NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Aura Systems, Inc. (“Aura”, “We” or the “Company”), a Delaware corporation, is engaged in the development, commercialization, and sale 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.

Basis of Presentation

The accompanying unaudited condensed financial statements as of and for the three months ended May 31, 2026 and 2025, have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the unaudited condensed financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the periods presented. The Condensed Balance Sheet information as of February 28, 2026, was derived from the Company’s audited Financial Statements as of February 28, 2026, included in the Company’s Annual Report on Form 10-K filed with the SEC on September 10, 2026. These financial statements should be read in conjunction with that report. The results of operations for the period ended May 31, 2026, may not necessarily be indicative of the results of the full fiscal year ending February 28, 2027.

The Company’s fiscal year ends on the last calendar day of February. Accordingly, the current fiscal year will end on February 28, 2027, and is referred to as “Fiscal 2027”. Our prior fiscal years ended February 28, 2026, February 28, 2025, and February 29, 2024, and are referred to as “Fiscal 2026”, “Fiscal 2025,” and “Fiscal 2024”, respectively.

Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has not yet generated sufficient revenues to fund operations, has experienced recurring operating losses, and relies on debt and equity offerings to generate working capital.

During the three-month period ended May 31, 2026, the Company recognized a net loss of $8,408 and used $719 in cash for operating activities. As of May 31, 2026, the Company also had a shareholders’ deficit of $53,566 and notes payable totaling $5,446 were 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 its report on the Company’s February 28, 2026 financial statements, raised substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary if the Company cannot continue as a going concern.

If the Company is unable to generate profits and obtain financing for its working capital requirements, it may have to further curtail its business or cease operations 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 depends on its ability to generate sufficient cash flow to meet its obligations on a timely basis, retain its current financing, obtain additional financing, and ultimately attain profitability.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Significant estimates include assumptions made for inventory valuation, impairment testing of long-lived assets, the valuation allowance for deferred tax assets, assumptions used in valuing notes payable, 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.

Concentration of Credit and Other Risks

Financial instruments that may subject the Company to concentration of credit risk include cash and accounts receivable. The Company deposits cash with a limited number of financial institutions. Balances held at any one financial institution may at times exceed Federal Deposit Insurance Corporation insurance limits of up to $250. We have not experienced any losses in such accounts and believe we are not exposed to any significant risk on cash and cash equivalents.

During the three months ended May 31, 2026, one customer accounted for 90% and one customer accounted for 10% of revenues. During the three months ended May 31, 2025, one customer accounted for 90% and one customer accounted for 10% of revenues. No other customer accounted for more than 10% of revenues.

As of May 31, 2026, four vendors accounted for 34%, 14%, 13%, and 11% of accounts payable. As of February 28, 2026, five vendors accounted for 34%, 13%, 11%, 10%, and 10% of accounts payable.

Revenue Recognition

The Company recognizes revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers.

Our primary source of revenue is manufacturing and delivering axial flux induction motors and generator sets used primarily in mobile power applications. Our principal sales channels are domestic end users and international distributors and agents. In accordance with ASC 606, the Company recognizes revenue, net of discounts, for our generator sets at the time of product delivery and acceptance by the customer (i.e., point-in-time), which also corresponds to the passage of legal title to the customer and the satisfaction of our performance obligation to the customer.

Share-Based Compensation

The Company periodically issues stock options, warrants, and shares of common stock to employees and non-employees in non-capital raising transactions for services and financing costs. The Company measures share-based compensation cost at the grant date, based on the estimated fair value of the award, and recognizes it as expense over the requisite service period. The Company recognizes compensation expense for non-employees in the same period and manner as if it had paid cash for the services. 

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.

The Company uses Level 3 inputs for its valuation methodology for the derivative liabilities as their fair values were determined by using a Black-Scholes pricing model. The Company’s derivative liabilities are adjusted to reflect fair value at each reporting date, with any increase or decrease in the fair value being recorded in the statement of operations. 

To determine the number of authorized but unissued shares available to satisfy outstanding convertible securities, the Company uses a sequencing method to prioritize its convertible securities as prescribed by ASC 815-40-35. At each reporting date, the Company reviews its convertible securities to determine whether their classification is appropriate.

Fair Value of Financial Instruments

The Company determines the fair values of its financial instruments based on a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The classification of a financial asset or liability within the hierarchy is based on the lowest-level input that is significant to the fair value measurement. Under ASC 820, Fair Value Measurement and Disclosures, the fair value hierarchy prioritizes the inputs into three levels that may be used to measure fair value:

The recorded amounts of inventory, other current assets, accounts payable, and accrued expenses approximate fair value because of their short-term nature. The carrying amounts of notes payable and convertible notes payable approximate their respective fair values because of their current interest rates payable in relation to current market conditions.

The following table sets forth by level, within the fair value hierarchy, the Company’s assets and liabilities at fair value as of May 31, 2026 and February 28, 2026:

The Company estimated the fair value of the derivative liability using the Black-Scholes Model.

The following table provides a roll-forward of the derivative liability measured at fair value on a recurring basis using unobservable level 3 inputs for the period ended May 31, 2026, as follows:

Loss per share

The Company’s loss per share amounts have been computed based on the weighted average number of shares of common stock outstanding for the period. Basic earnings (loss) per share is computed by dividing net earnings (loss) available to common shareholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is computed by dividing net earnings (loss) available to common shareholders by the weighted average number of shares of common stock assuming all potential shares had been issued, and the additional shares of common stock were dilutive. Diluted earnings (loss) per share reflects the potential dilution, using the as-if-converted method for convertible debt, and the treasury stock method for options and warrants, which could occur if all potentially dilutive securities were exercised.

For the three months ended May 31, 2026 and 2025, the calculations of basic and diluted loss per share are the same because potentially dilutive securities would have had an anti-dilutive effect. The potentially dilutive securities consisted of the following:

Recent Accounting Pronouncements

In November 2024, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses which includes amendments that require disclosure in the notes to financial statements of specified information about certain costs and expenses, including purchases of inventory; employee compensation; and depreciation, amortization and depletion expenses for each caption on the income statement where such expenses are included. The amendments are effective for the Company’s annual periods beginning January 1, 2027, with early adoption permitted, and should be applied either prospectively or retrospectively. The Company is evaluating this ASU to determine its impact on the Company’s disclosures.

Other recent accounting pronouncements issued by the FASB, its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission have not had and are not expected by management to have a material impact on the Company’s present or future financial statements.