AUSI 10-K & 10-Q changes, risk factors and insider trading

The Company’s financial statements have been prepared under the assumption that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, during the year ended February 28, 2025,2026, the Company incurred a net loss of $21.1$10.9 million, used cash in operations of $3.2 million, and at February 28, 2025,2026, had a stockholders’ deficit of $37.6$44.8 million. In addition, at February 28, 2025,2026, notes payable and related accrued interest with an aggregate balance of $5.2 million have reached maturity and are past due. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements are issued. In addition, the Company’s independent registered public accounting firm, in their audit report on the Company’s February 28, 29,2026, 2024, audited financial statements, raisedincluded an explanatory paragraph regarding substantial doubt about the Company’s ability to continue as a going concern.

We derive a substantial portion of our revenues from customers in industries susceptible to trends and factors affecting those industries, including the COVID-19 pandemic.industries.

We will need additional capital in the future to meet our obligationsobligations, and financing may not be available. During Fiscal 20252026 and Fiscal 2024,2025, the Company increased its engineering and manufacturing activities, but it still struggled with meeting its financial requirements. If we cannot obtain additional capital, we will not be able to continue our operations.

As a result of our operating losses, we have largely financed our operations through sales of our equity securities. Beginning with Fiscal 2017, the Company significantly reduced its engineering, manufacturing, sales, and marketing activities to focus on renegotiating numerous financial obligations and conserving cash. For Fiscal 20252026 and Fiscal 2024, 2025, we had approximately $3.2 million negative and $3.0$3.2 million negative cash flows from operations, respectively, due primarily to the impact of the COVID-19 pandemic.respectively. The Company’s engineering and manufacturing activities remained limited due to our inability to increase sales and raise significant amounts of new financing. Our ability to continue as a going concern is directly dependent upon our ability to obtain additional operating capital and generating sufficient operating cash flow. The impacts of the COVID-19 pandemic, increasedIncreased interest rates and inflation have caused significant uncertainty and volatility in the credit markets and there can be no assurance that lenders or investors will make additional commitments to provide financing to us under current circumstances. As a result of the impacts of the COVID-19 pandemic,result, we may be required to raise additional capital and our access to and cost of financing will depend on, among other things, global economic conditions, conditions in the global financing markets, the availability of sufficient amounts of financing, and our prospects. 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 patents, trademarks, and all of our other intellectual property rights are important assets for us. There are events that are outside of our control that pose a threat to our intellectual property rights. For example, effective intellectual property protection may not be available in every country in which our products and services are distributed or made available. Also, the efforts we have taken to protect our proprietary rights may not be sufficient or effective. Due to our lack of financial resources, we may not be able to adequately protect our technology portfolio or apply for new patents to extend our intellectual property portfolio. The expiration of patents in our patent portfolio may also have an adverse effect on our business. Any significant impairment of our intellectual property rights could harm our business and or our ability to compete. Protecting our intellectual property rights is costly and time consuming and we may need to resort to litigation to enforce our patent rights or to determine the scope and validity of third-party intellectual property rights and we may not have the financial resources to pay for such litigation. Some of our competitors may be able to sustain the costs of complex patent litigation more effectively than we can because they have substantially greater resources.

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

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

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

On February 28, 2025,2026, we had total liabilities of $39.0$46.2 million, of which $17.6$22.8 million was due to a derivative liability related to debt conversion rights to a related party. The current liability portion was $38.4$45.4 million, of which $17.6$22.8 million was due to a derivative liability related to debt conversion rights to a related party. AfterOn adjustingFebruary for28, the2025, we had total liabilities of $39.0 million, of which $17.6 million was due to a derivative liability related to debt conversion rights to a related party. The current liability portion was $38.4 million, of which $17.6 million was due to a derivative liability,liability the current liabilities are $20.9 million as comparedrelated to $15.2 milliondebt onconversion Februaryrights 29,to 2024.a related party.

If we aresuccessfully successful in executingexecute 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 systems, and reorganize our operations. If we fail to manage growth efficiently, our business could be adversely affected.

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

As described in ITEM 9A, Controls and Procedures contained herein in this Annual Report, management has concluded that as of February 28, 2025,2026, its internal controls over financial reporting were not effective. While the Company believes it has addressed and remediated material weaknessesweaknesses, identified in 2022, there can be no guarantee that other weaknesses in its financial reporting controls will not be identified in the future. Presently, the Company does not have the financial resources to fully comply with all the requirements of Section 404. If, in the future, we identify one or more material weaknesses in our internal controls over financial reporting during this continuous evaluation process, our management may not be able to assert that such internal controls are effective. Therefore, if we are unable to assert that our internal controls over over financial reporting are effective in the future, or if our auditors are unable to attest that our internal controls are effective or they are unable to express an opinion on the effectiveness of our internal controls, we could lose investor confidence in the accuracy and and completeness of our financial reports, which would have an adverse effect on our business and the market price of our Common Stock.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations includesinclude 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”.

