc.’s Form 10-Q filed on January 14, 2013)
10.27		Demand Promissory Note dated October 25, 2012 by Aura Systems, Inc. in favor of Warren Breslow in the original principal amount of $300,000 (Incorporated by reference to Exhibit 10.82 to Aura Systems, Inc.’s Form 10-Q filed on January 14, 2013)
10.28		Demand Promissory Note dated November 2, 2012 by Aura Systems, Inc. in favor of Warren Breslow in the original principal amount of $135,000 (Incorporated by reference to Exhibit 10.83 to Aura Systems, Inc.’s Form 10-Q filed on January 14, 2013)
10.29		Demand Promissory Note dated November 30, 2012 by Aura Systems, Inc. in favor of Warren Breslow in the original principal amount of $100,000 (Incorporated by reference to Exhibit 10.84 to Aura Systems, Inc.’s Form 10-Q filed on January 14, 2013)
10.30		Convertible Promissory Note dated October 2, 2012 by Aura Systems, Inc. in favor of Peter Dalrymple in the original principal amount of $500,000 (Incorporated by reference to Exhibit 10.85 to Aura Systems, Inc.’s Form 10-Q filed on January 14, 2013)
10.31		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**
10.32		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 of Exhibit 10.31 to this Form 10-K)**
10.33		Form of Warrant by Aura Systems, Inc. to KF Business Ventures, LP (Incorporated by reference to Exhibit B of Exhibit 10.31 to this Form 10-K)**
10.34		Debt Refinancing Agreement dated January 24, 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 10.1 to Aura Systems, Inc.’s Form 8-K filed on January 25, 2017)

10.35		Unsecured Convertible Promissory Note dated January 24, 2017 by and between the Survivor’s Trust Under the Warren L. Breslow Trust and Aura Systems, Inc. (Incorporated by reference to Exhibit 10.2 to Aura Systems, Inc.’s Form 8-K filed on January 25, 2017)
10.36		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)
10.37		First Amendment to Transaction Documents dated January 30, 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 Form 8-K filed on February 8, 2017)
10.38		Securities Purchase Agreement dated May 6, 2013 among Registrant and those persons listed on the Schedule of Buyers attached thereto (Incorporated by reference to Exhibit 10.2 to Aura Systems, Inc.’s Form 8-K filed on February 8, 2017)
14.1		Code of Ethics (Incorporated by reference to Exhibit 14.1 to Aura Systems, Inc.’s Form 10-K filed on March 25, 2008)
16.1		Letter of Kabani & Company
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.DEF		XBRL Definition Linkbase Document
101.LAB		XBRL Label Linkbase Document
101.PRE		XBRL 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.

ITEM 16. FORM 10-K SUMMARY

None.

SIGNATURES

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:	September 18, 2017

	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 and Acting Chief Financial Officer	September 18, 2017
Melvin Gagerman	(Principal Executive Officer, Principal Financial Officer,
	Principal Accounting Officer)

/s/ Salvador Diaz-Verson, Jr.	Director	September 18, 2017
Salvador Diaz-Verson, Jr.

	Director
Robert Kopple

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, 2015 and February 28, 2014 (Restated)	F-3

Statements of Operations - Years ended February 28, 2015 and February 28, 2014 (Restated)	F-4

Statements of Stockholders’ Deficit - Years ended February 28, 2015and February 28, 2014 (Restated)	F-5

Statements of Cash Flows - Years ended February 28, 2015 and February 28, 2014 (Restated)	F-6 to F-7

Notes to Financial Statements	F-8 to F-22

F- 1

5757 W Century Blvd, Suite 303,

Los Angeles, CA 90045

Tel +1(310) 568-1628

Fax +1(310) 410-0371

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, 2015 and February 28, 2014, and the related statements of operations, stockholders' equity (deficit), and cash flows for each of the years in the two-year period ended February 28, 2015. 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, 2015 and February 28, 2014, and the results of its operations and its cash flows for each of the years in the two year period ended February 28, 2015 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 11 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 11. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

As discussed in note 15, the financial statement for the year ended February 28, 2014 has been restated.

/s/ Los Angeles, California

September 11, 2017

F- 2

AURA SYSTEMS, INC.

BALANCE SHEETS

	As of February 28,			As of February 28,
	2015			2014
				(Restated)
ASSETS
Current assets:
Cash and cash equivalents	$	34,855		$	40,927
Accounts receivable, net, respectively		58,957			155,719
Other current assets		60,597			100,952
Total current assets		154,409			297,598

Deposits		100,138			89,138
Property, plant, and equipment, net		945			7,955

Total assets	$	255,492		$	394,691

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	1,889,453		$	2,077,513
Accrued expenses		4,524,919			3,385,937
Customer advances		464,067			80,641
Notes payable		1,942,990			1,559,990
Convertible notes payable, net of discount		2,720,700			2,567,556
Notes payable and accrued interest- related party		23,905,073			19,730,372
Total current liabilities		35,447,202			29,402,009

Convertible note payable, net of discount		1,277,261			1,187,598
Convertible note payable and accrued interest-related party, net of discount		2,096,113			2,176,005

Total liabilities		38,820,576			32,765,612

Commitments and contingencies

Stockholders’ deficit:
Common stock, $0.0001 par value; 150,000,000 shares authorized at February 28, 2015 and 2014; 113,001,432 and 88,914,499 issued and outstanding at February 28, 2015 and, 2014, respectively		11,304			8,891
Additional paid-in capital		410,404,692			404,314,016
Accumulated deficit		(448,981,080	)		(436,693,828	)

Total stockholders’ deficit		(38,565,084	)		(32,370,921	)

Total liabilities and stockholders’ deficit	$	255,492		$	394,691

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, 2015			For the Year ended February 28, 2014
				(Restated)

Net revenues	$	1,155,811		$	2,317,352
Cost of goods sold		490,379			909,222

Gross profit		665,432			1,408,130

Operating expenses:
Engineering, research and development		845,135			1,294,619
Selling, general, and administrative		8,898,166			9,099,230

Total operating expenses		9,743,301			10,393,849

Loss from operations		(9,077,869	)		(8,985,719	)

Other income (expense):
Interest expense, net		(3,214,963	)		(3,991,156	)
Gain on settlement of debt, net		-			203,110
Other income net		5,580			49,607

Total other expense		(3,209,383	)		(3,738,439	)

Net Loss	$	(12,287,252	)	$	(12,724,158	)

Basic and diluted loss per share	$	(0.11	)	$	(0.15	)

*Weighted-average shares outstanding		109,542,599			84,780,593

* Basic and diluted weighted average number of shares outstanding are equivalent because the effect of dilutive securities is anti-dilutive.

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, 2015 AND 2014(Restated)

	Common Stock Shares		Common Stock Amount		Additional Paid-In Capital			Accumulated Deficit			Total Stockholders’ Deficit

Balance, February 28, 2013		76,604,573	$	7,661	$	400,029,521		$	(423,969,670	)	$	(23,932,488	)

Shares issued for note conversions		2,660,225		267		1,126,736						1,127,002

Shares issued for services		3,562,118		356		974,370						974,726
Shares issued for cancellation of warrants		4,254,250		425		(425	)					-
Shares issued for re-pricing		1,833,333		183		(183	)					-
Discount on convertible notes payable						1,484,538						1,484,538
Employee option and warrant expense						699,459						699,459
Net Loss									(12,724,158	)		(12,724,158	)

Balance, February 28, 2014(Restated)		88,914,499	$	8,892	$	404,314,016		$	(436,693,828	)	$	(32,370,921	)

Common stock issued in private placements, net		3,992,400		399		631,061						631,461
Shares issued for services		2,800,000		280		419,720						420,000
Employee option and warrant expense						3,308,175						3,308,175
Shares issued for warrant exercise		17,334,533		1,733		1,731,720						1,733,453
Net Loss									(12,287,252	)		(12,287,252	)

Balance, February 28, 2015		113,041,432	$	11,304	$	410,404,692		$	(448,981,080	)	$	(38,565,084	)

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,

	2015			2014 (Restated)

Cash flows from operating activities:
Net loss	$(12,287,252)			$(12,724,158)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		7,010			32,515
Provision for bad debt		-			71,319
Stock option and warrant expense		3,308,176			699,459
Amortization of debt discount		515,176			1,079,400
Gain on debt settlement		-			(203,110	)
Shares issued for services		420,000			974,726
(Increase) decrease in:
Accounts receivable		96,762			102,513
Inventory
Other current assets		29,355			106,888
Increase (decrease) in:
Accounts payable and accrued expenses		3,757,362			3,904,386
Customer advances		383,426			68,043

Net cash used in operating activities		(3,769,985	)		(5,888,019	)

Cash flows from investing activities:
Purchase of property, plant, and equipment		-			-

(Continued)

The accompanying notes are an integral part of these financial statements

F- 6

AURA SYSTEMS, INC.

STATEMENTS OF CASH FLOWS (CONTINUED)

For the Years Ended February 28,

	2015			2014
				(Restated)

Cash flows from financing activities:
Proceeds from notes payable	628,000			1,196,000
Payments on notes payable		(245,000	)		(170,000	)
Proceeds from notes payable - related party		1,016,000			1,545,000

Proceeds from convertible notes payable		-			1,075,000
Payments on convertible notes payable		-			(306,250	)
Proceeds from convertible notes payable-related party		-			2,500,000
Net proceeds from issuance of common stock		2,364,913			-

Net cash provided by financing activities		3,763,913			5,839,750

Net decrease in cash and cash equivalents		(6,072	)		(48,269	)
Cash and cash equivalents, beginning of year		40,927			89,196

Cash and cash equivalents, end of year	$	34,855		$	40,927

Supplemental disclosures of cash flow information:
Interest paid	$	-		$	103,783

Income taxes paid	$	-		$	-

Supplemental schedule of non-cash financing and investing activities:

During the year ended February 28, 2015, 2,800,000 shares of common stock were issued for services valued at $420,000.

During the year ended February 28, 2014, $1,127,002 of notes payable and accrued interest were converted into 2,660,225 shares of common stock, 1,833,333 shares of common stock and 916,666 7-year warrants to purchase our stock with an exercise price of $0.75 were issued to re-price a prior issuance of stock in December 2012, 4,254,250 shares of common stock were issued in exchange for the cancellation of warrants to purchase 5,005,000 shares of common stock at an exercise price of $0.75 per share which would have expired on September 22, 2016, and 3,562,118 shares of common stock were issued for services valued at $974,726.

The accompanying notes are an integral part of these financial statements

F- 7

AURA SYSTEMS, INC.

NOTES TO FINANCIAL STATEMENTS

February 28, 2015

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, we also sell our developed and patented High Force Electromagnetic Linear Actuators.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Revenue Recognition

Terms of our sales generally provide for Shipment from our facilities to customers FOB point of shipment. Title passes to customers at the time the products leave our warehouse.

The Company does not offer a general right of return on any of its sales and considers all sales as final. However, if a customer determines that a different system configuration would better suit their application, we will allow them to exchange the system and bill them the incremental cost, or credit them if there is a decrease in the system cost. While some sales are for evaluative purposes, they are still considered final sales. The customers’ evaluation is for them to determine if there is a benefit to them to outfit additional vehicles in their fleets.

The only potential post delivery obligation the Company might have is for the installation of the unit. However, the unit is typically delivered at the time of installation, and the billing is done when the installation is complete. Any discounts that are offered are done as a reduction of the invoiced amount at the time of billing. The Company does not utilize bill and hold. The Company does provide customers with a warranty; however, due to the low sales volume to date, the amount has not been material and is expensed as incurred.

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 maintain cash deposits at a bank located in California. Deposits at this bank are insured by the Federal Deposit Insurance Corporation up to $250,000. We have not experienced any losses in such accounts and believe we are not exposed to any significant risk on cash and cash equivalents.

F- 8

Accounts Receivable (Restated)

The Company grants credit to its customers generally in the form of short-term trade accounts receivable. Accounts receivable are stated at the amount that management expects to collect from outstanding balances. When appropriate, management provides for probable uncollectible amounts through an allowance for doubtful accounts. Management primarily determines the allowance based on the aging of accounts receivable balances, historical write-off experience, customer concentrations, customer creditworthiness and current industry and economic trends. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the allowance for doubtful accounts and a credit to accounts receivable.

Inventories (Restated)

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 not operated and therefore has not produced product since late 2015. As a result, while the Company believes that a significant portion of the inventory has value, we are unable to substantiate it’s demand and market value and as a result have elected to reserve it in its entirety as of February 28, 2016 and February 28, 2017.

Property, Plant, and Equipment

Property, plant, and equipment, including leasehold improvements, are recorded at cost, less accumulated depreciation and amortization. Depreciation is provided using the straight-line method over the estimated useful lives of the respective assets as follows:

Machinery and equipment		5 to 10 years
Furniture and fixtures		7 years

Improvements to leased property are amortized over the lesser of the life of the lease or the life of the improvements. Maintenance and minor replacements are charged to expense as incurred. Gains and losses on disposals are included in the results of operations.

Patents and Trademarks

We capitalize the cost of obtaining or acquiring patents and trademarks. Amortization of patent and trademark costs is provided for by the straight-line method over the estimated useful lives of the assets.

Valuation of Long-Lived Assets

The Company accounts for the impairment of long-lived assets, such as fixed assets, patents and trademarks, under the provisions of Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 360, “Property, Plant, and Equipment”, which establishes the accounting for impairment of long-lived tangible and intangible assets other than goodwill and for the disposal of a business. Pursuant to FASB ASC 360, we review for impairment when facts or circumstances indicate that the carrying value of long-lived assets to be held and used may not be recoverable. If such facts or circumstances are determined to exist, an estimate of the undiscounted future cash flows produced by the long-lived asset, or the appropriate grouping of assets, is compared to the carrying value to determine whether impairment exists. If an asset is determined to be impaired, the loss is measured based on various valuation techniques, including a discounted value of estimated future cash flows. We report impairment costs as a charge to operations at the time it is recognized. During the years ended February 28, 2015 and February 28, 2014, we determined that there was no impairment of long-lived assets.

Stock-Based Compensation

F- 9

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.

Shipping and handling expenses

We record all shipping and handling billings to a customer as revenue earned for the goods provided in accordance with FASB ASC 605-45-45-19, “Shipping and Handling Fees and Costs”. We include shipping and handling expenses in selling, general and administrative expense. Shipping and handling expenses amounted to $61,346 and $123,124 for the years ended February 28, 2015 and February 28, 2014, respectively.

Advertising Expense

Advertising costs are charged to expense as incurred and were immaterial for the years ended February 28, 2015 and February 28, 2014.

Research and Development

Research and development costs are expensed as incurred. These costs include the expenses incurred in the development of products such as the 375amp ECU, the TanGen (dual generator), the eight inch generator, the 30 kW unit and the refrigeration system.

Income Taxes (Restated)

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, 2015 and February 28, 2014.

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.

F- 10

Earnings (Loss) per Share (Restated)

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.

Major Customers

Recently Issued Accounting Pronouncements

In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03, Interest–Imputation of Interest (Subtopic 835-30) (“ASU 2015-03”), which changes the presentation of debt issuance costs in financial statements. ASU 2015-03 requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. It is effective for annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The new guidance will be applied retrospectively to each prior period presented. The Company is currently in the process of evaluating the impact of adoption of ASU 2015-03 on its balance sheets.

In January 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2016-01, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company is currently evaluating the impact of adopting this guidance.

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 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) that clarifies how to apply revenue recognition guidance related to whether an entity is a principal or an agent. ASU 2016-08 clarifies that the analysis must focus on whether the entity has control of the goods or services before they are transferred to the customer and provides additional guidance about how to apply the control principle when services are provided and when goods or services are combined with other goods or services. The effective date for ASU 2016-08 is the same as the effective date of ASU 2014-09 as amended by ASU 2015-14, for annual reporting periods beginning after December 15, 2017, including interim periods within those years. The Company has not yet determined the impact of ASU 2016-08 on its financial statements.

F- 11

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 April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which provides further guidance on identifying performance obligations and improves the operability and understandability of licensing implementation guidance. The effective date for ASU 2016-10 is the same as the effective date of ASU 2014-09 as amended by ASU 2015-14, for annual reporting periods beginning after December 15, 2017, including interim periods within those years. In May 2016, the FASB issued ASU 2016-12 “Revenue from Contracts with Customers (Topic 606) - Narrow-Scope Improvements and Practical Expedients,” which amends the guidance on transition, collectability, non-cash consideration, and the presentation of sales and other similar taxes. ASU 2016-12 clarifies that, for a contract to be considered completed at transition, all (or substantially all) of the revenue must have been recognized under legacy GAAP. In addition, ASU 2016-12 clarifies how an entity should evaluate the collectability threshold and when an entity can recognize nonrefundable consideration received as revenue if an arrangement does not meet the standard’s contract criteria. The standard allows for both retrospective and modified retrospective methods of adoption. The Company has not yet determined the impact of ASU 2016-10 on its 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 not yet determined the potential effects of the adoption of ASU 2016-15 on its Financial Statements.

All other newly issued accounting pronouncements but not yet effective have been deemed either immaterial or not applicable.

Reclassifications

Certain reclassifications have been made to the 2014 financial statements to conform to the 2015 presentation.

NOTE 3 – INVENTORIES (Restated)

Inventories at February 28, 2015 and February 28, 2014 consisted of the following:

	2015			2014

Raw materials	$	1,772,869		$	1,808,556
Finished goods		1,565,190			1,735,019

		3,338,059			3,543,575
Inventory reserve		(3,338,059	)		(3,543,575	)

	$	0		$	0

F- 12

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, most of which was then assembled into finished AuraGen ^® units. Since sales did not meet such 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, 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 significant 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, 2017 and February 28, 2016.

NOTE 4 – OTHER CURRENT ASSETS

Other current assets of $60,597 and $100,952 are primarily comprised of vendor advances of $38,179 and $69,497 as of February 28, 2015 and February 28, 2014, respectively.

NOTE 5 – PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment at February 28, 2015 and February 28, 2014consists of the following:

	2015			2014

Machinery and equipment	$	964,111		$	964,111
Furniture and fixtures		163,302			163,302

		1,127,413			1,127,413
Less accumulated depreciation and amortization		(1,126,468	)		(1,119,458	)

Property, plant and equipment, net	$	945		$	7,955

Depreciation and amortization expense was $7,010 and $32,515 for the years ended February 28, 2015 and February 28, 2014, respectively.

