Quarterly Report for Quarter Ending May 31, 2026 (Form 10-Q)

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Amounts in thousands, except share and per share amounts)

Forward Looking Statements

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

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

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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 II, Item 1A of this Quarterly Report on Form 10-Q and those risks discussed in our other filings with the Securities and Exchange Commission, including those risks discussed under the caption "Risk Factors" in our Annual Report on Form 10-K for the year ended February 28, 2026, issued on September 10, 2026 (as the same may be updated from time to time in subsequent quarterly reports), which discussion is incorporated herein by this reference.

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

Overview

Our business is based on the application of our axial flux induction technology to both electric motors and generators. Our power generation solution based on axial flux induction is known as the AuraGen^® for commercial and industrial applications and the VIPER for military applications. Aura's axial flux induction technology provides: (i) higher motor/generator efficiency, which directly translates into lower operating costs; (ii) lighter and smaller machines that lead to lower manufacturing costs; (iii) higher reliability that results in less downtime and lower maintenance costs; (iv) construction uses only copper and steel, without rare earth materials or other types of permanent magnets. This supports global availability and reduces market and geopolitical risks associated with dependence on a single source; and (v) the use of approximately 60% less copper than equivalent radial flux induction machines, resulting in less mining to extract the needed copper and a direct positive environmental impact.

Our business model consists of three major components: (i) sales and marketing; (ii) design and engineering; and (iii) manufacturing axial flux induction motors and generators. Our sales and marketing approach consists of direct sales in North America and the use of agents and distributors in other regions. In addition, we are exploring limited licensing of our technology to very large potential users, as well as potential joint ventures with existing industrial motor and generator suppliers. The second component of our business model focuses on designing, engineering, and commercializing new commercial and industrial electric motors based on our axial flux induction technology for numerous applications, such as pumps, compressors, and HVAC systems. We are also designing electric motors for both two- and four-wheel electric vehicle applications and expanding the product line for electric power generation. The third component of our business model is to establish manufacturing capabilities for the axial flux induction products being engineered and designed.

We recently completed designs for 1.5 kW, 3.75 kW, and new 10 kW machines, as well as second-generation 250 kW machines, for both electric motor and generator applications. We are also currently designing 50 kW and new 5 kW machines for specific military applications. We are also in discussions regarding the use of our technology in numerous wind turbine applications.

In fiscal 2025 and 2026, we significantly increased our engineering capabilities by hiring expert engineers in thermodynamics (Ph.D.), electromagnetic motor design (Ph.D.), power electronics and controls (Ph.D.), and mechanical design (M.S.M.E.). We also acquired advanced engineering tools, including Ansys Maxwell finite element software, MATLAB, and 3D SolidWorks. Our engineering, research and development costs for fiscal 2026 were approximately $1.6 million.

Critical Accounting Policies and Estimates

Our management's discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Preparing financial statements requires management to make estimates and disclosures as of the date of the financial statements. In preparing our financial statements, we have made our best estimates and judgments of certain amounts included in the financial statements. We use authoritative pronouncements, historical experience, and other assumptions as the basis for making judgments. For these key estimates and assumptions, we made appropriate accounting estimates based on the facts and circumstances available as of the reporting date. To the extent that there are significant differences between these estimates and actual results, our financial statements may be materially affected. Significant estimates include assumptions made for inventory reserve, impairment testing of long-lived assets, the valuation allowance for deferred tax assets, assumptions used in valuing derivative liabilities, assumptions used in valuing share-based compensation, and accruals for potential liabilities. Amounts could materially change in the future. Actual results could differ from those estimates. There were no changes to our critical accounting policies described in the financial statements included in our Annual Report on Form 10-K for the fiscal year ended February 28, 2026, that impacted our condensed financial statements and related notes included herein.

Revenue Recognition

The Company recognizes revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. In accordance with ASC 606, we recognize revenue, net of discounts, for our generator sets at the time of product delivery and acceptance to the domestic distributor (i.e., point-in-time), which also corresponds to the passage of legal title to the customer and the satisfaction of our performance obligations to the customer.