In fiscal 20242025 and 20252026 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 advanceadvanced engineering tools such as Ansys Maxwell finite elements, MATLAB and 3-D solid work. Our engineering, research and development costs for fiscal 20252026 were approximately $1.2$1.6 million.

Engineering, research and development expenses were $1,249approximately $1.6 million for Fiscal 2025,2026, compared to $750$1.2 million for Fiscal 2024.2025. 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 administration (“SG&A”) expenses for Fiscal 20252026 were $3,586$2.2 million as compared to $1,873$3.6 million for Fiscal 2024, an increase of $1,713 or 91%.2025. The increase decrease in SG&A was due to increaseda headcount$1.5 andmillion pay increases, and $1,342decrease in stock-based compensation.

Interest expense increased by $345$0.4 million to $1,810$2.2 million for Fiscal 2025,2026, as compared to $1,465$1.8 million for Fiscal 2024. During Fiscal 2025, the Company recorded a gain on debt settlement of $179 and a loss on debt extinguishment of $19,324 (see Notes 7 and 9 of the accompanying financial statements), both of which did not occur in the prior year period.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 $4,629$(5.3) million and $9$4.6 million at February 28, 20252026 and February 29, 2024,2025, respectively.

We recorded net losses of approximately $21,138$10.9 million and $4,216$21.1 million for Fiscal 20252026 and 2024,2025, respectively. The increasedecrease in our net loss was due to several factors, as noted above, including increaseddecreased stock-based compensation expense, the recording of a loss on debt extinguishment to a related party party,in the prior year, and the change in fair value of our derivative liability.

Prior to Fiscal 2020,2026, in order to maintain liquidity, we relied uponon external sources of financing, principally equity financing and private indebtedness. We have no bank line of credit and will require additional debt or equity financing to fund ongoing operations. Based on a cash flow analysis performed conducted by management, we estimate that we will need an additional $6$5 million to maintain existing operations for Fiscal 20262027 and to increase the shipment volume of shipments to customers. We cannot assure the reader that additional financing will be availableavailable, nor that the commercial targets will be met in the amounts required to keep the business operating. The issuance of additional equity shares of equity in connection with such financing could dilute the interests of our existing stockholders, and suchthe dilution could be substantial. If we cannot raise the needed funds,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.

In addition to the other information set forth in this report, you should carefully consider the risk factors disclosed in Item 1A, “Risk Factors,” of the Company’s Fiscal 20242026 Annual Report on Form 10-K issued on JuneSeptember 16,10, 2025.2026.

We do not intend to update or revise any forward-looking statements, whether because of new information, future events or otherwiseotherwise, 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.

Our business is based on the exploitationapplication of our Axial Fluxaxial Inductionflux induction technology forto 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 provideprovides: (i) higher motor/generator efficiency, thatwhich directly translatedtranslates tointo lower costoperating forcosts; operations (ii) lighter and smaller machines that lead to lower manufacturing cost,costs; (iii) higher reliability that results in less down timedowntime and lower maintenance cost, costs; (iv) theconstruction uses only raw materials used for construction are copper and steelsteel, without any rare earth materials or any other types of permanent magnets. This immediately results insupports global availability withoutand reduces market risks as well asand geopolitical risks ofassociated with dependence on a single source,source; and (v) the use of approximately 60% less of copper than the equivalent radial flux induction machines, resultsresulting in less needed mining to extract the needed copper withand a direct positive environmental impact.

Our business model consists of three major components: (i) sales and marketing,marketing; iii(ii) design and engineering; and (iii) manufacturing axial flux induction motors and generators manufacturing.generators. Our sales and marketing approachesapproach are composedconsists of direct sales in North America and the use of agents and distributors in other areas.regions. In addition, we are also exploring limited licensing of our technology to very large potential usersusers, as well as potential joint ventures with existing industrial motor/ and generator suppliers. The second component of our business model is focusedfocuses on thedesigning, design, engineerengineering, and commercialize ofcommercializing new commercial and industrial electric motors based on our axial flux induction technology for numerous applicationsapplications, such as pumps, compressors, and HVAC.HVAC systems. We are also designing electric motors for both 2-two- and 4-wheelfour-wheel EVelectric application,vehicle asapplications welland as, expendingexpanding the product line for electric power generation. The third component of our business model is to set upestablish manufacturing ofcapabilities for the axial flux induction products being engineered and design.designed.