NOTE 6 – NOTES PAYABLE

Notes payable consisted of the following:

	February 28, 2015		February 28, 2014

Demand notes payable, at 10% and 16%	$	1,942,990	$	1,559,990
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 10 ^th of each month with the principal payment due on the maturity date.		848,344		786,198
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 2 ^nd of each month with the principal payment due on the maturity date.		428,917		401,399
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. The note was not repaid when originally due.		2,395,700		2,261,643
Senior secured convertible notes dated June 20, 2013, due June 20, 2014, convertible into shares of our common stock at a price of $0.50 per share. The note was not repaid when originally due.		325,000		305,913
		5,940,951		5,315,143

Less: Current portion	$	4,663,690	$	4,127,545

Long-term portion	$	1,277,261	$	1,187,598

F- 13

CONVERTIBLE DEBT

On September 23, 2011, the Company entered into a purchase agreement to sell convertible notes with a total principal value of $3,675,000 and warrants to purchase shares of common stock to an investment fund managed by MDB Capital Group. The notes have a 1.5 year maturity date and are convertible into shares of common stock at the initial conversion price of $0.75 per share. The warrants entitle the investors to acquire 4,900,000 and 490,000 shares and have an initial exercise price of $1 and $0.75 per share, respectively, and have a 5-year term. The proceeds of the convertible notes were assigned between warrants and convertible notes per ASC 470-20. The company recorded $175,000 as a discount (prepaid interest), $1,006,482 as capitalized financing cost and a discount of $1,790,482 on shares to be issued upon conversion of the note into equity. This discount (prepaid interest), capitalized finance cost and discount will be amortized over the life of the note . The notes were repaid in full in March 2013 and the Company then entered into an exchange agreement with the note holders whereby the outstanding warrants held by the investors, which carried an exercise price of $0.75 per share and would expire on September 22, 2016, were exchanged for our Common Stock at a ratio of 0.85 shares of common stock for each warrant outstanding.

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 and warrants to Kenmont Capital Partners. This new senior secured convertible note has a 1-year maturity date and is convertible into shares of common stock at the conversion price of $0.75 per share. The warrants entitle the holder to acquire 1,449,333 shares and have an initial exercise price of $0.75 per share, and have a 7-year term. The Company recorded $342,020 as a discount, which will be amortized over the life of the note.

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 and warrants to LPD Investments, Ltd. This new senior secured convertible note has a 1-year maturity date and is convertible into shares of common stock at the conversion price of $0.75 per share. The warrants entitle the holder to acquire 744,933 shares and have an initial exercise price of $0.75 per share, and have a 7-year term. The Company recorded $175,793 as a discount, which will be amortized over the life of the note.

On May 7, 2013, the Company entered into an agreement with an individual for the sale of a secured convertible note in the original principal amount of $750,000 and warrants to the holder. This note has a 1-year maturity date and is 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 will be amortized over the life of the note.

On June 20, 2013, the Company entered into an agreement with four individuals for the aggregate sale of $325,000 of secured convertible notes and warrants to the holders. These notes have a 1-year maturity date and are convertible into shares of common stock at the conversion price of $0.50 per share. The warrants entitle the holders to acquire 433,334 shares and have an initial exercise price of $0.75 per share, and have a 7-year term. The Company recorded $63,622 as a discount, which will be amortized over the life of the notes.

On August 19, 2013, the Company entered into an agreement with a member of its Board of Directors for the sale of $2,500,000 of convertible notes payable and warrants to the holder. These 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 entitle the holder to acquire 5,000,000 shares and have an initial exercise price of $0.75 per share and have a 7-year term. The Company recorded $667,118 as a discount, which will be amortized over the life of the note.

Future maturities of notes payable at February 28, 2015 are as follows:

Year Ending February 28,
2016	-
2017		1,277,261
Total	$	1,277,261

F- 14

CONVERTIBLE PROMISSORY NOTES

At February 28, 2013, the three other unsecured convertible promissory note payable amounted to $1,447,938, net of discounts of $402,063. These convertible notes bear interest at 7% per annum and are convertible into common stock of the Company at $0.76 per share (as well as variable conversion rates as described below). The notes are due on August 10, 2017, October 2, 2017, and January 4, 2013. On May 7, 2013, the note due on January 4, 2013 was converted into a portion of the note due June 15, 2013, which carries an interest rate of 12%.

7% Convertible Promissory Notes:

On August 10, 2012 the Company entered into an agreement with an individual for the sale of an unsecured convertible promissory note in the original principal amount of $1,000,000.00. This convertible promissory note was due and payable on August 10, 2017 and bears a interest rate of 7% per annum. Interest on the unpaid principal amount of this note is payable monthly in arrears on the tenth day of each calendar month commencing September 10, 2012. Interest is computed based on the actual number of days elapsed over a 360-day year. The Holder has the right to convert any outstanding and unpaid principal portion of this convertible promissory note into shares of Common Stock. The company recorded $310,723 as a debt discount, which will be amortized over the life of the note .

On October 2, 2012 the Company entered into an agreement with an individual for the sale of an unsecured convertible promissory note in the original principal amount of $500,000. This convertible promissory note is due and payable on October 2, 2017 and bears an interest rate of 7% per annum. Interest on the unpaid principal amount of this note is payable monthly in arrears on the second day of each calendar month commencing November 2, 2012. Interest is computed on the actual number of days elapsed over a 360-day year. The Holder has the right to convert any outstanding and unpaid principal portion of this convertible promissory note into shares of Common Stock. The company recorded $137,583 as a debt discount, which will be amortized over the life of the note .

NOTE 7 – RELATED PARTIES TRANSACTIONS

At February 28, 2015, the balance in Notes Payable and accrued interest-related party, current, includes $14,235,960 of unsecured notes payable plus accrued interest of $6,220,790 to Mr. Breslow, a member of our Board of Directors, payable on demand, bearing interest at a rate of 10% per annum. The payable balance of $13,819,960 plus accrued interest of $4,827,502 as of February 28, 2014. During the years ended February 28, 2015 and February 28, 2014, interest amounting to $1,395,855 and $1,381,996 respectively, was incurred on these notes. Related Party transactions also includes $82,000 of unsecured notes payable plus accrued interest of $15,594 and $7,391 to our CEO pursuant to a demand note entered into on April 5, 2014 and an unsecured note payable to Mr. Kopple, another member of our Board of Directors in the total amounts of $3,047,856 and $963,000 plus accrued interest of $302,874 and $30,518 pursuant to 10% demand note payable as of February 28, 2015 and 2014 respectively.

At February 28, 2015 and 2014, the balance in Convertible note payable and accrued interest-related party, long term, includes $1,672,379 and $2,005,601of secured convertible notes payable net of discounts of $327,621 and $494,399 plus accrued interest of $423,734 and $170,403 to Mr. Kopple, a member of our Board of Directors. On June 20, 2014, $500,000 of the original note was converted into a portion of a 10% demand note. The Company also issued the following stock and warrants to this board member: 1,833,333 shares of our common stock and 916,666 7-year warrants with an exercise price of $0.75 as a re-pricing of a previous issuance made in December 2012, 1,266,667 shares of our common stock and 1,000,000 7- year warrants with an exercise price of $0.75 for failure to repay a $500,000 note when due, 700,000 shares of our common stock and 700,000 7-year warrants with an exercise price of $0.75 for issuing a $350,000 letter of credit on Aura’s behalf, 500,000 shares of our common stock and 800,000 7- year warrants with an exercise price of $0.75 for joining Aura’s Board of Directors, 5,000,000 7- year warrants attached to the $2,500,000 convertible note which includes the unpaid $500,000 note referred to above, and 500,000 shares of our common stock as a consulting fee.

F- 15

NOTE 8 - ACCRUED EXPENSES

Accrued expenses at February 28, 2015 and February 28, 2014 consisted of the following:

	2015		2014

Accrued payroll and related expenses	$	3,130,414	$	2,729,944
Accrued rent		216,547		198,111
Accrued interest		1,177,873		456,801
Other		85		1,079
Total	$	4,524,919	$	3,385,937

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 9 - COMMITMENTS & CONTINGENCIES

Leases

In September, 2014, we entered into lease for a facility of approximately 69,000 square feet. The lease is for a term of seven years, has an option to extend for five years, and carries an initial base rent of $46,871.72. In accordance with the terms of the lease, the Company is responsible for common area charges. Rent expense charged to operations amounted to $747,683 and $681,134 for the years ended February 28, 2015 and February 28, 2014, respectively. The Company moved out of the facility in June 2015 to a much smaller facility in Stanton, California. In the new Stanton California facility, the Company is on a month-to-month lease. During the next 12 months, the Company plans to move to a new, larger facility.

Contingencies

Subsequent to year end, the Company was sued in 2016 by a former employee for a work-related injury. The plaintiff is seeking $45,000. The Company has made the plaintiff a settlement offer which, as of the date of this filing, has not been accepted.

Subsequent to year end, the Company was sued by a customer for an alleged failure to partially deliver against an advanced payment of approximately $120,000. The Company has made the plaintiff a settlement offer which, as of the date of this filing, has not been accepted.

Subsequent to year end, the Company’s former COO has been awarded approximately $238,000 in accrued salary and related charges by the California labor board. The Company has made the plaintiff a settlement offer which, as of the date of this filing, has not been accepted.

F- 16

Subsequent to year end, 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 which became 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 which was denied by the Court. Thereafter, the Court sustained demurrers by Mr. Gagerman and the Company but granted plaintiffs leave to amend. In response to the plaintiffs’ second amended complaint, both the Company and Mr. Gagerman intend to further demurrer seeking dismissal of this action.

In June 2015, the landlord of the Company’s primary facility in Redondo Beach, California initiated litigation against us seeking to terminate the Company’s lease and require the Company to vacate the premises prior to the scheduled lease end. As a result of that litigation, the Company was forced to vacate its primary facility and relocate to its present facility in Stanton, California. To date, no action seeking damages or any other amount has been filed against the Company by the landlord, nor does the Company believe it has any further liability to the landlord.

NOTE 10 - STOCKHOLDERS’ DEFICIT

Common Stock

At February 28, 2015 and February 28, 2014, we had 150,000,000 shares of $0.0001 par value common stock authorized for issuance, respectively. During the years ended February 28, 2015 and February 28, 2014, we issued 24,126,933 and 12,309,926 shares of common stock, respectively.

Employee Stock Options (Restated)

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 2011. Under the 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 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.

During the year ended February 28, 2015, no employee options were granted by the Company.

The Company incurred stock options related expenses of $0 and $62,921, during the years ended February 28, 2015 and February 28, 2014, respectively.

F- 17

Activity in this plan is as follows:

	2006 Plan
	Weighted-Average Exercise Price		Aggregate Intrinsic Value		Number of Options

Outstanding, February 28, 2013	$	0.75-$1.00	$	0.00		8,548,000
Granted	$	0.75				240,333
Cancelled	$	0.75				(186,000	)
Outstanding, February 28, 2014	$	0.75-$1.00	$	0.00		8,602,333
Granted		-				-
Cancelled	$	0.75				(825,833	)
Outstanding, February 28, 2015	$	0.75-$1.00				7,777,000

The exercise prices for the options outstanding at February 28, 2015, and information relating to these options is as follows:

Options Outstanding

Exercisable Options

Range of Exercise
Price

Number

Weighted Average Remaining Life

Weighted Average Exercise Price

Weighted Average Remaining Life

Number

Weighted Average Exercise Price

$0.75-$1.00

7,777,000

5 years

0.79

5 years

7,777,000

0.79

The weighted average fair values of the options on the date of grant for the year ended February 28, 2015 and February 28, 2014 were $0.0 per share and $0.08 per share, respectively.

A summary of the status of the Company’s non-vested shares as of February 28, 2015, and changes during the year ended February 28, 2015, is presented below:

Non-vested Shares	Shares			Weighted-Average Grant-Date Fair Value
Non-vested at February 28, 2014		366,667		$	0.38
Granted		-		$	-
Cancelled		(366,667	)	$	0.38
Non-vested at February 28, 2015		0		$	-

As of February 28, 2015, there was no unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan.

Warrants

Activity in issued and outstanding warrants is as follows:

	Number of Shares			Exercise Prices
Outstanding, February 28, 2014		48,503,720		$	0.75-$2.00
Granted		18,381,012		$	0.10-$0.75
Exercised		(17,334,540	)	$	0.10
Cancelled		(12,004,144	)	$	0.75-$2.00
Outstanding, February 28, 2015		37,546,048		$	0.10-$1.50

The grant date fair value of the warrants issued in the year ended February 28, 2015 amounted to $1,910,579 which was calculated using the Black-Scholes option pricing model with the following assumptions: risk free rates of return of 2.18%, volatility of 80.82%, a dividend yield of 0%, and an expected life of 7 years.

F- 18

The exercise prices for the warrants outstanding at February 28, 2015, and information relating to these warrants is as follows:

Range of Exercise Prices		Stock Warrants Outstanding		Stock Warrants Exercisable		Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price of Warrants Outstanding		Weighted- Average Exercise Price of Warrants Exercisable		Intrinsic Value
$	0.10-$0.75		18,381,012		18,381,012	74 months	$	0.55	$	0.55	$	0.00
$	0.75		1,082,734		1,082,734	72 months	$	0.75	$	0.75	$	0.00
$	0.75		1,000,000		1,000,000	62 months	$	0.75	$	0.75	$	0.00
$	0.75-$1.00		5,990,275		5,990,275	57 months	$	0.77	$	0.77	$	0.00
$	1.00-$1.25		795,000		795,000	19 months	$	1.05	$	1.05	$	0.00
$	1.00		8,272,187		8,272,187	17 months	$	1.00	$	1.00	$	0.00
$	1.50		105,000		105,000	13 months	$	1.50	$	1.50	$	0.00
$	0.75-1.50		709,198		709,198	10 months	$	1.25	$	1.25	$	0.00
$	1.50		156,000		156,000	6 months	$	1.50	$	1.50	$	0.00
$	1.50		704,000		704,000	5 months	$	1.50	$	1.50	$	0.00
$	1.50		350,642		350,642	2 months	$	1.50	$	1.50	$	0.00

			37,546,048		37,546,048

NOTE 11 – GOING CONCERN (Restated)

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. During the years ended February 28, 2015 and February 28, 2014, the Company incurred losses of $12,287,252 and $12,724,158, respectively and had negative cash flows from operating activities of $3,769,985 and $5,888,019, 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 twelve months subsequent to the end of the February 28, 2017 fiscal year end, we intend to restart operations of our AuraGen/VIPER business both domestically and internationally. At the next shareholders meeting the shareholders will vote for an entire new slate of five board candidates. The new board when elected will hire a new management team. In addition, we plan to acquire a new facility of approximately 45,000 square feet for operations, as well as, rebuild the engineering QA and sales teams to support the operation. We anticipate being able to fund these additions in the fiscal year following our February 28, 2017 year end.

F- 19

NOTE 12- INCOME TAXES (Restated)

The Company did not record any income tax expense due to the net loss during the years ended February 28, 2015 and February 28, 2014. 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 40% to loss before income taxes as follows for the years ended February 28, 2015 and February 28, 2014:

	2015		2014
Current:
Federal	$	-	$	-
State		800		800

Total		800		800

Deferred
Federal		-		-
State		-		-

Total		-		-

Total Income Tax Provision	$	800	$	800

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

	2015			2014

Expected tax benefit		34.0	%		34.0	%
State income taxes, net of federal benefit		6.0			6.0
Changes in valuation allowance		(40.0	)		(40.0	)
Total		-	%		-	%

The following table summarizes the significant components of our deferred tax asset at February 28, 2015 and February 28, 2014:

	2015			2014
Deferred tax asset
Primarily relating to net operating loss carry-forwards, but also reserves for inventory and accounts receivable, stock-based compensation and other		120,000,000			116,000
Valuation allowance		(120,000,000	)		(116,000,000	)
Net deferred tax asset	$	-		$	-

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

At February 28, 2015, we had operating loss carry-forwards of approximately $354,000,000 for federal purposes, which expire through 2035, and $57,000,000 for state purposes, which expire through 2020.

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, 2015 and February 28, 2014, 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, 2015 and February 28, 2014, 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 2010 and forward are subject to examination by our tax authorities. We are not currently under examination by any tax authority.

NOTE 13 - EMPLOYEE BENEFIT PLANS

We sponsor two employee benefit plans: The Employee Stock Ownership Plan (the “ESOP”) and a 401(k) plan.

The ESOP is a qualified discretionary employee stock ownership plan that covers substantially all employees. We did not make any contributions to the ESOP during the years ended February 28, 2015 and February 28, 2014, respectively.

F- 20

We sponsor a voluntary, defined contribution 401(k) plan. The plan provides for salary reduction contributions by employees and matching contributions by us of 100% of the first 4% of the employees’ pre-tax contributions. The matching contributions included in expense were $31,766 and $73,804 for the years ended February 28, 2015 and February 28, 2014, respectively.

NOTE 14 - SEGMENT INFORMATION

We are a United States based company providing advanced technology products to various industries. The principal markets for our products are North America, Europe, and Asia. All of our operating long-lived assets are located in the United States. We operate in one segment.

Total net revenues from customer geographical segments are as follows for the years ended February 28, 2015 and February 28, 2014:

	2015		2014

United States	$	585,688	$	1,446,035
Canada		91,217		149,097
Europe		33,588		1,273
Other		62,061		12,005
Asia		383,257		708,942
Total	$	1,155,811	$	2,317,352

NOTE 15 - RESTATEMENT:

In 2017 the company determined that certain accounts receivable that had not yet been collected should be removed from accounts receivable and sales. The company also determined that, due to the cessation of sales, the value of the remaining inventory could no longer be determined and should be fully reserved. Additionally, the company determined to revalue the value of options that had been extended.

	As
	Previously						As
	Stated			Adjustments			Restated
Balance Sheet
Accounts Receivable	$	125,593			30,126		$	155,719
Inventory- current		1,000,000			(1,000,000	)		0
Inventory-long term		131,037			(131,037	)		0
Additional paid in capital		403,234,261			1,079,755			404,314,016
Accumulated Deficit		(434,513,163	)		(2,180,665	)		(436,693,828	)

Statement of Operations
Net Revenues	$	2,337,446			20,094		$	2,317,352
Cost of goods sold		2,162,328			1,253,106			909,222

Statement of Cash Flows
Net Loss	$	(13,957,451	)		1,233,293		$	(12,724,158	)
Provision for inventory obsolescence		1,070,888			(1,070,888	)		--

Accounts Receivable		82,639			19,874			102,513
Accounts Payable and Accrued Expenses		3,929,449			375,063			3,554,386
Inventory		182,216			(182,216	)		-
Proceeds from notes payable		1,171,000			25,000			1,196,000

F- 21

NOTE 16 - SUBSEQUENT EVENTS:

From April 2016 to February 2017, the Company issued convertible notes payable to certain note-holders. The notes carry an interest rate of 5% and might be converted into the company shares of common stock if the stockholders approve a 1-for-7 reverse stock split.

