AURA SYSTEMS INC 10-K

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 include 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 Our business is based on the exploitation of our Axial Flux Induction technology for 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 provide: (i) higher motor/generator efficiency, that directly translated to lower cost for operations (ii) lighter and smaller machines that lead to lower manufacturing cost, (iii) higher reliability that results in less down time and maintenance cost, (iv) the only raw materials used for construction are copper and steel without any rare earth or any other types of permanent magnets. This immediately results in global availability without market risks as well as geopolitical risks of dependence on single source, and (v) the use of approximately 60% less of copper than the equivalent radial flux induction machines, results in less needed mining to extract the needed copper with direct positive environmental impact. Our business model consists of three major components: (i) sales and marketing, iii) design and engineering and (iii) axial flux induction motors and generators manufacturing. Our sales and marketing approaches are composed of direct sales in North America and the use of agents and distributors in other areas. In addition, we are also exploring limited licensing of our technology to very large potential users as well as potential joint ventures with existing industrial motor/generator suppliers. The second component of our business model is focused on the design, engineer and commercialize of new commercial and industrial electric motors based on our axial flux induction for numerous applications such as pumps, compressors, and HVAC. We are also designing electric motors for both 2- and 4-wheel EV application, as well as, expending the product line for electric power generation. The third component of our business model is to set up manufacturing of the axial flux induction products being engineered and design. We recently completed the design for 1.5, 3.75 kW a new 10 kW and second generation of 250 kW machines for both electric motor and generator applications. We also currently designed a 50 kW and a new 5 kW machines for specific military applications. We are also currently in discussions for usage of our technology for numerous wind turbines applications. In fiscal 2025 and 2026 we have significantly increased our engineering capabilities with having hired experts’ engineers in thermo dynamics (Ph.D.), electromagnetic motor design (Ph.D.) Power electronics & control (Ph.D.) and mechanical design (M.S.M.E). We have also acquired the latest in advanced engineering tools such as Ansys Maxwell finite elements, MATLAB and 3-D solid work. 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 conditions 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. The preparation of financial statements requires management to make estimates and disclosures on 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. 21 Revenue Recognition The Company recognizes revenue in accordance with Financial Accounting Standard Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers. In accordance with ASC 606, we recognize revenue, net of discounts, for our generator sets at time of product delivery to the domestic distributor (i.e. point-in-time), which also corresponds to the passage of legal title to the customer and the satisfaction of our performance obligations to the customer. Inventories Inventories are valued at the lower of cost (first-in, first-out) or net realizable value, on an average cost basis. We review the components of inventory on a regular basis 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 has been written down, it creates a new cost basis for inventory that may not be subsequently written up. Derivative Financial Instruments The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the 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 instrument 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 fiscals 2025 and 2026 and will continue to impact the Company’s business in fiscal 2027. The implications of 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 an increase in the Company’s operating expenses. Results of Operations Fiscal 2026 compared to Fiscal 2025 Revenues Net revenue was $278,000 for Fiscal 2026, compared to $50,000 for Fiscal 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 numerous prototypes for our new product line. We cannot project with confidence the timing or amount of revenue that we can expect until the prototypes are completed, which should be in Fiscal 2026. Cost of Goods Cost of goods sold was $25,000 for Fiscal 2026, compared to $29,000 for Fiscal 2025. This resulted in a gross profit of $253,000 for Fiscal 2026, compared to gross profit of $21,000 for Fiscal 2025. The increase in gross profit was due to the increase in net revenue. 22 Engineering, Research and Development Engineering, research and development expenses were approximately $1.6 million for Fiscal 2026, compared to $1.2 million for Fiscal 2025. The increase is a result of the Company’s augmented engineering activities, including (i) successfully recruiting new additions to the engineering staff; (ii) licensing of modeling and design software tools for the full 12-month period; as well as (iii) additional expenses incurred in the process of designing, fabricating and testing the new version of our electronic control unit (“ECU”) for our AuraGen ® /VIPER products. Selling, General and Administrative Expense Selling, general and administration (“SG&A”) expenses for Fiscal 2026 were $2.2 million as compared to $3.6 million for Fiscal 2025. The decrease in SG&A was due to a $1.5 million decrease in stock-based compensation. Other Income (Expense) and Interest Expense Interest expense increased by $0.4 million to $2.2 million for Fiscal 2026, as compared to $1.8 million for Fiscal 2025. The Company estimated the fair value of the conversion option derivative liability using a Black-Scholes option pricing model and recorded the change in fair value of the derivative liability of $(5.3) million and $4.6 million at February 28, 2026 and 2025, respectively. Net Loss We recorded net losses of approximately $10.9 million and $21.1 million for Fiscal 2026 and 2025, respectively. The decrease in our net loss was due to several factors, as noted above, including decreased stock-based compensation expense, the recording of a loss on debt extinguishment to a related party in the prior year, and the change in fair value of our derivative liability. Liquidity and Capital Resources For the year ended February 28, 2026, we recorded a net loss of $10.9 million, used cash in operations of $3.2 million, and at February 28, 2026, had a stockholders’ deficit of $44.8 million. In addition, at February 28, 2026, notes payable and related accrued interest with an aggregate balance of $5.2 million have reached maturity and are past due. These conditions raise substantial doubt regarding our ability to continue as a going concern for a period of at least one year from the date of issuance of these financial statements. In addition, the Company’s independent registered public accounting firm, in their 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 million 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. The issuance of 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. See “Item 3. Legal Proceedings” and “Part IV, Item 15, and Note 9 to the Financial Statements” included elsewhere in this Annual Report on Form 10-K for information regarding the dispute and settlement with Mr. Kopple regarding these transactions. 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 Financial Statements at page F-1. 23 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE For the year ended February 28, 2026, there were no disagreements or any reportable events to disclose.