In fiscal 20242025 and 20252026, we havesignificantly significantly increased our engineering capabilities withby havinghiring hired experts’expert engineers in thermo dynamicsthermodynamics (Ph.D.), electromagnetic motor design (Ph.D.) Power electronics & control (Ph.D.), power electronics and controls (Ph.D.), and mechanical design (M.S.M.EM.S.M.E.). We have also acquired the latest in advanceadvanced engineering tools suchtools, asincluding Ansys Maxwell finite elements,element MATLABsoftware, MATLAB, and 3-D3D solidSolidWorks. work.Our engineering, research and development costs for fiscal 2026 were approximately $1.6 million.

Our management’s discussion and analysis of our financial conditionscondition 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 ofPreparing financial statements requires management to make estimates and disclosures onas 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 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, 2025,2026, that impacted our condensed financial statements and related notes included herein.

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 the time of product delivery and acceptance to the domestic distributor (i.e.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 are valued at the lower of cost (first-in, first-out) or net realizable value, on an average cost basis. We regularly review the components of inventory on a regular basiscomponents 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 beenis written down, it creates a new cost basis for inventory that may not be subsequently written up.

The Company evaluates its financial instruments to determine ifwhether such instrumentsthey are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivativeCompany initially records the instrument is initially recorded at its fair value and is then re-valuedremeasures it 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.

Three months ended November 30,May 2025,31, 2026, compared to three months ended NovemberMay 30,31, 20242025

Net revenue was $80 for the three months ended November 30, 2025, compared to $0$2 for the three months ended NovemberMay 30,31, 2024.2026, 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 2026.2027.

Cost of goods sold was $0 in the three months ended NovemberMay 30,31, 2025,2026, compared to $0$25 for the three months ended NovemberMay 30,31, 2024.2025.

Engineering, research and development expenses were $459$386 in the three months ended NovemberMay 30,31, 2025,2026, compared to $196$353 for the three months ended NovemberMay 30, 2024.31, 2025. The increase is primarily attributable to the purchase of engineering software and program licenses.

Selling, general and administration (“SG&A”)administrative expenses for the three months endingended NovemberMay 30,31, 2025,2026, were $466 as$468 compared to $673$484 for the three months endingended NovemberMay 30,31, 2025, a decrease of $207$16 inor 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 three-month period ending November 30, 2025, compared to the three months ended November 30, 2024.period.

Interest expense decreased by $121$114 to $358 for the three months ended November 30, 2025, as compared to $479$480 for the three months ended NovemberMay 30,31, 2024.2026, 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 the changechanges in the fair value of the derivative liability of $6,705$7,028 and $808$1,570 atfor Novemberthe 30,three 2025months ended May 31, 2026 and November 30, 2024,2025, respectively.

We recorded net incomelosses of $5,502$8,408 and net losses of approximately $540$2,841 for the three months ended NovemberMay 30,31, 20252026 and 2024,2025, respectively. The decrease in ourOur net loss wasincreased due to several factors,lower asgross notedprofit, above,higher includingoperating expenses, and changes in the change in fair value of our derivative liability.

For the ninethree months ended NovemberMay 30,31, 2025,2026, we recorded a net loss of $2,104,$8,408, used cash in operations of $2,457,$719, andand, atas Novemberof 30,May 2025,31, 2026, had a stockholders’shareholders’ deficit of $36,928. $53,566. In addition, at November 30, 2025, notes payable and related accrued interest with an aggregate balance of $5,266$5,446 havehad reached maturity and arewere past due. These conditions raise substantial doubt regardingabout 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 theirits report on the Company’s February 28, 2025,2026, audited financial statements, raised substantial doubt about the Company’s ability to continue as a going concern.

Prior to Fiscal 2020, in order2026, to maintain liquidity, we relied uponon external sources of financing, principally equity financing and private indebtedness. We have no bank line of credit and will require additional debt or equity financing to fund ongoing operations. Based on a cash flow analysis performedconducted by management, we estimate that we will need an additional $6 million$5,246 to maintain existing operations for Fiscal 20262027 and to increase theshipment volume of shipments to customers. We cannot assure the reader that additional financing will be availableavailable, nor that the commercial targets will be met in the amounts required to keep the business operating. The issuance ofIssuing additional equity shares of equity in connection with such financing could dilute the interests of our existing stockholders, and suchthe 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.