On January 24, 2017 the Company entered into a debt refinancing agreement with Warren Breslow, a 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 $88,890,574 of accrued interest. Mr. Breslow agreed to cancel and forgive all interest, waive all events of default, and sign a new five-year convertible note in the amount of $14,930,041 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. The agreement further provides that $11,982,041 of the note will be converted into 7,403,705 shares of common stock upon stockholders approving a 1 for 7 reverse stock split within one year of entering this agreement; the remaining balance may be converted at any time thereafter. In the absence of stockholder approval of a reverse stock split within one year, this agreement will become null and void. The Company has elected to continue to accrue interest on this agreement until such time as the 1 for 7 reverse stock split has been approved.

On January 27, 2017, the Company entered into a joint venture (JV) agreement with a Chinese company to manufacture, market and distribute certain mobile power products based on Aura’s patented technology solely within the Peoples Republic of China. The Company owns 49% of the JV and contributed $250,000 and a license to specific technology. The Chinese company owns 51% of the JV and is required to contribute $9,750,000. In addition, the Chinese company has invested $2,000,000 in Aura at $0.20 per share for a total of 10,000,000 shares of common stock and is required to purchase a minimum of $1,250,000 of product supported by letters of credit for distribution until the JV factory is fully built and staffed. In order to properly train JV personnel in the workings of Aura’s products, Aura has also committed to supply limited technical staff to the JV for a period of six months at no cost to the JV other than to reimbursement for travel, room and board. The agreement was subject to the approval of the Chinese Government which was received in April, 2017.

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. 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, the agreement is binding on all seven of the secured creditors. The total debt at October 31, 2016 was approximately $4,095,700 including interest of $1,606,884. 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 bears no interest from November 1, 2016 to May 1, 2016 and 16% per annum thereafter. Upon stockholder approval of a 1-for-7 reverse stock split and the election of a new Board of Directors, 80% of the total debt including accrued interest will be converted into shares of common stock and a new five-year 5% per annum convertible note to be issued for the remaining balance. The note also provides for early payoff under certain conditions and contains various default provisions. The agreement was further amended subsequent to year end to extend the time for the Company to file a proxy statement.

On February 21, 2017 the Company entered into several debt refinancing agreements with debt holders relating to an aggregate debt totaling $2,237,456 including interest of $489,466. Pursuant to these agreements, all past events of default are waived and new five-year 5% convertible notes with no interest for the first six months have replaced the original debt instruments. Upon stockholder approval of a 1 for 7 reverse stock split, these new notes will be converted into an aggregate total of 1,164,555 shares of stock. The notes also provide various default provisions.

F-22

Exhibit 10.31

Aura Systems, Inc.
4000 Redondo Beach Avenue
Redondo Beach, CA 90278

June 20, 2014

KF Business Ventures, LP
Attention: Robert C. Kopple

10866 Wilshire Boulevard, Suite 1500

Los Angeles, California 90024

Re: Financing Letter of Agreement

Gentlemen:

This agreement (this “ Loan Agreement ”) set forth the terms of the agreement between Aura Systems, Inc., a Delaware corporation (the “ Company ”), and IKE Business Ventures, LP, a California limited partnership (“ Lender ”), joined by its affiliate, Kopple Family Partnership, LP, a California limited partnership (“ KFP ”), regarding the following financing transaction:

1. Lender shall lend to the Company, and the Company shall borrow from Lender, Two Million Nine Hundred Fifteen Thousand Two Hundred Six Dollars and Eleven Cents ($2,915,206.11), consisting of the aggregate sum of (i) Five Hundred Thousand Dollars ($500,000.00) (the “Past Due Principal Amount”), in refinancing of a portion of the outstanding principal balance of Two Million Five Hundred Thousand Dollars ($2,500,000.00) of that certain Convertible Promissory Note dated August 19, 2013 by the Company payable to the order of KFP (the “Convertible Note”), past due and payable on February 25, 2014, which Past Due Principal Amount shall be added to the principal amount of the Loan contemplated hereunder as of the date hereof and shall be credited by KFP against said outstanding principal balance of the Convertible Note as of the date hereof, plus (ii) Sixty Eight Thousand Twenty Seven Dollars and Seventy Eight Cents ($68,027.78), in refinancing of accrued unpaid interest on the Past Due Principal Amount from the date originally advanced on March 28, 2013 to February 25, 2014 and default interest thereon from February 25, 2014 to the date hereof, as provided in the Convertible Note, as more specifically set forth in Schedule 1 attached hereto and incorporated herein by reference (“Past Due Accrued Interest”), which Past Due Accrued Interest shall be capitalized and added to the principal amount of the Loan contemplated hereunder as of the date hereof and shall be credited by KFP against the outstanding accrued interest and default interest under the Convertible Note as of the date hereof, plus (iii) One Million Nine Hundred Sixty Three Thousand Dollars ($1,963,000.00) (the “Additional Principal Amount”), in refinancing of the entire outstanding• principal balance of certain additional loans advanced by Lender to the Company prior to the date hereof (in addition to the principal amounts evidenced by the Convertible Note) (the “Existing Additional Loans”), as more specifically set forth in Schedule 1 attached hereto and incorporated herein by reference, which Additional Principal Amount shall be added to the principal amount of the Loan contemplated hereunder as of the date hereof and shall be credited by Lender against said outstanding principal balance of the Existing Additional Loans as of the date hereof, plus (iv) Eighty Four Thousand One Hundred Seventy Eight Dollars and Thirty Three Cents ($84,178.33), in refinancing of interest on the Additional Loan Amount at the rate of ten percent (10%) per annum from the dates originally advanced to the date hereof, as more specifically set forth in Schedule 1 attached hereto and incorporated herein by reference (“Additional Accrued Interest”), which Additional Accrued Interest shall be capitalized and added to the principal amount of the Loan contemplated hereunder as of the date hereof and shall be credited by Lender against interest on the Additional Loans as of the date hereof (the Past Due Principal Amount, the Past Due Accrued Interest, the Additional Principal Amount and the Additional Accrued Interest being sometimes referred to herein as the “Refinanced Loan Portion) , plus (v) Three Hundred Thousand Dollars ($300,000.00), as an additional advance to the Company by Lender concurrently upon execution and delivery of this Loan Agreement by wire transfer of immediately available funds to an account designated by the Company (the “Additional Advance”; and, together with the Refinanced Loan Portion, collectively as the “Loan”).

2. Concurrently upon execution and delivery of this Loan Agreement:

A. The Company shall execute and/or deliver to Lender (i) an unsecured, non-convertible promissory note of the Company payable to the order of Lender in the amount of the Loan evidencing the indebtedness of the Loan, substantially in the form of Exhibit “A” attached hereto and made a part hereof (the “Note”), (ii) a warrant agreement by the Company substantially in the form of Exhibit “B” attached hereto and made a part hereof, duly completed in respect to the number of shares covered by the Initial Warrants and the Exercise Price thereof in accordance with Paragraph 4 hereof (as such capitalized terms are therein defined), and (iii) a certificate by the Secretary of the Company, certifying resolutions adopted by the Board of Directors of the Company authorizing the Company to enter into this Loan Agreement and borrow the Loan from Lender, to execute and deliver the Note, the Warrants and all other Loan Documents (as hereinafter defined), if any, to perform its obligations under the Loan Documents, and to consummate the transactions contemplated by the Loan Documents, in form and substance reasonably satisfactory to Lender. In addition, within thirty (30) days after the date hereof, the Company shall obtain and deliver to Lender one or more subordination agreements with Warren Breslow and each of his relevant affiliates in favor of Lender in respect to the Loan in form and substance reasonably satisfactory to Lender (collectively, the “Subordination Agreement”), time being of the essence thereof. As used herein, the term “Loan Documents” shall mean, collectively, this Agreement, the Note the Warrants and any and all other agreements evidencing, securing or otherwise pertaining to the indebtedness evidenced by the Note to which the Company is or hereafter becomes a party.

B. Concurrently upon execution and delivery of this Loan Agreement, the Note and the Initial Warrants in accordance with Paragraph 2(A) hereof, (i) the principal balance payable by the Company pursuant to the Convertible Note shall be automatically reduced by Five Hundred Thousand Dollars ($500,000.00), leaving an outstanding principal balance of the Convertible Note in the amount of Two Million Dollars ($2,000,000.00) as of the date hereof after accounting for such reduction (the “Convertible Note Principal Balance”), as more specifically set forth in Schedule 1 attached hereto and incorporated herein by reference, (ii) the accrued unpaid interest and default interest under the Convertible Note payable by the Company pursuant to the Convertible Note shall be automatically reduced by the Past Due Accrued Interest Amount, which shall be credited against accrued interest and default interest on the Past Due Amount as of the date hereof, leaving accrued unpaid interest on the remaining principal balance of the Convertible Note in the amount of Two Hundred Thirteen Thousand Three Hundred Ninety Five Dollars and Eighty Three Cents ($213,395.83) as of the date hereof after accounting for such reduction (the “Convertible Note Accrued Interest Balance”), as more specifically set forth in Schedule I attached hereto and incorporated herein by reference, and (iii) this Loan Agreement (and the Note) shall supersede and replace all obligations of the Company with respect to the Refinanced Loan Portion, and the Past Due Amount, the Past Due Accrued Interest, the Existing Additional Loans and all interest in respect thereto shall automatically be deemed satisfied and no longer outstanding, and all rights of Lender and KFP with respect thereto will forthwith cease and terminate except as expressly set forth in this Loan Agreement, the Note and the Warrants, and (iv) KFP hereby waives the Events of Default under the Convertible Note, the Securities Purchase Agreement for the Convertible Note between the Company and KFP and any and all other agreements evidencing, securing or otherwise pertaining to the indebtedness evidenced by the Convertible Note to which the Company is or hereafter becomes a party (collectively, the “Convertible Loan Documents”) resulting from the Company’s failure to pay the Past Due Principal Amount due on February 25, 2014, and to pay Default Interest monthly in arrears during the continuation of such Event of Default as provided in the Convertible Note, expressly reserving all other rights under the Convertible Note, and KFP and the Company agree that the Convertible Note Accrued Interest Balance and all interest accrued on the Convertible Note Principal Balance from and after the date hereof as provided in the Convertible Note shall be due and payable in full on August 16, 2014, time being of the essence thereof

C. In order to induce KFP to waive and forebear certain rights and remedies under or arising the Convertible Loan Documents pursuant to Paragraph 2(B)(iv) hereof, KFP and the Company agree that the Convertible Loan Documents shall be, and each of them hereby is, amended to provide that an Event of Default (as hereinafter defined) in respect to the Loan shall automatically constitute an Event of Default under the Convertible Loan Documents, and each of them, without any requirement of any election, notice or demand by KFP of any kind or nature whatsoever. Except as modified by this Loan Agreement, the Convertible Loan Documents, and each of them, remain in full force and effect in accordance with their respective terms and are hereby ratified and confirmed in all respects by the Company and KFP.

3. The Company covenants andagrees with Lender as follows:

A. The Company shall pay simple interest on the outstanding principal balance of the Note (including capitalized interest therein) at a rate equal to ten percent (10%) per annum from the date hereof until paid in full. All interest due with respect to the Note shall be computed on the basis of a 360-day year and the actual number of days elapsed. Subject to acceleration upon the occurrence of an Event of Default, the outstanding principal balance of the Note, together with accrued unpaid interest thereon, shall be due and payable in a single lump-sum payment on May 31, 2015 (the “Maturity Date”), at which time the entire outstanding principal balance of the Note and accrued unpaid interest thereon shall be due and payable without demand therefor except as otherwise required by applicable law.

B. Subject to Paragraph 3(E) hereof, in the event the Company borrows any funds, issues any class of capital stock or rights to acquire or convert into capital stock of the Company or grants any rights in respect to territories to any Person for cash consideration of more than Five Million Dollars ($5,000,000.00) in the aggregate in any one or more transactions from or after the date hereof (excluding the Loan and Excluded Securities), the Company shall pay to Lender the entire amount of such cash consideration in excess Five Million Dollars ($5,000,000.00) in the aggregate as a mandatory prepayment of the indebtedness evidenced by the Note until the entire indebtedness evidenced by this Note is paid in full, concurrently upon receipt of such cash consideration by the Company, time being of the essence thereof, without notice or demand whatsoever by Lender.

C. The indebtedness evidenced by the Note may be prepaid, either in whole or in part in increments of not less than Two Hundred and Fifty Thousand Dollars ($250,000.00) each, at any time and from time to time without prepayment penalty or premium.

D. Each payment required or permitted under the Note shall be applied first in payment of any late payment charges pursuant to Paragraph 3(G) hereof, if any, second in payment of accrued and unpaid interest, whether or not then due, third in payment of the accrued and unpaid capitalized interest included in the principal balance of the Note, whether or not then due, and finally in payment of the remaining outstanding principal balance of the Note.

E. For so long at the indebtedness evidenced by the Note is outstanding, the Company shall not (i) incur any indebtedness or capitalized lease obligations other than (a) indebtedness or capitalized lease obligations in existence on the date hereof, (b) trade payables incurred by the Company pursuant to preexisting contract(s) in existence on the date hereof or as otherwise incurred in the ordinary course of business of the Company, and (c) debt-instrument financing which is subordinate to the right of the prior full and final payment in full of the indebtedness evidenced by the Note and the Convertible Note pursuant to a written subordination in form and substance approved by Lender in its sole and absolute discretion, (ii) transfer, pledge, hypothecate, encumber, license, sell or otherwise dispose of any of the assets of the Company other than liens against the assets of the Company in existence on the date hereof, licenses of the assets of the Company in existence on the date hereof and non-exclusive licenses hereafter granted by the Company in the ordinary course of business of the Company and sales of inventory in the ordinary course of business of the Company, (iii) issue any capital stock or any rights to acquire or convert into capital stock of the Company in any one or more transactions on or after the date hereof except for (a) the Warrants and other Excluded Securities and shares issuable upon exercise thereof, (b) shares of Common Stock of the Company for a price of not less than Twenty Cents ($0.20) per share, and (c) Options and Convertible Securities with .a duration of not more than seven (7) years, for which the lowest exercise or conversion price set forth in such Option or Convertible Security (as applicable) for which one share of Common Stock is issuable upon the exercise, conversion, or exchange of any such Options or Convertible Securities is not less than Fifty Cent ($0.50) per share, and for which ratio of the number of Options issued in connection with the issuance of any shares of Common Stock or Convertible Security is not more than two-to-one (2:1), respectively, (iv) declare, pay or make any dividend or distribution or declare or make any split or reverse split of any capital stock or any rights to acquire or convert into capital stock of the Company in any one or more transactions on or after the date hereof, (v) enter into any merger, reorganization or other similar transaction, or (vi) hire any personnel or disburse any funds of any kind or nature in excess of one hundred ten percent (110%) of any expenditure reflected in the itemized budget set forth in Schedule “3(E)” attached hereto and made a part hereof, or such other budget of the Company as may be approved by Lender from time to time in its sole and absolute discretion (the “Budget”), or in e?wess of one hundred ten percent (110%) of the aggregate amount of all expenditures set forth in the Budget, in each instance without the prior written consent of Lender, which consent may be withheld or delayed for any or no reason as determined by Lender in its sole and absolute discretion. Violation of the provisions of this Paragraph 3(E) shall constitute a non-curable default by the Company under the Loan Documents unless otherwise agreed by Lender in writing as determined by Lencer in its sole and absolute discretion in each instance.

F. For so long at the indebtedness evidenced by the Note is outstanding, the Company shall prepare and furnish to Lender (i) monthly financial statements of the revenues and expenses, balance sheet and cash flows of the Company ‘for each fiscal month of the Company, including cumulative year-to-date figures for the then current fiscal year of the Company, within fifteen (15) days after the end of such fiscal month, subject to year’s-end adjustment and notes, and (ii) annual financial statements of the revenues and expenses, balance sheet and cash flows of the Company for each fiscal year of the Company, including comparative figures for the fiscal year immediately preceding the then current fiscal year of the Company.

G. The occurrence ‘of any one or more of the following events, acts or occurrences shall constitute an event of default (each an “Event of Default”): (i) the Company fails to pay in full the entire outstanding principal balance of the Note and all then-accrued unpaid interest thereon on the Maturity Date, time being of the essence thereof, without notice or demand therefor, or fails to pay in full any other sum under the Loan Documents, or any of them, within five (5) Business Days after the same first becomes due and payable thereunder, (ii) the Company violates the provisions of Paragraph 3(E) above, without any right to cure the same, (iii) the Company shall breach or fail to perform, comply with or observe, or shall be in default under, any of its other obligations, terms, covenants or conditions on its part to be performed, complied with and observed under the Loan Documents, or any of them, including, without limitation, delivery of the Subordination Agreement to Lender within thirty (30) days after the date hereof, time being of the essence thereof, and if such breach, failure or default may be cured, such breach, failure or default is not cured within five (5) Business Days after written notice thereof is given to the Company by Lender, (iv) the Company fails to pay in full any sum under the Convertible Note when duc, (v) the Company shall breach or fail to perform, comply with or observe, or shall be in default under, any of its other obligations, terms, covenants or conditions on its part to be performed, complied with and observed under the Convertible Loan Documents, or any of them, and if such breach, failure or default may be cured, such breach, failure or default is not cured within any applicable grace period, (vi) there shall be commenced against the Company an involuntary case seeking the liquidation or reorganization under Title 11 of the United States Code (11 U.S ^. .C. Section 101 et seq. as amended from time to time) or an involuntary case or proceeding seeking the appointment of a receiver, custodian, trustee or similar official for it, or to take possession of all or a substantial portion of its property or to operate all or a substantial portion of its business, and any of the following events occur: (a) the Company consents to such involuntary case or proceeding or fails to diligently contest it in gbod faith; (b) the petition commencing the involuntary case or proceeding is not timely controverted; (c) the petition commencing the involuntary case or proceeding remains undismissed or unstayed for a period of sixty (60) calendar days; or (d) an order for relief shall have been issued or entered therein or a receiver, custodian, trustee or similar official appointed; or (vii) the Company shall institute a voluntary case seeking liquidation or reorganization under (11 U.S.C. Section 101 et seq. as amended from time to time), or shall consent thereto; or shall consent to the conversion of an involuntary case to a voluntary case; or shall file a petition, answer a complaint or otherwise institute any proceeding seeking, or shall consent or acquiesce to the appointment of, a receiver, custodian, trustee or similar official for it, or to take possession of all or a substantial portion of its property or to operate all or a substantial portion of its business; or shall make a general assignment for the benefit of creditors; or the board of directors of the Company (or any committee thereof) adopts any resolution or otherwise authorizes action to approve any of the foregoing, then in each such event (w) the Company shall pay to Lender a late payment fee equal to five percent (5%) of any past-due sum under the Loan Documents, or any of them, payable upon demand therefor by Lender, (x) the outstanding principal balance of the Note shall bear interest at the rate of fifteen percent (15%) per annum (“Default Interest Rate”) from the date of the occurrence of the Event of Default until such Event of Default is cured or waived in writing by Lender as determined in its sole and absolute discretion, payable upon demand therefor by Lender, (y) the entire principal balance of the Note together with all accrued and unpaid interest thereon shall become immediately due and payable in full at the option of the holder of the Note if as a result of an Event of Default specified in Clause (i), (ii), (iii), (iv) or (v), above or automatically without any election, declaration or other act on the part of the holder of the Note if as a result of an Event of Default specified in Clause (vi) or (vii) above, without notice or demand whatsoever except as otherwise required by applicable law, and (z) all of the remaining Additional Warrants (as hereinafter defined) not yet vested in accordance with Paragraph 4 hereof shall become immediately vested in full, regardless of whether or not the holder of the Note elects to accelerate the indebtedness evidenced by the Note pursuant to Clause (y) above, and the Company shall promptly issue said Additional Warrants to Lender upon demand therefor by Lender. Interest at the Default Interest Rate shall begin to accrue on the date on which the applicable Event of Default shall be deemed to have occurred and shall continue until such Event of Default shall have been cured or waived in accordance with the terms of the this Loan Agreement. Upon the waiver or cure of an Event of Default, the Default Interest Rate shall cease to be in effect and interest shall accrue at the rate of ten percent (10%) per annum from and after the date of such waiver or cure and be payable in accordance with terms of the Note.