Inventories

Inventories are valued at the lower of cost (first-in, first-out) or net realizable value, on an average cost basis. We regularly review inventory components for excess or obsolete inventory based on estimated future usage and sales. When evidence exists that the net realizable value of inventory is lower than its cost, the difference is recognized as a loss in the period in which it occurs. Once inventory is written down, it creates a new cost basis that may not be subsequently written up.

Derivative Financial Instruments

The Company evaluates its financial instruments to determine whether they are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments accounted for as liabilities, the Company initially records the instrument at fair value and then remeasures it at each reporting date, with changes in fair value reported in the statements of operations. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.

Inflation

Higher inflation, the actions by the Federal Reserve Bank to address inflation, most notably continuing increases in interest rates, and rising energy prices create uncertainty about the future economic environment. The Company expects that the impact of these issues will continue to evolve. The Company believes these factors impacted the Company's business in fiscal 2025 and 2026 and will continue to impact the Company's business in fiscal 2027. Higher government deficits and debt, tighter monetary policy, and higher long-term interest rates may drive a higher cost of capital for the business and increase the Company's operating expenses.

Results of Operations

Three months ended May 31, 2026, compared to three months ended May 31, 2025

Revenues

Net revenue was $2 for the three months ended May 31, 2026, compared to $185 for the three months ended May 31, 2025. Revenues continue to be negatively impacted due to a generally low level of resources on our legacy products as well as our shift to the development and production of the prototype for our new product line. We cannot project with confidence the timing or amount of revenue that we can expect until the prototype is completed, which should be in Fiscal 2027.

Cost of Goods

Cost of goods sold was $0 in the three months ended May 31, 2026, compared to $25 for the three months ended May 31, 2025.

Engineering, Research and Development

Engineering, research and development expenses were $386 in the three months ended May 31, 2026, compared to $353 for the three months ended May 31, 2025. The increase is primarily attributable to the purchase of engineering software and program licenses.

Selling, General and Administrative Expense

Selling, general and administrative expenses for the three months ended May 31, 2026, were $468 compared to $484 for the three months ended May 31, 2025, a decrease of $16 or 3%. The decrease is primarily attributable to lower professional services fees, offset by higher travel and meeting expenses and increased health insurance premiums during the period.

Other Income (Expense) and Interest Expense

Interest expense decreased by $114 to $480 for the three months ended May 31, 2026, as compared to $594 for the three months ended May 31, 2025. The Company estimated the fair value of the conversion option derivative liability using a Black-Scholes option pricing model and recorded changes in the fair value of the derivative liability of $7,028 and $1,570 for the three months ended May 31, 2026 and 2025, respectively.

Net Loss

We recorded net losses of $8,408 and $2,841 for the three months ended May 31, 2026 and 2025, respectively. Our net loss increased due to lower gross profit, higher operating expenses, and changes in the fair value of our derivative liability.

Liquidity and Capital Resources

For the three months ended May 31, 2026, we recorded a net loss of $8,408, used cash in operations of $719, and, as of May 31, 2026, had a shareholders' deficit of $53,566. In addition, notes payable with an aggregate balance of $5,446 had reached maturity and were past due. These conditions raise substantial doubt about our ability to continue as a going concern for at least one year from the date of issuance of these financial statements. In addition, the Company's independent registered public accounting firm, in its report on the Company's February 28, 2026, audited financial statements, raised substantial doubt about the Company's ability to continue as a going concern.

Prior to Fiscal 2026, to maintain liquidity, we relied on external sources of financing, principally equity and private indebtedness. We have no bank line of credit and will require additional debt or equity financing to fund ongoing operations. Based on a cash flow analysis conducted by management, we estimate that we will need an additional $5,246 to maintain existing operations for Fiscal 2027 and to increase shipment volume to customers. We cannot assure the reader that additional financing will be available, nor that the commercial targets will be met in the amounts required to keep the business operating. Issuing additional equity shares in connection with such financing could dilute the interests of our existing stockholders, and the dilution could be substantial. If we cannot raise the funds needed, we will 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.