H. In order to induce Lender to make the Loan to the Company evidenced by the Note, the Company hereby represents and warrants to Lender and each other holder of the Note (i) that, by reason of its own business and financial experience, the Company and Lender could reasonably be assumed to have the capacity to protect its own interests in connection with the transactions contemplated by the Loan Documents, and (ii) as a consequence, that the indebtedness evidenced by the Note, including all interest thereon and other consideration therefor, including, without limitation, the Warrants issued pursuant to the Loan Documents, is exempt from the usury restrictions under California law pursuant to the exemption set for in California Corporation Code Section 25118(b). Without limiting the effectiveness of said representations, warranties and exemptions, however, it is nevertheless the intent of the Company and Lender that the holder of the Note shall never be entitled to receive, collect or apply, as interest or other consideration of any kind under the Note, any amount in excess of the maximum rate of interest permitted to be charged by applicable law; and in the event the holder of the Note ever receives, collects or applies as interest or other consideration of any kind any such excess, such amount which would be excess interest or other consideration shall be deemed a partial prepayment of the principal amount of the Note and treated as such under the Note; and if the principal amount of the Note is paid in full, any remaining excess interest or other consideration shall be paid to the Company forthwith upon demand therefor.

I. Upon payment in full of the entire indebtedness evidenced by the Note and all other sums payable by the Company under the Note or this Loan Agreement, the Company shall have no further obligations to make any further payments to Lender in respect to the Loan under the Note or this Loan Agreement.

4. In consideration of the Loan, the Company shall issue to Lender (i) a warrant substantially in the form of Exhibit “B” attached hereto and made a part hereof, duly completed, representing Lender’s right to purchase up to 5,830,412 shares of Common Stock of the Company at any time and from time to time during the period of seven (7) years following the date of the issuance thereof, for an exercise price of Ten Cents ($0.10) per share (subject to adjustment pursuant to terms of the warrant agreement) (the “Exercise Price”) (the “Initial Warrant”), and (ii) in the event that the entire outstanding principal balance of the Note together with all then-accrued unpaid interest thereon is 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 that any amount of the principal balance of the Note or any then-accrued unpaid interest on the Note remains outstanding and unpaid on the first (1st) day of such calendar month, the Corn pany shall issue to Lender an additional warrant substantially in the form of Exhibit “B” attached hereto and made a part hereof, duly completed, representing Lender’s right to purchase up to 2,915,206 shares of Common Stock of the Company at any time and from time to time during the period of seven (7) years following the date of the issuance thereof, for an exercise equal to the then Exercise Price per share under the Initial Warrant (subject to adjustment pursuant to terms of the warrant agreement) (each an “Additional Warrant”; the Initial Warrants and Additional Warrants being here sometimes referred to collectively as the “Warrants”); provided, however, in the event that the Company shall pay to Lender not less than Two Million Dollars ($2,000,000.00) in the aggregate in respect to the indebtedness evidenced by the Note at any time prior to October 1, 2014, then the number of shares of Common Stock covered by each Additional Warrant for each such calendar month shall be reduced to the product of 2,915,206 shares of Common Stock of the Company, multiplied by a fraction, the numerator of which shall be an amount equal to the outstanding principal balance of the Note (including capitalized interest therein) on the first (1 ^st ) day of such calendar month, and the denominator of which shall be an amount equal to the original principal amount of the Note (including capitalized interest therein).

A. The Warrants shall not be transferable by the holder thereof except to an affiliate controlling, controlled by of under common control of such holder (collectively, “Affiliates”, without the prior written consent of the Company in each instance as determined inn its sole and absolute discretion. For so long as Lender and/or any of its Affiliates holds any Warrants, Lender shall not, and shall not permit any of its Affiliates to, or cause any other Person to, or act in concert with any other Person to maintain a position whereby such Person has executed one or more sales of Common Stock that is marked as a short sale (but not including any sale marked “short exempt”) and that is executed at a time when such Person has no equivalent offsetting long position in the Common Stock (or is deemed to have a long position hereunder or otherwise in accordance with Regulation SHO of the Securities Exchange Act of 1934, as amended). For purposes of determining whether a Person has an equivalent offsetting long position in the Common Stock, all Common Stock (i) that is then owned by such Person, or (ii) that would be issuable upon conversion or exercise or otherwise of any convertible or exercisable securities of the Company then held by such Person (assuming that such securities were then fully convertible or exercisable, notwithstanding any provisions to the contrary, and giving effect to any conversion or exercise price adjustments that would take effect given only the passage of time), in each case, shall be deemed to be held long by such Person.

B. The Company shall at all times during the period within which the rights represented by the Warrant may be exercised, keep reserved for issuance a number of shares of Common Stock as shall from time to time be sufficient to satisfy the Company’s then-existing obligation to issue Warrant Shares thereunder.

C. The Company shall, at its sole cost and expense, provide to the holder of shares of common capital stock of the Company issued upon exercise of the Warrants upon request a legal opinion from legal counsel to the Company that the offer or sale of such shares of capital stock of the Company so issued to such holder is exempt from any registration requirements pursuant to Rule 144 (so long as and to the extent the requirements of Rule 144 are satisfied).

5. Lender represents to the Company (a) that Lender is an “accredited investor” as that term is defined in Rule 501 of Regulation D under the Securities Act, (b) that Lender is not acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to this Loan Agreement or any other Loan. Documents or any of the transactions contemplated hereby and thereby, (c) that, by reason of its business and financial experience, Lender has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the investment in the Securities, has the capacity to protect its own interests, and is able to bear the economic risk of such investment (including the complete loss thereof), (d) that Lender has conducted its own investigation of the Company and, to the extent deemed necessary or advisable by Lender, has retained and relied upon qualified professional advice regarding the. investment, tax and legal merits and consequences of this Loan Agreement and the other Loan. Documents and its investment in the Securities, and (e) that Lender and its advisors, if any, have been furnished with all materials relating to the business, finances and operations of the Company and with all materials relating to the offer and sale of the Securities which have been requested by Lender, and have been afforded the opportunity to ask questions of the Company. The Company acknowledges to Lender (x) that the principal of Lender and KFP, Robert C. Kopple (“Kopple”), is a director and vice chairman of the board of the Company, and has disclosed to the other members of the board of directors of the Company that he has a financial interest in the indebtedness and other transactions contemplated by the Loan Documents and the Convertible Loan Documents and has recused himself from any deliberations or other actions by the board of directors of the Company in respect to the indebtedness and other transactions contemplated by the Loan Documents and the Convertible Loan Documents, (y) that Kopple has not acted as a financial advisor or fiduciary of the Company (or in any similar capacity) in respect to the indebtedness or other transactions contemplated by the Loan Documents or the Convertible Loan Documents, and (z) that the indebtedness and other transactions contemplated by the Loan Documents and the Convertible Loan Documents are fair to the Company.

6. Lender understands and acknowledges that the Securities are being offered and sold to Lender in reliance upon specific exemptions from the registration requirements of federal and state securities laws and that such exemption depends, in part, on the accuracy and truthfulness of the representations of Lender made in this Loan Agreement and the other Loan Documents. Lender represents and warrants to the Company that all information which has been furnished to the Company with respect to Lender’s financial position and business experience is correct and complete as of the date hereof. Lender represents to the Company that Lender (a) is acquiring the Note and Warrants, and (b) upon exercise of its Warrants will acquire the Common Stock issuable upon exercise thereof, in each case, for its own account and not with a view towards, or for resale in connection with, the public sale or distribution thereof in violation of applicable securities laws except pursuant to sales registered or exempted under the Securities Act; provided, however, by making the representations herein, Lender does not agree, or make any representation or warranty, to hold any of the Securities for any minimum or other specific term and reserves the right to dispose of the Securities at any time in accordance with or pursuant to a registration statement or an exemption under the Securities Act. Lender has no present or contemplated agreement, arrangement or understanding, directly or indirectly, with any Person to distribute any of the Securities in violation of applicable securities laws. Lender further represents to the Company that Lender was not formed for the purpose of purchasing the Securities.

7. Lender understands that the Securities being acquired hereunder are characterized as “restricted securities” under federal and state securities or “blue sky” laws inasmuch as they are being acquired in a transaction not involving a public offering such securities may be resold without registration under the Securities Act and applicable state securities or “blue sky” laws only in certain limited circumstances. Lender is familiar with Rule 144 promulgated by the SEC, as presently in effect, and understands the resale limitations imposed thereby and by the Securities Act and applicable state securities laws, pursuant to which the Securities must be held indefinitely unless a subsequent disposition thereof is registered under the Securities Act and applicable state securities laws or is exempt from such registration. Lender further understands that the Securities have not been registered under the Securities Act or any state securities laws and that neither the Company nor any other Person is under any obligation to register the Securities under the Securities Act or any state securities laws or to comply with the terms and conditions of any exemption thereunder.

8. The Company shall reimburse Lender and KFP, for all attorneys’ fees and costs (other than attorneys’ fees, if any, charged personally by Kopple) and other associated out-of-pocket expehses and fees incurred by them in connection with (i) the negotiation, preparation and consummation of the Loan Documents, the Convertible Loan Dqcuments and all other documents with the Company for issuance of securities of the Company to Lender or KFP, in an amount not exceeding Ten Thousand Dollars ($10,000.00) in the aggregate, and (ii) any and all filings with the Securities and Exchange Commission by Lender and KFP, in connection with securities of the Company issued or to be issued pursuant to the terms of hereof and thereof. Except as provided in the preceding sentence, each Party shall be responsible for all costs and expenses, including, without limitation, attorneys’ fees and costs, incurred by such party in connection with the negotiation, preparation and consummation of the Loan Documents.

9. IN ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO CONTRACTS MADE AND PERFORMED IN THAT STATE (WITHOUT REGARD TO CHOICE OF LAW OR CONFLICTS OF LAW PROVISIONS) AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA. ANY SUIT, LEGAL ACTION OR SIMILAR PROCEEDING ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT SHALL BE BROUGHT EXCLUSIVELY IN THE COURTS OF THE STATE OF CALIFORNIA SITTING IN THE COUNTY OF LOS ANGELES OR IN THE COURTS OF THE UNITED STATES FOR THE CENTRAL DISTRICT OF CALIFORNIA SITTING IN THE ,COUNTY OF LOS ANGELES. THE PARTIES CONSENT, FOR THEMSELVES AND IN RESPECT OF THEIR PROPERTY, TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS AND. HEREBY IRREVOCABLY WAIVE, AND AGREE NOT TO ASSERT IN ANY SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT THEY ARE NOT PERSONALLY SUBJECT TO THE JURISDICTION OF ANY SUCH COURT, THAT SUCH SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE OF SUCH SUIT, ACTION OR PROCEEDING IS IMPROPER. NOTHING CONTAINED HEREIN SHALL BE DEEMED TO LIMIT IN. ANY WAY ANY RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW.

10. The prevailing party shall be entitled to recover its reasonable attorneys’ fees and costs incurred in any action, suit, arbitration or other proceeding under, arising from or related to this Loan Agreement or any other Loan Document, the validity hereof or thereof or the transactions contemplated hereby or thereby, in addition to any other relief to which such party may be entitled.

11. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same instrument. In the event that any signature is delivered by facsimile transmission or by an e-mail which contains a portable document format (.pdf) file of an executed signature page, such signature page shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such signature page were an original thereof.

12. The following terms shall have the following definitions:

“Approved Share Plan” means any benefit plan which has been approved by the board of directors of the Company in existence on the date hereof or hereafter amended or replaced with the prior written approval of Lender as determined in its sole and absolute discretion, pursuant to which shares of Common Stock and/or options to purchase Common Stock may be issued to any employee, officer, director or consultant for services provided to the Company in their capacity as such.

“Business Day” means any day that is not a Saturday, a Sunday or a day on which banking institutions in the City of Los Angeles, California, are authorized or required by law to close.

“Common Stock” means (i) the Company’s shares of common stock, $0.0001 par value per share, and (ii) any capital stock into which such common stock shall have been changed or any share capital resulting from a reclassification of such common stock.

“Convertible Securities” means any stock or other security (other than Options) that is at any time and under any circumstances, directly or indirectly, convertible into, exercisable or exchangeable for, or which otherwise entitles the holder thereof to acquire, any shares of Common Stock.

“Excluded Securities” means: (i) shares of Common Stock or Options to purchase Common Stock issued or granted prior to the date hereof to employees or directors of the Company pursuant to an Approved Share Plan or hereafter issued or granted to employees or directors of the Company pursuant to an Approved Share Plan with the prior written approval of Lender in each instance as determined in its sole and absolute discretion, and shares of Common Stock issued pursuant to such Options, provided that the exercise of any such Option is made solely pursuant to the exercise provisions of such Options that were in effect on the date hereof or the date of the grant of such Option, whichever occurs later (subject to adjustment of the exercise price thereof pursuant to the provisions of such Option in effect on such date); (ii) shares of Common Stock issued upon the conversion or exercise of Convertible Securities issued prior to the date hereof, provided that the conversion or exercise (as the case may be) of any such Convertible Security is made solely pursuant to the conversion or exercise (as the case may be) provisions of such Convertible Security that were in effect on the date immediately prior to the date hereof (subject to adjustment of the conversion or exercise price thereof pursuant to the provisions of such Convertible Security in effect on the date hereof); (iii) the Note; (iv) the Initial Warrants; (v) the Additional Warrants; and (vi) the Warrant Shares.

“Options” means any right, option or warrant to subscribe for, purchase, or otherwise acquire Common Stock or Convertible Securities.

“ Person ” means any entity, corporation, company, association, joint venture, joint stock company, partnership, trust, organization, individual (including personal representatives, executors and heirs of a deceased individual), nation, state, government (including agencies. departments, bureaus, boards, divisions and instrumentalities thereof), trustee, receiver or liquidator, as well as any syndicate or group that would be deemed to be a Person under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended.

“ Securities ” means collectively the Note, the Initial Warrants, the Additional Warrants, and the Warrant Shares.

“Warrant Shares” means the shares of Common Stock issuable upon exercise of the Warrants.

13. All notices, requests, demands and other communications which are required or may be given under this Loan Agreement shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile prior to 5:00 p.m. California time on a Business Day, (ii) the next Business Day after the date of transmission, if such notice or communication is delivered via facsimile on a day which is not a Business Day or later than 5:00 p.m. California time on a Business Day; (iii) the second Business Day following the date of mailing, if sent by nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given, in each case properly addressed to the party to receive the same and, provided confirmation of transmission, deposit, or delivery, as the case may be, is mechanically or electronically generated and kept on file by the sending party. The addresses, and facsimile numbers for such communications shall be:

If to the Company:

Aura Systems, Inc.

4000 Redondo Beach Avenue

Redondo Beach, CA 90278

Attention: Chief Executive Officer

Telephone: (310) 643-5300

Facsimile: (310) 643-7457

If to Lender:

KF Business Ventures, LP

10866 Wilshire Blvd., Ste 1500

Los Angeles, CA 90024

Attention: Robert C. Kopple

Telephone: (310) 475-1444

Facsimile: (310) 475-2459

or at such other address or addresses or facsimile number and/or to the attention of such other Person as the recipient party may specify by written notice given in accordance with this Paragraph 13.

If this letter correctly sets forth our agreement regarding the financing transaction described above, please sign and return a copy of this letter to the undersigned to indicate your agreement.

	Very truly yours,

	Aura systems, inc.

	By:	/s/ MELVIN GAGERMAN
	Name:	MELVIN GAGERMAN
	Title:	CEO

READ AND AGREED:

Kf business ventures, lp

By:	Kopple financial, inc.,
	Its General Partner

	By:
		Robert C. Kopple, Its President

Kopple family partnership, lp

By:	Kopple financial, inc.,

	By:
		Robert C. Kopple, as Trustee of
		the E.L. II Properties Trust,
		Its General Partner

Exhibit “A”

Form of Note

[Attached]

UNSECURED PROMISSORY NOTE

$2,915,206.11	June 20, 2014
	Los Angeles, California

FOR VALUE RECEIVED, the undersigned, AURA SYSTEMS, INC., a Delaware Corporation with its principal offices located at 4000 Redondo Beach Avenue, Redondo Beach, California 90278 (“Maker”), hereby promises to pay to the order of KF BUSINESS VENTURES, LP, a California limited partnership with its principal offices located at 10866 Wilshire Boulevard, Suite 1500, Los Angeles, California 90024 (“Payee”), the original principal amount of TWO MILLION NINE HUNDRED FIFTEEN THOUSAND TWO HUNDRED SIX DOLLARS AND ELEVEN CENTS ($2,915,206.11), consisting of the sum of (i) Five Hundred Thousand Dollars ($500,000.00) in refinancing of a portion of the outstanding principal balance of Two Million Five Hundred Thousand Dollars ($2,500,000.00) of that certain Convertible Promissory Note dated August 19, 2013 by the Company payable to the order of Kopple Family Partnership, LP, an affiliate of Payee (the “Convertible Note”), plus (ii) Sixty Eight Thousand Twenty Seven Dollars and Seventy Eight Cents ($68,027.78), in refinancing of accrued unpaid interest and default interest on said portion of the outstanding principal balance of the Convertible Note as of the date hereof as provided in the Convertible Note, which accrued unpaid interest and default interest shall be capitalized and added to the principal amount of the indebtedness evidenced by this Note as of the date hereof, plus (iii) One Million Nine Hundred Sixty Three Thousand Dollars ($1,963,000.00) in refinancing of the entire outstanding principal balance of certain additional loans advanced by Payee to Maker prior to the date of this Note, plus (iv) Eighty Four Thousand One Hundred Seventy Eight Dollars and Thirty Three Cents ($84,178.33), in refinancing of accrued unpaid interest on said additional loans at the rate of ten percent (10%) per annum from the dates originally advanced to the date hereof, which accrued unpaid interest shall be capitalized and added to the principal amount of indebtedness evidenced by this Note as of the date hereof, plus (v) Three Hundred Thousand Dollars ($300,000.00), advanced by Payee to Maker on the date of this Note, together with interest on said original principal amount at the rate of TEN PERCENT (10%) PER ANNUM from the date of this Note until paid in full (collectively, the “Indebtedness”), on June 1, 2015 (the “Maturity Date”), at which time the entire principal balance of this Note and all then accrued unpaid interest thereon shall become due and payable in full in a single lump sum payment without notice or demand whatsoever except as otherwise required by applicable law. All interest due with respect to the outstanding principal balance of this Note shall be computed on the basis of a 360-day year and the actual number of days elapsed. All sums due and payable hereunder shall be paid in lawful money of the United States of America at the address set forth above for Payee or at such other place as the holder hereof may designate from time to time in writing to Maker.

This Note is issued by Maker pursuant to the terms of that certain Loan Agreement of even date herewith by and between Maker and Payee (the “Loan Agreement”; the Loan Agreement, this Note, the Warrants and any and all other agreements, documents and instruments evidencing, securing or otherwise pertaining to the indebtedness to which Maker is or hereafter becomes a party, collectively, the “Loan Documents” ), and the holder of this Note is entitled to the rights and benefits of the Loan Documents, and each of them. Capitalized terms not defined herein shall have the meanings assigned to such terms in the Loan Agreement.

Unsecured Promissory Note Page 1 of 5

Subject to Paragraph 3(E) of the Loan Agreement, in the event that Maker borrows any funds, issues any class of capital stock or rights to acquire or convert into capital stock of the Company or grants any rights in respect to territories to any Person for cash consideration of more than Five Million Dollars ($5,000,000.00) in the aggregate in any one or more transactions from and after the date hereof (excluding the Indebtedness and Excluded Securities), Company shall pay to Lender the entire amount of such cash consideration in excess Five Million Dollars ($5,000,000.00) in the aggregate as a mandatory prepayment of the indebtedness evidenced by the Note until the entire Indebtedness evidenced by this Note have been paid in full, concurrently upon receipt of such cash consideration by the Company, time being of the essence thereof, without notice or demand whatsoever by Lender.

The Indebtedness evidenced by this Note may be prepaid prior to the Maturity Date, either in whole or in part in increments of not less than Two Hundred and Fifty Thousand Dollars ($250,000.00) each, at any time and from time to time without prepayment penalty or premium, at the election of Maker. No prepayment required or permitted hereunder shall affect the obligation of Maker to continue to pay the payments described above until the entire Indebtedness evidenced by this Note has been paid in full.

Each payment required or permitted under the Note shall be applied first in payment of any late payment charges pursuant to the terms of this Note, if any, second in payment of accrued and unpaid interest, whether or not then due, third in payment of the accrued and unpaid capitalized interest included in the principal balance of the Note, whether or not then due, and finally in payment of the remaining outstanding principal balance of the Note.

Upon payment in full of the Indebtedness evidenced by this Note, including all principal thereof and accrued and unpaid interest thereon, and all other sums payable by Maker under this Note, (i) this Note shall automatically be deemed canceled and no longer outstanding, and all rights with respect to the Note will forthwith cease and terminate, and (ii) the Note shall timely be surrendered to the Maker for cancellation and shall not be reissued.

In the event of the occurrence of an Event of Default (as defined in the Loan Agreement) then in each such event (w) the Company shall pay to the holder of this Note a late payment fee equal to five percent (5%) of any past-due sum under this Note, payable upon demand therefor by Lender, (x) the outstanding principal balance of this Note shall bear interest at the rate of FIFTEEN PERCENT (15%) per annum (“Default Interest Rate”) from the date of the occurrence of the Event of Default until such Event of Default is cured or waived in writing by the holder of this Note as determined in its sole and absolute discretion, payable upon demand therefor by Lender, (y) the entire principal balance of this Note together with all accrued and unpaid interest thereon shall become immediately due and payable in full at the option of the holder of this Note if as a result of an Event of Default specified in Clauses (i), (ii), (iii), (iv) or (v) of Paragraph 3(G) of the Loan Agreement, or automatically without any election, declaration or other act on the part of the holder of this Note if as a result of an Event of Default specified in Clause (vi) or (vii) of Paragraph 3(G) of the Loan Agreement, without notice or demand whatsoever except as otherwise required by applicable law, and (z) all of the remaining Additional Warrants not yet vested in accordance with Paragraph 4 of the Loan Agreement shall become immediately vested in full, regardless of whether or not the holder of this Note elects to accelerate the Indebtedness evidenced by this Note pursuant to Clause (y) above, and Maker shall promptly issue said Additional Warrants to Payee upon demand therefor by Payee. Interest at the Default Interest Rate shall begin to accrue on the date on which the applicable Event of Default shall be deemed to have occurred and shall continue until such Event of Default shall have been cured or waived in accordance with the terms of the Loan Agreement. Upon the waiver or cure of an Event of Default, the Default Interest Rate shall cease to be in effect and interest shall accrue at the rate of Ten Percent (10%) per annum from and after the date of such waiver or cure and be payable in accordance with this Note. .Neither this provision nor the acceptance of any payment hereunder by the holder of this Note after default shall be construed as a right, privilege or agreement to extend the time of any payment hereunder beyond its due date or constitute a waiver of any of the rights or remedies of the holder hereof by reason of such default.

Unsecured Promissory Note Page 2 of 5

In order to induce Payee to make the loan to Maker evidenced by this Note, Maker represents and warrants to Payee and each holder of this Note (i) that, by reason of its own business and financial experience, Maker and Payee could reasonably be assumed to have the capacity to protect its own interests in connection with the transactions contemplated by the Loan Documents, and (ii) as a consequence, that the Indebtedness evidenced by this Note issued pursuant to the Loan Agreement, including all interest thereon and other consideration therefor provided in the Loan Documents, or any of them, including, without limitation, the Warrants issued to Payee pursuant to the Loan Documents, is exempt from the usury restrictions under California law pursuant to the exemption set for in California Corporation Code Section 25118(b), and is not usurious under any other laws applicable to Maker. Without limiting the effectiveness of said representations, warranties and exemptions, however, it is nevertheless the intent of Maker and Payee that the holder of this Note shall never be entitled to receive, collect or apply, as interest or other consideration of any kind under the Loan Documents, or any of them, any amount in excess of the maximum rate of interest permitted to be charged by applicable law; and in the event the holder of this Note ever receives, collects or applies as interest or other consideration of any kind any such excess, such amount which would be excess interest or other consideration shall be deemed a partial prepayment of principal and treated hereunder as such; and if the principal is paid in full, any remaining excess interest or other consideration shall be paid to Maker forthwith upon demand.

Except as otherwise expressly required hereunder, Maker hereby waives presentment, notice of presentment, demand, notice of demand, dishonor, notice of dishonor, notice of nonpayment, protest, notice of protest and any and all other notices and demands required by applicable law.

In any action, suit or other proceeding to enforce or interpret any of the provisions of this Note, the prevailing party shall be entitled to recover its reasonable attorneys’ fees, costs and expenses incurred in connection therewith.

This Note and the respective rights and remedies of the parties hereunder shall be governed by and construed in accordance with the internal laws of the State of California, without reference to its principles of conflict of laws.

Unsecured Promissory Note Page 3 of 5

ANY SUIT, LEGAL ACTION OR SIMILAR PROCEEDING ARISING OUT OF OR IN CONNECTION WITH THIS NOTE SHALL BE. BROUGHT EXCLUSIVELY IN THE COURTS OF THE STATE OF CALIFORNIA SITTING IN THE CITY OF LOS ANGELES OR IN THE COURTS OF THE UNITED STATES FOR THE CENTRAL DISTRICT OF CALIFORNIA SITTING IN THE CITY OF LOS ANGELES. EACH PARTY CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS AND HEREBY IRREVOCABLY WAIVES, AND AGREES NOT TO ASSERT’ IN ANY SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF ANY SUCH COURT, THAT SUCH SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE OF SUCH SUIT, ACTION OR PROCEEDING IS IMPROPER. NOTHING CONTAINED HEREIN SHALL BE. DEEMED TO LIMIT IN ANY WAY ANY RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW. MAKER HEREBY IRREVOCABLY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT OR OTHER PROCEEDING UNDER, ARISING FROM OR RELATED TO THIS NOTE, TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW.

No failure to exercise, and no delay in exercising, any right, power or remedy hereunder or under any document delivered to the holder hereof shall impair any right, power or remedy that the holder may have. The rights and remedies of the holder hereof are cumulative and not exclusive of any rights or remedies that such holder would otherwise have.

The Loan Documents contain the complete and entire understanding of the parties and shall supersede and replace any and all other arrangements, communications, representations or agreements, whether oral or written, with respect to the subject matter hereof. The provisions of this Note shall be binding upon and inure to the benefit of the parties named herein and their respective heirs, devisees, personal and legal representatives, successors and assigns. No waiver, modification, termination or discharge of any of the terms or provisions of this Note shall be valid or binding unless set forth in a writing signed by Maker and the holder of this Note, and then only to the extent therein specifically set forth.

The provisions of this Note may be amended, supplemented or otherwise modified with (and only with) the written consent or agreement of both Maker and the holder(s) of this Note.

If any provision of this Note is prohibited by law or otherwise determined to be invalid or unenforceable in any respect by a court of competent jurisdiction, the provision that would otherwise be prohibited, invalid or unenforceable shall be deemed amended to apply to the broadest extent that it would be valid and enforceable, and the invalidity or unenforceability of such provision shall not affect the validity of the remaining provisions of this Note so long as this Note as so modified continues to express, without material change, the original intentions of the parties as to the subject matter hereof and the prohibited nature, invalidity or unenforceability of the provision(s) in question does not substantially impair the respective expectations or reciprocal obligations of the parties or the practical realization of the benefits that would otherwise be conferred upon the parties.

This Note shall be deemed to be jointly drafted by the Maker and the Payee and shall not be construed against any Person as the drafter hereof The headings of the Note, if any, are for convenience of reference and shall not form part of, or affect the interpretation of, this Note. Unless the context clearly requires otherwise, the use of the word “including” is not limiting and the use of the word “or” has the inclusive meaning represented by the phrase “and/or.” Unless otherwise specified, the plural includes the singular and vice versa.

Unsecured Promissory Note Page 4 of 5

This Note may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same instrument. In the event that any signature is delivered by facsimile transmission or by an e-mail which contains a portable document format (.pdf) file of an executed signature page, such signature page shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such signature page were an original thereof.

Each individual signing this. Note on behalf of a party which is a corporation, limited company, partnership, limited liability company, trust or other entity represents and warrants that he or she has been duly authorized by all necessary action to execute and deliver this Note and all other agreements, documents and instruments contemplated hereby, to perform its obligations hereunder and thereunder and to consummate of the transactions contemplated hereby and thereby in the name and on behalf of such party.

	Aura Systems, Inc.
	a Delaware corporation

	By:	/s/ Melvin Gagerman
	Name:	MELVIN GAGERMAN
	Title:	CEO

AGREED AND ACCEPTED:

June 20, 2014

PAYEE:

KF BUSINESS VENTURES, L.P.

By:	KOPPLE FINANCIAL, INC.
	Its General Partner

By:
Name:	Robert C. Kopple
Title:	Its President

Unsecured Promissory Note Page 5 of 5

Exhibit “B”

Form of Warrant Agreement

[Attached]

WARRANT

NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL TO THE HOLDER (IF REQUESTED BY THE COMPANY), IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD OR ELIGIBLE TO BE SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.

Warrant No. [_________]

Date of Issuance: [_____________], 201[__]

AURA SYSTEMS, INC.

WARRANT TO PURCHASE COMMON STOCK

Aura Systems, Inc., a Delaware corporation (the “ Company ”), hereby certifies that, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, KF B usiness V entures , LP , a California limited partnership, or its permitted assigns (the “ Holder ”), is entitled, subject to the conditions set forth in this Warrant to Purchase Common Stock (the “ Warrant ”), to subscribe for and purchase from the Company, at any time or from time to time during the Exercise Period, up to a total of ___________(__________) fully paid and non-assessable shares of the Company’s Common Stock (the “ Warrant Shares ”), at an exercise price equal to_______ Cents ($0.___) per share, subject to adjustment from time to time pursuant to the provisions of this Warrant (the “ Exercise Price ”). This Warrant to Purchase Common Stock is the “Warrant” referred to in, and being issued in connection with the consummation of the transactions contemplated by, that certain Loan Agreement dated as of June 13, 2014 (as amended from lime to time, the “ Loan Agreement ”), by and between the Company and the Holder. Unless otherwise indicated, all capitalized terms used and not otherwise defined in this Warrant have the respective meanings ascribed to them in the Loan Agreement. This Warrant is subject to the following provisions, terms and conditions:

1. DEFINITIONS . For the purpose of this Warrant, the following terms, whether or not capitalized or underlined in the text of this Warrant, shall have the following meanings:

“Aggregate Exercise Price” means the amount equal to the Exercise Price in effect on the date of such exercise multiplied by the number of Warrant Shares as to which this Warrant was so exercised.

“Bloomberg” means Bloomberg, L.P. or any successor entity.

“Business Day” means any day that is not a Saturday, a Sunday or a day on which banking institutions in the City of Los Angeles, California, are authorized or required by law to close.

“Closing Sale Price” means, for any security as of any date, the last closing trade price for such security on the Principal Market, as reported by Bloomberg, or, if the Principal Market begins to operate on an extended hours basis and does not designate the closing trade price then the last trade price of such security prior to 4:00 p.m., New York time, as reported by Bloomberg, or, if the Principal Market is not the principal securities exchange or trading market for such security, the last trade price of such security on the principal securities exchange or trading market where such security is listed or traded as reported by Bloomberg, or if the foregoing do not apply, the last trade price of such security in the over-the-counter market on the electronic bulletin board for such security as reported by Bloomberg, or, if no last trade price, respectively, is reported for such security by Bloomberg, the average of the bid prices, or the ask prices, respectively, of any market makers for such security as reported in the “pink sheets” by OTC Markets Group Inc. If the Closing Sale Price cannot be calculated for a security on a particular date on any of the foregoing bases, the Closing Sale Price of such security on such date shall be the fair market value as mutually determined in good faith by the Company’s board of directors.

“Convertible Securities” means any stock or other security that is at any time and under any circumstances, directly or indirectly, convertible into or exchangeable for shares of Common Stock, but excluding Options.

“Date of Issuance” means [___________], 201[__].

“Excluded Securities” means: (i) shares of Common Stock or Options ^, to purchase Common Stock issued or granted prior to June 20, 2014 to employees or directors of the Company pursuant to an Approved Share Plan, and shares of Common Stock issued pursuant to such Options, provided that the conversion or exercise (as the case may be) of any such Option is made solely pursuant to the exercise provisions of such Options that were in, effect on the date immediately prior to June 20, 2014 (subject to adjustment of the exercise price thereof pursuant to the provisions of such Option in effect immediately prior to June 20, 2014); (ii) shares of Common Stock issued upon the conversion or exercise of Convertible Securities issued prior June 20, 2014, provided that the conversion or exercise (as the case may be) of any such Convertible Security is made solely pursuant to the conversion or exercise (as the case may be) provisions of such Convertible Security that were in effect on the date immediately prior to June 20, 2014 (subject to adjustment of the conversion or exercise price thereof pursuant to the provisions of such Convertible Security in effect immediately prior to June 20, 2014); (iii) the Note; (iv) the Initial Warrants; (v) the Additional Warrants; and (vi) the Warrant Shares.

“ Exercise Date ” means the date on which the Holder has fully complied with all requirements necessary to effectuate a Cash Exercise or Net Issuance, as the case may be, of Warrant Shares as set forth herein, provided however, that if such date is not a Business Day or the Holder satisfies such requirements after 5:00 p.m. Los Angeles time on a Business Day, then the Exercise Date shall be the immediately succeeding Business Day, unless that Business Day falls after the Expiration Date, in which case the Exercise Date shall be the immediately preceding Business Day.

“ Exercise Period ” means the period commencing on the Date of Issuance and ending at 5:00 p.m., Los Angeles time on the Expiration Date.

“Expiration Date” means the date that is the eighty-forth (84th) month anniversary of the Date of Issuance, provided however, that if such date is not a Business Day, then the Expiration Date shall be the immediately succeeding Business Day.

“Fair Market Value” means the average of the Closing Sale Prices for the Common Stock on the Principal Market or, if the Common Stock is not listed on the electronic bulletin board, as reported by the principal U.S. national or regional securities exchange or quotation system on which the Common Stock is then listed or quoted, as reported by Bloomberg in each case for the seven (7) Trading Days prior to the date of determination of fair market value. If the Fair Market Value cannot be calculated on the foregoing basis, the Fair Market Value shall be the fair market value as determined in good faith by the Company’s Board of Directors.

“Options” means any rights, warrants or options to subscribe for, purchase, or otherwise acquire, directly or indirectly, shares of Common Stock.

“ Person ” means any entity, corporation, company, association, joint venture, joint stock company, partnership, trust, organization, individual (including personal representatives, executors and heirs of a deceased individual), nation, state, government (including agencies, departments, bureaus, boards, divisions and instrumentalities thereof), trustee, receiver or liquidator, as well as any syndicate or group that would be deemed to be a Person under Section 13(d)(3) of the Securities Exchange Act of 1934, as amended.

“Principal Market” means the exchange or over-the-counter market on which the Common Stock is primarily listed on or quoted for trading, which, as of the date hereof is the OTC Bulletin Board.

“Trading Day” means any Business Day on which the Common Stock is traded on the Principal Market on which the Common Stock is then traded, provided that “Trading Day” shall not include any day on which the Common Stock is scheduled to trade on such Principal Market for less than 4.5 hours or any day that the Common Stock is suspended from trading during the final hour of trading on such Principal Market (or if such Principal Market does not designate in advance the closing time of trading on such Principal Market, then during the hour ending at 4:00:00 p.m., New York time) unless such day is otherwise designated as a Trading Day in writing by the Holder.

“Loan Documents” means, collectively, the Loan Agreement, the Note of even date therewith issued pursuant thereto, this Warrant and each of the other agreements and instruments of even date herewith entered into or delivered by any of the parties hereto in connection with the transactions contemplated hereby and thereby, as may be amended from time to time.

“Voting Stock” of a Person means capital stock of such Person of the class or classes pursuant to which the holders thereof have the general voting power,to elect, or the general power to appoint, at least a majority of the board of directors, managers, trustees or other similar governing body of such Person (irrespective of whether or not at the time capital stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency).

“VWAP” means, for any security as of any date, the dollar volume-weighted average price for such security on the Principal Market during the period beginning at 9:30:01 a.m., New York time, and ending at 4:00:00 p.m., New York time, as reported by Bloomberg through its “Volume at Price” function or, if the foregoing does not apply, the dollar volume-weighted average price of such security in the over-the-counter market on the electronic bulletin board for such security during the period beginning at 9:30:01 a.m., New York time, and ending at 4:00:00 p.m., New York time, as reported by Bloomberg, or, if no dollar volume-weighted average price is reported for such security by Bloomberg for such hours, the average of the highest closing bid price and the lowest closing ask price of any of the market makers for such security as reported in the “pink sheets” by OTC Markets Group Inc.

Capitalized terms herein not defined in this Warrant shall have the meanings assigned to such terms in the Loan Agreement.

2. EXERCISE OF WARRANT .

(a) Method of Exercise . Subject to the terms and conditions hereof, .the purchase right represented by this Warrant may be exercised by the Holder, in whole or in part, at any time during the Exercise Period, by: (i) surrender of this Warrant at the principal office of the Company and delivery to the Company at its principal office of: (1) written notice of the Holder’s election to exercise this Warrant in the form attached hereto as Exhibit A (the “ Exercise Notice ”), duly completed and executed; and (2) the payment to the Company in cash or by wire transfer of immediately available funds in U.S. Dollars, of an amount equal to the then-applicable Exercise Price multiplied by the number of Warrant Shares then being purchased together with any applicable taxes or other amounts payable by the Holder pursuant to this Warrant (a “ Cash Exercise ”); or (ii) exercise of the “net issuance right” provided for in Section 2(b) below.

(b) Net Issuance Right . In lieu of Cash Exercise of this Warrant, The Holder may, at any time during the Exercise Period, elect to convert this Warrant, in whole or in part, into shares of Common Stock by surrender of this Warrant at the principal office of the Company and delivery to the Company at its principal office of a duly completed and executed Exercise Notice. Upon receipt of such Exercise Notice and surrender of the Warrant by the Holder, the Company shall deliver to the Holder, without payment by the Holder of any cash or other consideration, that number of shares of Common Stock computed using the following formula (a “ Net Exercise ”):

X = (Y) (A-B)

Where:

X =

the number of shares of Common Stock to be issued to the Holder.

Y =

the total number of Warrant Shares with respect to which this Warrant is being exercised.

A =

the average VWAP for Common Stock for the five Trading Days immediately prior to (but not including) the Exercise Date, or if no VWAP is available because Common Stock is not then traded on the Principal Market, the fair market the fair market value of a share of Common Stock on the date on which the Holder exercises the Warrants determined by an independent appraiser selected in good faith by the Holder and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the Company.

B =

Exercise Price.

(c) Notwithstanding anything contained in this Warrant or any of the other Loan Documents to the contrary, if an Event of Default (as defined in the Loan Agreement) occurs under the Loan Documents, or any of them, at any time while the Warrant remains outstanding and unexpired, the purchase right represented by this Warrant may be exercised by the Holder, in whole or in part, at any time and from time to time for so long as such Event of Default is continuing, by a Cash Exercise (and not by means of a Net Exercise) for an amount equal to the product of (i) the lesser of (A) then-applicable Exercise Price or (B) the average VWAP for Common Stock for the five Trading Days immediately prior to (but not including) the Exercise Date, or if no VWAP is available because Common Stock is not then traded on the Principal Market, the fair market value of a share of Common Stock on the Exercise Date determined by an independent appraiser selected in good faith by the Holder and reasonably acceptable to the Company, the fees and expenses of which shall be paid by the Company, multiplied by (ii) by the number of Warrant Shares then being purchased together with any applicable taxes or other amounts payable by the Holder pursuant to this Warrant.

(d) The Holder shall have the right (but not the obligation) to offset the amount of cash payable by the Holder to the Company upon a Cash Exercise of the Warrant against the indebtedness of the Company evidenced by the Note then owed to Holder, if any; provided, however, that such offset in connection with such exercise of the Warrant shall not be deemed or construed as an exchange of securities for purposes of Rule 144.

(e) Issuance of Certificates . In the event of any exercise of the rights represented by this Warrant, certificates evidencing Warrant Shares so purchased or converted shall be issued and delivered to the Holder within a reasonable time, not exceeding five (5) Trading Days, following the Exercise Date. The stock certificate or certificates so delivered shall be in such denominations as may be requested by the Holder hereof and shall be registered in the name of said Holder or such other name as shall be designated by said Holder (subject to the transfer restrictions applicable to this Warrant and to shares purchased upon exercise of this Warrant). The Person or Persons in whose name(s) any certificate(s) representing shares of Common Stock shall he issuable upon exercise or conversion of this Warrant shall be deemed to have become the holder(s) of record of, and shall be treated for all purposes as the record holder(s) of, the Common Stock represented thereby (and such Common Stock shall be deemed to have been issued) as of 5:00 p.m. Los Angeles time on the Exercise Date.

(f) Payment of Certain Taxes . The Company shall pay any and all documentary, stamp or similar taxes that may be payable upon the initial issuance of this Warrant or upon the issuance of Warrant Shares upon the exercise or conversion of this Warrant or upon the issuance of stock certificates in respect thereof in the respective name of, or in such names as may be directed by, the Holder, provided however, that the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such stock certificate, warrant, or other securities in a name other than that of the registered holder of this Warrant at the time surrendered upon exercise or conversion hereof, and the Company shall not be required to issue or deliver such certificates, warrant, or other securities unless and until the Person or Persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. The Holder shall be responsible for all other tax liabilities (including, without limitation, any and all income or income-based, capital gains or similar taxes) that may arise in connection with the issuance of this Warrant or as a result of holding or receiving Warrant Shares upon exercise or conversion hereof.

(g) Partial Exercise . If the Holder shall exercise or convert less than all of the Warrant Shares that could be purchased or received hereunder, the Company shall issue and deliver to the Holder, as promptly as reasonably practicable but in any event within five (5) Business Days following the Exercise Date, a new Warrant evidencing the Holder’s right to purchase the remaining Warrant Shares.

(h) Duration . All rights represented by this Warrant shall expire and become void as of the earlier of: (i) 5:00 p.m. Los Angeles time on the Expiration Date, at which time any portion of this Warrant not exercised or converted prior thereto shall expire unexercised and unconverted and be and become void and of no value; or (ii) the date on which all Warrant Shares are exercised or converted in full.

(i) No Fractional Shares . This Warrant shall be exercisable only for a whole number of Warrant Shares and no fractions of shares of Common Stock, or scrip for any such fractions of shares, shall be issued upon the exercise or conversion of this Warrant. In lieu of any fractional Warrant Shares to which the Holder would otherwise be entitled, the Company shall make a cash payment therefor equal to the product of such fraction multiplied by the Fair Market Value of one share of Common Stock on the Exercise Date.

3. CERTAIN ADJUSTMENTS . The Exercise Price and the number of Warrant Shares issuable upon exercise or conversion of this Warrant shall be subject to adjustment from time to time as set forth in this Section 3.

(a) Subdivisions, Combinations and Stock Dividends . If the Company shall at any time while this Warrant remains outstanding (i) subdivide one or more classes of its then outstanding shares of Common Stock into a larger number of shares by any stock split, stock dividend, recapitalization or otherwise, (ii) combine one or more classes of its then outstanding shares of Common Stock into a smaller number of shares by combination, by reverse stock split or otherwise, or (iii) pay a stock dividend on one or more classes of its then outstanding shares of Common Stock or otherwise makes a distribution on any class of capital stock that is payable in shares of Common Stock, then in each such case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event. Any adjustment made pursuant to (i) or (ii) of this Section 3(a) shall become effective as of thefirst Business Day following the effective date of such subdivision or combination and any adjustment pursuant to (iii) of this Section 3(a) shall become effective as of the record date for the determination of stockholders entitled to receive such dividend or distribution, or in the event that no record date is fixed, upon the making of such dividend or distribution.

(b) Fundamental Transactions . If, at any time while this Warrant remains outstanding, (i) the Company shall, directly or indirectly, in or more related transactions (1) effect any merger or consolidation of the Company with or into another Person, (2) effect any sale of all or substantially all of its assets in one or a series of related transactions, (3) complete any tender offer or exchange offer (whether by the Company or another Person) pursuant to which holders of Common Stock are permitted to tender or exchange their shares for other securities, cash or property, or (4) effect any reclassification of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property, or (ii) any “person” or “group” (as these terms are used for purposes of Sections 13(d) and 14(d) of the 1934 Act and the rules and regulations promulgated thereunder) is or shall become the “beneficial owner” (as defined in Rule 13d-3 under the 1934 Act), directly or indirectly, of 50% or more of the aggregate voting power represented by issued and outstanding Voting Stock of the Company (in any such case a “ Fundamental Transaction ”), then the Holder shall have the right thereafter to receive, upon exercise of this Warrant, the same amount and kind of securities, cash or property as it would have been entitled to receive upon the occurrence of such Fundamental Transaction if it had been, immediately prior to such Fundamental Transaction, the holder of the number of Warrant Shares then issuable upon exercise in full of this Warrant (the “ Alternate Consideration ”). For purposes of any such exercise, the determination of the Exercise Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Exercise Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. At the Holder’s option and request, any successor to the Company or surviving entity in such Fundamental Transaction shall, either (1) issue to Holder a new warrant substantially in the form of this Warrant and consistent with the foregoing provisions and evidencing the Holder’s right to purchase the Alternate Consideration for the aggregate Exercise Price upon exercise thereof, or (2) timely purchase the Warrant from the Holder for a purchase price, payable in cash, equal to the Black-Scholes Value of the remaining unexercised portion of this Warrant on the effective date of the Fundamental Transaction. Black-Scholes Value shall be determined in accordance with the Black-Scholes Option Pricing Model obtained from the “OV” function on Bloomberg using (A) a price per share of Common Stock equal to the VWAP of the Common Stock for the Trading Day immediately preceding the date of consummation of the applicable Fundamental Transaction, (B) a risk-free interest rate corresponding to the U.S. Treasury rate for a period equal to the remaining term of this Warrant as of the date of such request and (C) an expected volatility equal to the 100 day volatility obtained from the HVT function on Bloomberg determined as of the Trading Day immediately following the public announcement of the applicable Fundamental Transaction.

(c) Adjustment Upon Issuance of Common Stock. Options and Convertible Securities . If and while this Warrant remains outstanding the Company sells or grants any Common Stock, Option or Convertible Security (other than Excluded Securities) and the lowest issuance price for one share of Common Stock so issued or the lowest exercise or conversion price set forth in such Option or Convertible Security for which one share of Common Stock is issuable upon the exercise or conversion of such Option or Convertible Security, as the case may be (the “ Applicable Price ”), is less than a price equal to the Exercise Price of this Warrant in effect immediately prior to such sale or grant (the foregoing a “ Dilutive Issuance ”), then immediately after such Dilutive Issuance, the Exercise Price of this Warrant then in effect shall be reduced to an amount equal to the Applicable Price, provided however, that no adjustment of the Exercise Price shall be made in an amount less than one cent per share. In addition to the foregoing, in the event that, if and while this Warrant remains outstanding, (1) the Company effectuates any transaction by which it grants or sells Options together with, and in combination with other: securities of the Company (the foregoing a “Option Issuance”), and (2) the Issuance Rate of the Options Issuance is greater than the Issuance. Rate of this Warrant, then the number of Warrant Shares that may be purchased or converted upon exercise of this Warrant shall be immediately increased proportionately, so that after such adjustment the Issuance Rate of this Warrant shall be equal to the Issuance Rate of the Option Issuance. For purposes of this Paragraph 3(c), the “Issuance Rate” of a given Option Issuance shall be computed by dividing (x) the total number of shares of Common Stock that may be purchased or converted upon exercise of such Option by (y) the aggregate amount of cash received by the Company in exchange for both the Options and other securities issued in connection with such Option. The foregoing notwithstanding, no Dilutive Issuance shall be deemed to have occurred and no adjustment of any kind to the Exercise Price of this Warrant or to the number of Warrant Shares that may be purchased or converted upon exercise of this Warrant shall be made in connection with or by reason of any Excluded Securities, or (ii) in connection with the Company permitting all or substantially all of the record holders of Options (including the Holder) to exercise such Options for a limited period of time at an exercise price per share less than the Exercise Price of this Warrant then in effect. Except as expressly contemplated in this Warrant, no further adjustment to the Exercise Price or to the number of Warrant Shares that may be purchased or converted upon exercise hereof shall be made upon issuance of shares of Common Stock upon the exercise of such Options or Convertible Securities, and if any such grant or sale is made upon exercise of any Options or Convertible Securities for which adjustment of the Exercise Price has been or is to be made pursuant to this Section 3, no further adjustment of the Exercise Price shall be made by reason of such grant or sale.

(d) Purchase Rights . In addition to any other adjustments pursuant to this Section 3, if at any time while this Warrant remains outstanding the Company grants, issues or sells any Additional Options or rights to purchase stock, warrants, securities or other property pro rata to all or substantially all of the record holders of any class of shares of Common Stock (the “ Purchase Rights ”), then the Holder will be entitled to acquire, upon the terms applicable to such . Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights.

(e) Calculations . All calculations under this Section 3 shall be made to the nearest whole cent or the nearest 1/100th of a share, as applicable. For purposes of this Section 3, the number of shares of Common Stock deemed to be issued and outstanding at any given time shall not include shares owned or held by or for the account of the Company.

(f) Notice of Transaction . If the Company shall at any time while this Warrant remains outstanding (i) subdivide one or more classes of its then outstanding shares of Common Stock Pinto a larger number of shares by any stock split, stock dividend, recapitalization or otherwise, (ii) combine one or more classes of its then outstanding shares of Common Stock into a smaller number of shares by combination, reverse stock split or otherwise, or (iii) pay a stock dividend on one or more classes of its then outstanding shares of Common Stock or otherwise makes a distribution on any class, of capital stock that is payable in shares of Common Stock; (iv) enter into a Fundamental Transaction, or (v) issues Purchase Rights, then in each case the Company shall give written notice to the Holder at least seven (7) Business Days prior to the applicable record date or effective date on which a Person would need to be a stockholder in order to participate in or vote with respect to such transaction; provided however, that the failure to deliver such notice or any defect therein shall not invalidate or otherwise affect the validity of any corporate action taken with respect to such transaction or event.

4. RECORDATION OF WARRANT . The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the “ Warrant Register ”). The Warrant Register shall set forth (i) the number of this Warrant, (ii) the name and address of the Holder hereof, (iii) the original number of Warrant Shares purchasable upon the exercise or conversion hereof, (iv) the number of Warrant Shares purchasable upon the exercise hereof, as adjusted from time to time in accordance with the terms of this Warrant and (v) the Exercise Price for each Warrant Share, as adjusted from time to time in accordance with the terms of this Warrant. The Company shall be entitled to treat the Holder of this Warrant as the owner in fact hereof for all purposes and shall not be bound to recognize any equitable or other claim to or interest in such Warrant on the part of any other Person.

5. RESERVATION OF SHARES . The Company shall at all times during the period within which the rights represented by this Warrant may be exercised, keep reserved for issuance a number of shares of Common Stock as shall from time to time be sufficient to satisfy the Company’s then-existing obligation to issue Warrant Shares hereunder. If, at any time during the Exercise Period, the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the exercise of all then-unexercised Warrant Shares, in addition to such other remedies as shall be available to the Holder, the Company will timely take such corporate action as may be reasonably necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to its Certificate of Incorporation. All Warrant Shares will be duly and validly authorized and, upon issuance in accordance with the terms and conditions hereof, will be fully paid and nonassessable.

6. NO IMPAIRMENT . While this Warrant remains outstanding, the Company will not, by amendment of its Certificate of Incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of the terms of this Warrant. The Company will at all times in good faith assist in the carrying out of all the provisions of this Warrant will take all such actions as may reasonably be requested by the Holder to protect the right granted to the Holder hereunder against impairment.

7. NO RIGHTS OR LIABILITIES AS A SHAREHOLDER . Neither this Warrant nor any provision hereof shall entitle Holder, solely in its capacity as a holder of this Warrant, to vote or receive dividends or be deemed the holder of share capital of the Company for any purpose, nor shall anything contained in this Warrant be construed to confer upon the Holder, solely in its capacity as the holder of this Warrant, any of the rights of a stockholder of the Company or any right to vote, give or withhold consent to any corporate action (whether any reorganization, issue of stock, reclassification of stock, consolidation, merger, conveyance or otherwise), receive notice of meetings, receive dividends or subscription rights, or otherwise, prior to issuance to the Holder of the Warrant Shares which Holder is then entitled to receive upon the due exercise or conversion of this Warrant. No provision of this Warrant, in the absence of affirmative action by the Holder to purchase Warrant Shares, and no mere enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of such Holder for the Exercise Price or as a shareholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.

8. TRANSFER AND EXCHANGE .

(a) Transfer of Warrants . This Warrant may not be transferred or assigned, in whole or in part, except in compliance with all applicable federal and state securities laws. To the extent permitted by applicable securities laws and subject to the terms of this Warrant, this Warrant may be transferred, in whole or in part, to any Person, by (i) execution and delivery of the Notice of Assignment attached hereto as Exhibit B and (ii) surrender of this Warrant for registration of transfer at the primary executive office of the Company. together with funds sufficient to pay any applicable transfer tax. Upon receipt of the duly executed Notice of Assignment and the necessary transfer tax funds, if any, the Company, at its expense, shall execute and deliver, (i) in the name of the designated transferee or transferees, one or more new Warrants representing the right to purchase a like aggregate number of shares of Common Stock so transferred and (ii) a new Warrant evidencing the remaining portion, if any, of this Warrant not so transferred to the transferring Holder (each a “ New Warrant ”). The acceptance of the New Warrant by the transferee thereof shall be deemed the acceptance by such transferee of all of the right and obligations of a holder of a Warrant. Warrants and Warrant Shares may only be disposed of in compliance with state and federal securities laws. In connection with any transfer hereunder, the Company may require the transferring Holder to provide to the Company an opinion of counsel selected by the transferor, the form and substance of which opinion shall be reasonably satisfactory to the Company, to the effect that such transfer does not require registration under the Securities Act of 1933, as amended, and otherwise is not in contravention of applicable state or federal securities laws.

(b) Exchange of Warrant . This Warrant is exchangeable, upon the surrender hereof by the Holder at the principal office of the Company and upon delivery to the Company of a written request signed by the Holder thereof specifying the number and denominations of the Warrant(s) to be issued in such exchange and the name(s) in which such Warrant(s) are to be issued, for another Warrant of like kind and tenor representing in the aggregate the right to purchase the same number of Warrant Shares which could be purchased pursuant to the Warrant being so exchanged.

(c) Replacement of Lost, Stolen or Mutilated Warrant . Upon receipt by the Company of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction, upon receipt by the Company of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, upon surrender and cancellation of such mutilated Warrant, the Company will execute and deliver within five (5) Business Days, in lieu of the lost. stolen, destroyed or mutilated Warrant, a new warrant of like tenor representing the right to purchase the Warrant Shares then underlying this Warrant.

9. SECURITIES ACT LEGEND . This Warrant and all Warrant. Shares issued upon exercise or conversion hereof shall be stamped or imprinted with a legend in substantially the following form (in addition to any legend required by state securities laws):

[NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE [CONVERTIBLE] [EXERCISABLE] HAVE BEEN][THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN] REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL TO THE HOLDER (IF REQUESTED BY THE COMPANY), IN A FORM REASONABLY ACCEPTABLE TO THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD OR ELIGIBLE TO BE SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.

10. RULE 144 LEGAL OPINION . The Company shall, at its sole cost and expense, provide to the Holder upon request a legal opinion from legal counsel to the Company that the offer or sale of shares of Common Stock issued to Holder pursuant to this Warrant is exempt from any registration requirements pursuant to Rule 144 (so long as and to the extent the requirements of Rule 144 arc satisfied).

11. NOTICES . All notices demands, requests, consents, approvals, or other communication given under this Warrant, unless otherwise provided herein, such notice shall be given and served in accordance with Paragraph 14 of the Loan Agreement.

12. CONSENT TO AMENDMENTS: NO BENEFICIARIES . This Warrant may be amended, supplemented or otherwise modified with (and only with) the written consent or agreement of both the Company and the Holder. Nothing in this Warrant shall be construed to give to any Person other than the Company and the Holder any legal or equitable right, remedy, claim or cause of action hereunder.

13. ENTIRE AGREEMENT . This Warrant together with the Loan Agreement and other Loan Documents (as defined in the Loan Agreement) constitute the entire understanding and agreement between the Holder and the Company with respect to the subject matter hereof and supersede all prior oral and written, and all contemporaneous oral, agreements, understandings, negotiations, discussions and undertakings relating to the subject matter hereof.

14. COUNTERPARTS . This Warrant may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same instrument.

15. GOVERNING LAW . IN ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND ‘PERFORMANCE, THIS WARRANT SHALL BE GOVERNED BY, AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO CONTRACTS MADE AND PERFORMED IN THAT STATE (WITHOUT REGARD TO CHOICE OF LAW OR CONFLICTS OF LAW PROVISIONS) AND ANY APPLICABLE LAWS OF THE UNITED STATES OF AMERICA.

16. CONSENT TO JURISDICTION AND VENUE . ANY SUIT, LEGAL ACTION OR SIMILAR PROCEEDING ARISING OUT OF OR IN CONNECTION WITH THIS WARRANT SHALL BE BROUGHT EXCLUSIVELY IN THE COURTS OF THE STATE OF CALIFORNIA SITTING IN THE CITY OF LOS ANGELES OR IN THE COURTS OF THE UNITED STATES FOR. THE CENTRAL DISTRICT OF CALIFORNIA SITTING IN THE CITY OF LOS ANGELES. HOLDER CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS AND HEREBY IRREVOCABLY WAIVES, AND AGREES NOT TO ASSERT IN ANY SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF ANY SUCH COURT, THAT SUCH SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE OF SUCH SUIT, ACTION OR PROCEEDING IS IMPROPER. NOTHING CONTAINED HEREIN SHALL BE DEEMED TO LIMIT IN ANY WAY ANY RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW.

17. WAIVER OF TRIAL BY JURY . TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, EACH PARTY HEREBY KNOWINGLY, INTENTIONALLY AND VOLUNTARILY EXPRESSLY WAIVES ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING OUT OF OR IN CONNECTION WITH THIS WARRANT OR THE TRANSACTIONS RELATED THERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING.

18. ATTORNEYS FEES . In any action, suit or other proceeding to enforce or interpret any of the provisions of this Warrant, the prevailing party shall be entitled to recover its attorneys’ fees and expenses incurred in connection therewith.

19. SEVERABILITY . If any provision of this Warrant is prohibited by law or otherwise determined to be invalid or unenforceable in any respect by a court of competent jurisdiction, the provision that would otherwise be prohibited, invalid or unenforceable shall be deemed amended to apply to the broadest extent that it would be valid and enforceable, and the invalidity or unenforceability of such provision shall not affect the validity of the remaining provisions of this Warrant so long as this Warrant as so modified continues to express, without material change, the original intentions of the parties as to the subject matter hereof and the prohibited nature, invalidity or unenforceability of the provision(s) in question does not substantially impair the respective expectations or reciprocal obligations of the parties or the practical realization of the benefits that would otherwise be conferred upon the parties. The parties will endeavor in good faith negotiations to replace the prohibited, invalid or unenforceable provision(s) with a valid provision(s), the effect of which comes as close as possible to that of the prohibited, invalid or unenforceable provision(s).

20. CONSTRUCTION AND HEADINGS . This Warrant shall be deemed to be jointly drafted by the Company and the Holder and shall not be construed against any Person as the drafter hereof. The headings of this Warrant are for convenience of reference only and shall not form part of, or affect the interpretation of, this Warrant. Unless the context clearly requires otherwise, the use of the word “including” is not limiting and the use of the word “or” has the inclusive meaning represented by the phrase “and/or.” Unless otherwise specified, the plural includes the singular and vice versa. Terms used in this Warrant but defined in the other Transaction Documents shall have the meanings ascribed to such terms in such other Transaction Documents.

20. FAILURE OR INDULGENCE NOT WAIVER . Except as expressly provided otherwise in this Warrant or in the other Transaction Documents, no failure or delay on the part of the Holder in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. No waiver shall be effective unless it is in writing and signed by an authorized representative of the waiving party.

IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer this [______] day of [______], 201[__].

	COMPANY:

	AURA SYSTEMS, INC., a Delaware corporation

	By:	/s/ Melvin Gagerman
		Melvin Gagerman
		Its Chief Executive Officer

	Attested:

	By:	/s/ Melvin Gagerman
		Melvin Gagerman
		Its Secretary

	AGREED AND ACCEPTED:

	[__________], 201[__]

	HOLDER:

	KF BUSINESS VENTURES, L.P.

	By:	KOPPLE FINANCIAL, INC. Its General Partner

	By:
	Name:	Robert C. Kopple
	Title:	Its President

Exhibit A

EXERCISE NOTICE

Attention:

AURA SYSTEMS, INC.

1.	Pursuant to the terms of Warrant No. ______, enclosed with this Exercise Notice, the undersigned hereby irrevocably elects to receive _________ shares of Common Stock of Aura Systems, Inc.

2.	Method of Exercise (Please initial the applicable blank):

______

The Undersigned elects to exercise the attached Warrant by means of a Cash Exercise, and tenders herewith $ ________, representing payment in full for the purchase price of the shares being purchased, together with any applicable taxes.

______

The undersigned elects to convert the attached..Warrant by means of the net issuance provisions of SectiOn 2(b) of the Warrant.

3.	The undersigned represents that the aforesaid shares of Common Stock are being acquired for the account of the undersigned for investment and not with a view to; or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares.

4.	The undersigned represents that this Exercise Notice was executed on the date set forth below.

5.	Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned or in such other name as is specified below:


	(Name)




	(Address)

All capitalized terms not otherwise defined shall have the meaning ascribed thereto in the Warrant.


(Name of Holder)		(Date)


(Signature of Authorized Signatory)		(Print Name and Title)

Exhibit B

NOTICE OF ASSIGNMENT

(To be executed only upon the assignment of the within Warrant)

FOR VALUE RECEIVED, the undersigned registered Holder of the within Warrant hereby sells, assigns and transfers unto__________________________________, whose address is ________________________________ __________________ the right of the undersigned under the within Warrant to purchase______________ shares of Common Stock (as defined within the Warrant) of Aura Systems, Inc., and does hereby irrevocably appoint ________________________ attorney to transfer said right on the books of Aura Systems, Inc. maintained for that purpose, with full power of substitution in the premises.

Dated:_______________

Signature Guaranteed

	By:
		(Signature of Registered Holder)

	Name:
	Title:

NOTICE:	The signature to this Notice of Assignment must correspond in all respects with the name upon the face of the within Warrant, without alteration or change.

	The signature to this Notice of Assignment must be guaranteed by a commercial bank or trust company in the United States or a member firm of the New York Stock Exchange.

Schedule “1”

Refinanced Loan Portion

[Attached]

Schedule 1

Refinance Loan Portion

06/20/2014 Calculation Date

Past Due Principal Amount and Past Due Accrued Interest

				Total
		Principal		Principal		Elapsed		Interest			Accrued			Loan
Date	Description	Amount		Balance		Days		Rate			Interest			Balance

03/28/2013	Loan Advance	$	500,000.00	$	500,000.00		334		9.5	%	$	44,069.44		$	544,069.44
02/25/2014	Default Interest Accrual	$	-	$	500,000.00		115		15.0	%	$	23,958.33		$	568,027.78
06/20/2014	Capitalized Interest	$	68,027.78	$	568,027.78		0		10.0	%	$	(68,027.78	)	$	568,027.78
	SUBTOTAL	$	568,027.78								$	-

Additional Loans and Additional Accrued Interest

Date	Description	Principal Amount		Total Principal Balance		Elapsed Days		Interest Rate			Accrued Interest			Loan Balance

09/05/2013	Loan Advance	$	200,000.00	$	200,000.00		42		10.0	%	$	2,333.33		$	202,333.33
10/17/2013	Loan Advance	$	750,000.00	$	950,000.00		61		10.0	%	$	10,097.22		$	968,430.56
12/17/2013	Loan Advance	$	100,000.00	$	1,050,000.00		28		10.0	%	$	8,166.67		$	1,076,597.22
01/14/2014	Loan Advance	$	53,000.00	$	1,103,000.00		24		10.0	%	$	7,353.33		$	1,136,950.56
02/07/2014.	Loan Advance	$	60,000.00	$	1,163,000.00		102		10.0	%	$	32,951.67		$	1,229,902.22
05/20/2014	Loan Advance	$	400,000.00	$	1,563,000.00		31		10.0	%	$	13,459.17		$	1,643,361.39
06/13/2014	Loan Advance	$	400,000.00	$	1,963,000.00		7		10.0	%	$	3,816.94		$	2,047,178.33
06/20/2014	Capitalized Interest	$	84,178.33	$	1,647,178.33		0		10.0	%	$	(84,178.33	)	$	1,647,178.33
	SUBTOTAL	$	2,047,178.33								$	-

06/20/2014	REFINANCE LOAN PORTION	$	2,615,206.11								$	-			2,615,206.11

Loan Summary

06/20/2014	Past Due Principal Amount	$	500,000.00	$	500,000.00	0	10.0	%	$	-	$	500,000.00
06/20/2014	Past Due Accrued Interest	$	68,027.78	$	568,027.78	0	10.0	%	$	-	$	568,027.78
06/20/2014	Additional Loans	$	1,963,000.00	$	2,531,027.78	0	10.0	%	$	-	$	2,531,027.78
06/20/2014	Additional Accrued Interest	$	84,178.33	$	2,615,206.11	0	10.0	%	$	-	$	2,615,206.11
06/20/2014	Additional Advance	$	300,000.00	$	2,915,206.11	0	10.0	%	$	-	$	2,915,206.11

06/20/2014	TOTAL LOAN	$	2,915,206.11						$	-	$	2,915,206.11

Warrants

06/20/2014	Initial Warrants	2 Warrants Per Dollar of Loan	5,830,412
10/01/2014	Additional Warrants	1 Warrant Per Dollar of Loan	2,915,206
11/01/2014	Additional Warrants	1 Warrant Per Dollar of Loan	2,915,206
12/01/2014	Additional Warrants	1 Warrant Per Dollar of Loan	2,915,206
01/01/2015	Additional Warrants	1 Warrant Per Dollar of Loan	2,915,206
02/01/2015	Additional Warrants	1 Warrant Per Dollar of Loan	2,915 _; 206
03/01/2015	Additional Warrants	1 Warrant Per Dollar of Loan	2,915,206

Schedule 1

Aura Systems, Inc. Convertible Note dated August 19, 2013

06/20/2014 Calculation Date

Date	Description	Principal Amount			Total Principal Balance			Elapsed Days		Interest Rate			Accrued Interest			Loan Balance

03/28/2013	Loan Advance	$	500,000.00		$	500,000.00			84		9.5	%	$	11,083.33		$	511,083.33
06/20/2013	Loan Advance	$	.350,000.00		$	850,000.00			12		9.5	%	$	2,691.67		$	863,775.00
07/02/2013	Loan Advance	$	500,000.00		$	1,350,000.00			8		9.5	%	$	2,850.00		$	1,366,625.00
07/10/2013	Loan Advance	$	200,000.00		$	1,550,000.00			15		9.5	%	$	6,135.42.		$	1,572,760.42
07/25/2013	Loan Advance	$	500,000.00		$	2,050,000.00			25		9.5	%	$	13,524.31		$	2,086,284.72
08/19/2013	Loan Advance	$	450,000.00		$	2,500,000.00			190		9.5	%	$	125,347.22		$	2,661,631.94
02/25/2014	Default Interest Accrual	$	-		$	2,500,000.00			115		15.0	%	$	119,791.67		$	2,781,423.61

	Subtotals	$	2,500,000.00										$	281,423.61		$	2,781,423.61

06/20/2014	Refinanced Principal	$	(500,000.00	)	$	(500,000.00	)		0		9.5	%	$	-		$	(500,000.00	)
06/20/20 I 4	Refinanced Interest		-		$	(500,000.00	)		0		9.5	%	$	(68,027.78	)	$	(568,027.78	)

06/20/2014	Balance	$	2,000,000.00										$	213,395.83		$	2,213,395.83

Schedule “3(E)”

Budget

[Attached]

Assumptions

	1 Chinese JV	$	2,000,000.00
	2 Dist license net	$	925,000.00
	3 PP net	$	4,650,000.00

	May		June		July		August		September
Starting balance	$	60,000.00	$	723,506.98	-$	46,486.04	$	227,530.32	$	119,884.59
JV China	$	0.00	$	0.00	$	2,000,000.00	$	0.00	$	0.00
New $ Kopple	$	990,000.00	$	0.00	-$	1,000,000.00	-$	750,000.00	-$	950,000.00
New $ other	$	100,000.00	$	50,000.00	-$	100,000.00	$	875,000.00	$	4,650,000.00

A/R	$	270,000.00	$	360,000.00	$	900,000.00	$	925,000.00	$	900,000.00
SUBTOTAL	$	1,420,000.00	$	1,133,506.98	$	1,753,513.96	$	1,277,530.32	$	4,719,884.59

COGS	-$	105,000.00	-$	422,000.00	-$	330,000.00	-$	400,000.00	-$	450,000.00
Ops overhead	-$	175,750.00	-$	197,250.00	-$	210,550.00	-$	212,150.00	-$	207,150.00
Payroll burdened	-$	358,743.02	-$	358,743.02	-$	430,433.64	-$	482,495.73	-$	542,754.63
Termination			-$	145,000.00	-$	150,000.00			$	0.00
Medical Insurance	-$	42,000.00	-$	42,000.00	-$	45,000.00	-$	48,000.00	-$	55,000.00
Legal settlment	-$	15,000.00	-$	15,000.00	-$	15,000.00	-$	15,000.00	-$	15,000.00
Demand notes					-$	245,000.00			-$	245,000.00
Bridge notes									-$	159,000.00
Arrear legal					-$	100,000.00			-$	100,000.00
Arrear wages									-$	286,000.00
Arrear vendors									-$	430,000.00
	$	723,506.98	-$	46,486.04	$	227,530.32	$	119,884.59	$	2,229,979.97

License net

Included Audit+annual meeting exp

Facility	m		J		J		A		S		O
Rent	$	62.00	$	62.00	$	62.00	$	62.00	$	62.00	$	62.00
Cleaning supply		2.2		2.2		2.2		2.2		2.2		2.2
Janitorial service		2		2		2		2		3		3
R&M costs		2		2		2		2		2		2
Utilities Gas+electric)		7		7		7		10		10		10
Phone		8		9		9		9		10		10
Insurance
General Insurance		10		10		10		10		10		10
D&O insurance		6		6		6		6		6		6
Legal
Corporate legal		30		30		30		30		30		30
SEC legal				5		0				5
IP				0				10		0		10
Professional ser
Auditors		20		35		10				10
OTHERS		1		1		1		1		1		1
Consultant Yu		0		0		0		10		10		10
Travel
Engineering		0		0.5		1		1		1		1
Sales & service		2		2		3		3		3		4
Corporate		4		3		3		3		3		3
Supplies
Engineering materials/supplies		1		1		1		1		1		1
Sales & service supplies		1		1		1		1		1		1
Office supplies		0.5		0.5		0.5		0.5		0.5		0.5
Shop supplies		2		3		3		4		5		6
Receiving & shipping		10.0		10.0		12.0		15.0		15.0		15.0
Postage		0.1		0.1		15		0.1		0.1		0.1
Copying & printing		0.1		0.1		25		0.5		0.5		0.5
Other expenses
Bank charges		0.1		0.1		0.1		0.1		0.1		0.1
Entertainment		2		2		2		2		2		2
Public Company costs (including		1.5		1.5		1.5		1.5		1.5		1.5
Tax and licenses		0.25		0.25		0.25		0.25		0.25		0.25
IR		0		0		0				10		10
Misc. other/trade shows		1		1		1		25		2		2
OPERATING EX	$	175.75	$	197.25	$	210.55	$	212.15	$	207.15	$	204.15

	Base salary		SS+SDI+SD		WC		Fully burden		M		J		J		A		S		O
Corporate
CEO	$	30,000	$	2,700	$	135	$	32,835	$	1	$	1	$	1	$	1	$	1	$	1
CTO	$	12,500	$	1,125	$	56	$	13,681		1		1		1		1		1		1
COO	$	16,667	$	1,500	$	75	$	18,242		1		1		1		1		1		1
VP Corporate ComM/marketing	$	12,500	$	1,125	$	56	$	13,681		1		1		1		1		1		1
Director Q/C	$	10,000	$	1,125	$	56	$	11,181		-		-		-		-		1		1
Executive assistant	$	4,583	$	413	$	21	$	5,016		1		1		1		1		1		1
Receptionist	$	2,500	$	225	$	11	$	2,736		-		-		-		-		-		1
CONSULTANT MELVIN GAGERMAN	$	30,000	$	2,700	$	135	$	32,835		-		-		1		1		1		1
CONSULTANT (Harry Kurtzman)	$	30,000	$	2,700	$	135	$	32,835		1		1		1		1		1		1
										6		6		7		7		8		9
										116,291		116,291		149,126		149,126		160,307		163,043
Administration
Head accountant CFO	$	15,000	$	1,350.00	$	68	$	16,418		1		1		1		1		1		1
Accountant	$	8,500	$	765.00	$	38	$	9,303		1		1		1		1		1		1
Sr. Buyer	$	10,833	$	975.00	$	49	$	11,857		-		-		-		1		1		1
Buyer	$	50,000	$	4,500.00	$	225	$	54,725		1		1		1		1		1		1
Director HR	$	5,833	$	525.00	$	26	$	6,385		1		1		1		1		1		1
Director Information Systems	$	5,417	$	487.50	$	24	$	5,929		1		1		1		1		1		1
Web maintenance	$	2,917	$	262.50	$	13	$	3,192		1		1		1		1		1		1
Facility manager	$	5,000	$	450.00	$	23	$	5,473		-		-		-		-		-		-
										6		6		6		7		7		7
										95,951		95,951		95,951		107,808		107,808		107,808
Technical staff
VP of Engineering	$	18,333	$	1,650.00	$	119	$	20,103		1		1		1		1		1		1
Division secretary	$	3,333	$	300.00	$	22	$	3,655		-		-		-		-		-		-
Sr. ME	$	10,417	$	937.50	$	68	$	11,422		1		1		1		2		2		2
Sr. System Eng.	$	10,417	$	937.50	$	68	$	11,422		-		-		-		-		-		1
Sr. Manufacturing Eng.	$	12,083	$	1,087.50	$	79	$	13,249		-		-		-		-		-		1
Sr. E.E	$	10,833	$	975.00	$	70	$	11,879		-		-		1		2		2		2
E.E	$	7,083	$	637.50	$	46	$	7,767		2		2		2		2		2		2
Sr. Software Eng.	$	11,250	$	1,012.50	$	73	$	12,336		1		1		1		1		2		2
Circuit layout	$	7,083	$	637.50	$	46	$	7,767		-		-		1		1		1		1
Sr. Draftsperson	$	6,667	$	600.00	$	43	$	7,310		-		-		-		-		1		1
Sr. Mech technician	$	5,417	$	487.50	$	35	$	5,939		-		-		-		-		1		1
Mech technician	$	3,750	$	337.50	$	24	$	4,112		1		1		1		1		1		1
Sr. Electric technician	$	5,417	$	487.50	$	35	$	5,939		-		-		-		1		1		1
Sr. Test Engineer	$	10,000	$	900.00	$	65	$	10,965		-		-		-		1		1		1
Kit developers	$	5,417	$	487.50	$	35	$	5,939		1		1		2		2		2		2
technical writer	$	5,000	$	450.00	$	33	$	5,483		-		-		1		1		1		1
										7		7		11		15		18		20
										69,445		69,445		100,513		140,718		166,303		130,974

Sales Staff
1 VP Sales & Service	$	18,333	$	1,650.00	$	83	$	20,066		1		1		1		1		1		1
1 Secretary	$	3,333	$	300.00	$	15	$	3,648		-		-		-		-		-		-
1 Customer service	$	3,333	$	300.00	$	15	$	3,648		1		1		1		1		1		1
1 Military	$	10,000	$	900.00	$	45	$	10,945		-		-		-		-		-		1
1 Refrigeration sales executives	$	5,417	$	487.50	$	24	$	5,929		-		-		-		-		-		1
1 Sales executive	$	5,833	$	525.00	$	26	$	6,385		1		1		1		1		1		1
1 Field engineers	$	5,833	$	525.00	$	53	$	6,411		2		2		2		2		2		2
										5		5		5		5		5		7
										42,920		42,920		42,920		42,920		42,920		59,794
Manufacturing
1 Director of Manufacturing	$	10,000	$	900.00	$	95	$	10,995		-		-		-		-		1		1
1 QA inspectors	$	4,000	$	360.00	$	38	$	4,398		1		1		1		1		2		2
1 Warehouse/store control	$	2,880	$	259.20	$	27	$	3,167		1		1		1		1		1		1
1 Planner/schedu er	$	7,083	$	637.50	$	67	$	7,788		-		-		1		1		1		1
1 Machinists	$	5,600	$	504.00	$	53	$	6,157		3		3		3		3		3		3
1 RMA	$	3,200	$	288.00	$	30	$	3,518		-		-		-		-		1		1
1 repair	$	4,000	$	360.00	$	38	$	4,398		-		-		-		-		-		1
1 Driver	$	3,200	$	288.00	$	30	$	3,518		1		1		1		1		1		1
1 Shipping receiving	$	4,167	$	375.00	$	40	$	4,581		1		1		1		1		2		2
										7		7		8		8		12		13
										34,136		34,136		41,924		41,924		65,417		69,815
			$	43,512	$	2,687
TOTAL NON DIRECT STAFF										31		31		37		42		50		56

BURDENED PAYROLL										358,743		358,743		430,434		482,496		542,755		591,434

staff opening
Hiring

			Base		SS+SD1+		WC		Total
Direct labor			$	3,000.00	$	270.00	$	45.00	$	3,315.00
Medical insurance									$	1,000.00
Holidays/vacation				112 hr/year					$	175.00
									$	4,490.00
Burdened hourly rate	$	28.06

Direct labor cost component of COGS	time		rate		total
Generator		0.25	$	28.06	$	7.02
ECU preparation/setup		0.25	$	28.06	$	7.02
ECU AC part		1.25	$	28.06	$	35.08
ICS part		1.75	$	28.06	$	49.11
Cables		1.25	$	28.06	$	35.08
Packaging		0.2	$	28.06	$	5.61
Consumables (screws, glue etc)					$	5.00
Testing		2.75	$	28.06	$	77.17
Total cost/system					$	221.08

EXHIBIT C

UNSECURED PROMISSORY NOTE

$2,915,206.11	June 20, 2014
	Los Angeles, California

FOR VALUE RECEIVED , the undersigned, AURA SYSTEMS, INC ., a Delaware corporation with its principal offices located at 4000 Redondo Beach Avenue, Redondo Beach, California 90278 (“ Maker ”), hereby promises to pay to the order of KF BUSINESS VENTURES, LP , a California limited partnership with its principal offices located at 10866 Wilshire Boulevard, Suite 1500, Los Angeles, California 90024 (“ Payee ”), the original principal amount of TWO MILLION NINE HUNDRED FIFTEEN THOUSAND TWO HUNDRED SIX DOLLARS AND ELEVEN CENTS ($2,915,206.11), consisting of the sum of (i) Five Hundred Thousand Dollars ($500,000.00) in refinancing of a portion of the outstanding principal balance of Two Million Five Hundred Thousand Dollars ($2,500,000.00) of that certain Convertible Promissory Note dated August 19, 2013 by the Company payable to the order of Kopple Family Partnership, LP, an affiliate of Payee (the “ Convertible Note ”), plus (ii) Sixty Eight Thousand Twenty Seven Dollars and Seventy Eight Cents ($68,027.78), in refinancing of accrued unpaid interest and default interest on said portion of the outstanding principal balance of the Convertible Note as of the date hereof as provided in the Convertible Note, which accrued unpaid interest and default interest shall be capitalized and added to the principal amount of the indebtedness evidenced by this Note as of the date hereof, plus (iii) One Million Nine Hundred Sixty Three Thousand Dollars ($1,963,000.00) in refinancing of the entire outstanding principal balance of certain additional loans advanced by Payee to Maker prior to the date of this Note, plus (iv) Eighty Four Thousand One Hundred Seventy Eight Dollars and Thirty Three Cents ($84,178.33), in refinancing of accrued unpaid interest on said additional loans at the rate of ten percent (10%) per annum from the dates originally advanced to the date hereof, which accrued unpaid interest shall be capitalized and added to the principal amount of indebtedness evidenced by this Note as of the date hereof, plus (v) Three Hundred Thousand Dollars ($300,000.00), advanced by Payee to Maker on the date of this Note, together with interest on said original principal amount at the rate of TEN PERCENT (10%) PER ANNUM from the date of this Note until paid in full (collectively, the “ Indebtedness ”), on June 1, 2015 (the “ Maturity Date ”), at which time the entire principal balance of this Note and all then accrued unpaid interest thereon shall become due and payable in full in a single lump sum payment without notice or demand whatsoever except as otherwise required by applicable law. All interest due with respect to the outstanding principal balance of this Note shall be computed on the basis of a 360-day year and the actual number of days elapsed. All sums due and payable hereunder shall be paid in lawful money of the United States of America at the address set forth above for Payee or at such other place as the holder hereof may designate from time to time in writing to Maker.

This Note is issued by Maker pursuant to the terms of that certain Loan Agreement of even date herewith by and between Maker and Payee (the “ Loan Agreement ”; the Loan Agreement, this Note, the Warrants and any and all other agreements, documents and instruments evidencing, securing or otherwise pertaining to the Indebtedness to which Maker is or hereafter becomes a party, collectively, the “ Loan Documents ”), and the holder of this Note is entitled to the rights and benefits of the Loan Documents, and each of them. Capitalized terms not defined herein shall have the meanings assigned to such terms in the Loan Agreement.

Unsecured Promissory Note Page 1 of 5

Each payment required or permitted under the Note shall be applied first in payment of any late payment charges pursuant to the terms of this Note, if any, second in payment of accrued and unpaid interest, whether or not then due, third in payment of the accrued and unpaid capitalized interest included in the principal balance of the Note, whether or net then due, and finally in payment of the remaining outstanding principal balance of the Note.

In the event of the occurrence of an Event of Default (as defined in the Loan Agreement) then in each such event (w) the Company shall pay to the holder of this Note a late payment fee equal to five percent (5%) of any past-due sum under this Note, payable upon demand therefor by Lender, (x) the outstanding principal balance of this Note shall bear interest at the rate of FIFTEEN PERCENT (15%) per annum (“Default Interest Rate”) from the date of the occurrence of the Event of Default until such Event of Default is cured or waived in writing by the holder of this Note as determined in its sole and absolute discretion, payable upon demand therefor by Lender, (y) the entire principal balance of this Note together with all accrued and unpaid interest thereon shall become immediately due and payable in full at the option of the holder of this Note if as a result of an Event of Default specified in Clauses (i), (ii), (iii), (iv) or (v) of Paragraph 3(G) of the Loan Agreement, or automatically without any election, declaration or other act on the part of the holder of this Note if as a result of an Event of Default specified in Clause (vi) or (vii) of Paragraph 3(G) of the Loan Agreement, without notice or demand whatsoever except as otherwise required by applicable law, and (z) all of the remaining Additional Warrants not yet vested in accordance with Paragraph 4 of the Loan Agreement shall become immediately vested in full, regardless of whether or not the holder of this Note elects to accelerate the Indebtedness evidenced by this Note pursuant to Clause (y) above, and Maker shall promptly issue said Additional Warrants to Payee upon demand therefor by Payee. Interest at the Default Interest Rate shall begin to accrue on the date on which the applicable Event of Default shall be deemed to have occurred and shall continue until such Event of Default shall have been cured or waived in accordance with the terms of the Loan Agreement. Upon the waiver or cure of an Event of Default, the Default Interest Rate shall cease to be in effect and interest shall accrue at the rate of Ten Percent (10%) per annum from and after the date of such waiver or cure and be payable in accordance with this Note. Neither this provision nor the acceptance of any payment hereunder by the holder of this Note after default shall be construed as a right, privilege or agreement to extend the time of any payment hereunder beyond its due date or constitute a waiver of any of the rights or remedies of the holder hereof by reason of such default.

Unsecured Promissory Note Page 2 of 5

In order to induce Payee to make the loan to Maker evidenced by this Note, Maker represents and warrants to Payee and each holder of this Note (i) that, by reason of its own business and financial experience, Maker and Payee could reasonably be assumed to have the capacity to protect its own interests in connection with the transactions contemplated by the Loan Documents, and (ii) as a consequence, that the Indebtedness evidenced by this Note issued pursuant to the Loan Agreement, including all interest thereon and other consideration therefor provided in the Loan Documents, or any of them, including, without limitation, the Warrants issued to Payee pursuant to the Loan Documents, is exempt from the usury restrictions under California law pursuant to the exemption set for in California Corporation Code Section 25118(b), and is not usurious under any other laws applicable to Maker. Without limiting the effectiveness of said representations, warranties and exemptions, however, it is nevertheless the intent of Maker and Payee that the holder of this Note shall never be entitled to receive, collect or apply, as interest or other consideration of any kind under the Loan Documents, or any of them, any amount in excess of the maximum rate of interest permitted to be charged by applicable law; and in the event the holder of this Note ever receives, collects or applies as interest or other consideration of any kind any such excess, such amount which would be excess interest or other consideration shall be deemed a partial prepayment of principal and treated hereunder as such; and if the principal is paid in full, any remaining excess interest or other consideration shall be paid to Maker forthwith upon demand.

Unsecured Promissory Note Page 3 of 5

ANY SUIT, LEGAL ACTION OR SIMILAR PROCEEDING ARISING OUT OF OR IN CONNECTION WITH THIS NOTE SHALL BE BROUGHT EXCLUSIVELY IN THE COURTS OF THE STATE OF CALIFORNIA SITTING IN THE CITY OF LOS ANGELES OR IN THE COURTS OF THE UNITED STATES FOR THE CENTRAL DISTRICT OF CALIFORNIA SITTING IN THE CITY OF LOS ANGELES. EACH PARTY CONSENTS, FOR ITSELF AND IN RESPECT OF ITS PROPERTY, TO THE EXCLUSIVE JURISDICTION OF SUCH COURTS AND HEREBY IRREVOCABLY WAIVES, AND AGREES NOT TO ASSERT IN ANY SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF ANY SUCH COURT, THAT SUCH SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE OF SUCH SUIT, ACTION OR PROCEEDING IS IMPROPER. NOTHING CONTAINED HEREIN SHALL BE DEEMED TO LIMIT IN ANY WAY ANY RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW. MAKER HEREBY IRREVOCABLY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY ACTION, SUIT OR OTHER PROCEEDING UNDER, ARISING FROM OR RELATED TO THIS NOTE, TO THE MAXIMUM EXTENT PERMITTED BY APPLICABLE LAW.

No failure to exercise, and no delay in exercising, any right, power or remedy hereunder or under any document delivered to the holder hereof shall impair any right, power or remedy that the Holder may have. The rights and remedies of the holder hereof are cumulative and not exclusive of any rights or remedies that such holder would otherwise have.

The provisions of this Note may be amended, supplemented or otherwise modified with (and only with) the written consent or agreement of both Maker and the holder(s) of this Note.

If any provision of this Note is prohibited by law or otherwise determined to be invalid or unenforceable in any respect by a court of competent jurisdiction, the provision that would otherwise be prohibited, invalid or unenforceable shall be deemed amended to apply to the broadest extent that it would be valid and enforceable, and the invalidity or unenforceability of such provision shall not affect the validity of the remaining provisions of this Note so long as this Note as so modified continues to express, without material change, the original intentions of the parties as to the subject matter hereof and the prohibited nature, invalidity or unenforceability of the provision(s) in question does not substantially impair the respective expectations or reciprocal obligations of the parties or the _. practical realization of the benefits that would otherwise be conferred upon the parties.

This Note shall be deemed to be jointly drafted by the Maker and the Payee and shall not be construed against any Person as the drafter hereof The headings cf the Note, if any, are for convenience of reference and shall not form part of, or affect the interpretation of, this Note. Unless the context clearly requires otherwise, the use of the word “including” is not limiting and the use of the word “or” has the inclusive meaning represented by the phrase “and/or.” Unless otherwise specified, the plural includes the singular and vice versa.

Unsecured Promissory Note Page 4 of 5

Each individual signing this Note on behalf of a party which is a corporation, limited company, partnership, limited liability company, trust or other entity represents and warrants that he or she has been duly authorized by all necessary action to execute and deliver this Note and all other agreements, documents and instruments contemplated hereby, to perform its obligations hereunder and thereunder and to consummate of the transactions contemplated hereby and thereby in the name and on behalf of such party.

	Aura Systems, Inc .
	a Delaware corporation

	By:	/s/ Melvin Gagerman
	Name:	Melvin Gagerman
	Title:	CEO

AGREED AND ACCEPTED:

June 20, 2014

PAYEE:

KF BUSINESS VENTURES, L.P.

By:	KOPPLE FINANCIAL, INC.
	Its General Partner

By:
Name:	Robert C. Kopple
Title:	Its President

Unsecured Promissory Note Page 5 of 5

Exhibit 16.1

September 18, 2017

Securities and Exchange Commission

100 F Street, N.E.

Washington, D.C. 20549

We have read the statements made by Aura Systems, Inc. (the “Company”) in Item 14 of the Company’s Form 10-K dated September 18, 2017 and agree with the statements made regarding our firm. We have no basis to agree or disagree with other statements of the Company made under Item 14 therein.

/s/ Kabani & Company, Inc.

Los Angeles, CA

Exhibit 31.1

CERTIFICATION

I, Melvin Gagerman, certify that:

1. I have reviewed this annual report on Form 10-K of Aura Systems, Inc.,

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on our evaluation;

d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):

a. All significant deficiencies and material weaknesses in the design or operation of internal controls which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information ; and

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: September 18, 2017

By:

/s/ Melvin Gagerman

Melvin Gagerman

Chief Executive Officer and
Acting Chief Financial Officer

Exhibit 31.2

CERTIFICATION

I, Melvin Gagerman, certify that:

1. I have reviewed this annual report on Form 10-K of Aura Systems, Inc.,

b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: September 18, 2017

By:

/s/ Melvin Gagerman

Melvin Gagerman

Chief Executive Officer and
Acting Chief Financial Officer

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Aura Systems, Inc. (the “Company”) on Form 10-K for the annual period ending February 28, 2015, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Melvin Gagerman, Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to my knowledge:

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company for the periods indicated.

Date: September 18, 2017

By:

/s/ Melvin Gagerman

Melvin Gagerman

Chief Executive Officer and
Acting Chief Financial Officer