Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion of our financial
condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included
elsewhere in this filing.
You should read the following discussion and
analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes
and other financial information included in this report. Some of the information contained in this discussion and analysis or set forth
elsewhere in this report, including information with respect to our plans and strategy for our business, includes forward-looking statements
that involve risks and uncertainties as described under the heading “Forward-Looking Statements” elsewhere in this report.
You should review the disclosure under the heading “Risk Factors” in other filings we make with the SEC for a discussion
of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking
statements contained in the following discussion and analysis.
Overview
On June 22, 2021, we, Acquisition Sub and Biond
Photonics, entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”). Pursuant to the terms
of the Merger Agreement, on June 22, 2021, Biond Photonics merged with and into Acquisition Sub, with Acquisition Sub continuing as the
surviving corporation and our wholly owned subsidiary.
As a result of the Merger, we acquired the business
of Biond Photonics, a California corporation, doing business as Aeluma. See “Description of Business”above.
At the time the certificates of merger reflecting the Merger were filed with the Secretaries of State of California and Delaware,
each of Biond Photonics’ shares of capital stock issued and outstanding immediately prior to the closing of the Merger was converted
into the right to receive (a) 1.299135853 shares of our common stock (the “Common Share Conversion Ratio”), with the maximum
number of shares of our common stock issuable to the former holders of Biond Photonics’ capital stock equal to 4,100,002 after
adjustments due to rounding for fractional shares. Immediately prior to the effectiveness of the Merger, an aggregate of 2,500,000 shares
of our common stock owned by the stockholders of Parc Investments, Inc. prior to the Merger were forfeited and cancelled (the “Stock
Forfeiture”).
The issuance of shares of our common stock to
Biond Photonics’ former security holders are collectively referred to as the “Share Conversion.”
6
The Merger Agreement contained customary representations
and warranties and pre- and post-closing covenants of each party and customary closing conditions.
As a condition to the Merger, we entered into
an indemnity agreement with our former officer and directors (the “Pre-Merger Indemnity Agreement”), pursuant to which we
agreed to indemnify such former officer and directors for actions taken by them in their official capacities relating to the consideration,
approval and consummation of the Merger and certain related transactions.
The Merger was treated as a recapitalization
and reverse acquisition for us for financial reporting purposes. Biond Photonics is considered the acquirer for accounting purposes,
and our historical financial statements before the Merger were replaced with the historical financial statements of Biond Photonics before
the Merger in filings with the SEC. The Merger is intended to be treated as a tax-free reorganization under Section 368(a) of the Internal
Revenue Code of 1986, as amended.
The issuance of securities pursuant to the Share
Conversion was not registered under the Securities Act, in reliance upon the exemption from registration provided by Section 4(a)(2)
of the Securities Act, which exempts transactions by an issuer not involving any public offering, and Rule 506 of Regulation D
promulgated by the SEC thereunder. These securities may not be offered or sold in the U.S. absent registration or an applicable exemption
from the registration requirement and are subject to further contractual restrictions on transfer.
Prior to the Merger, our sole business purpose
was to seek the acquisition of or merger with, an existing company.
As a result of the consummation of the Merger,
on June 22, 2021, Biond Photonics, Inc. became our wholly owned subsidiary and the business of Biond Photonics, Inc. became our business
going forward. Accordingly, at the closing, we ceased to be a shell company.
Aeluma develops novel optoelectronic devices
for sensing and communications applications. Aeluma has pioneered a technique to manufacture devices using high performance compound
semiconductor materials on large diameter silicon wafers that are commonly used to manufacture mass market microelectronics. This enables
cost effective manufacturing of high-performance photodetector array circuits for imaging applications in mobile devices. These devices
may be used as image sensors that generate an image by detecting light, in a manner similar to a digital camera taking a picture. Our
devices may incorporate additional functionality and enhanced performance to enable 3D image capture when integrated into various system
architectures. This technology has the potential to greatly enhance the performance and capability of camera image sensors, Lidar, augmented
reality, facial recognition, and other applications. Aeluma has acquired a key piece of manufacturing equipment and has headquarter in
Goleta, California with a manufacturing cleanroom to house this equipment.
The Private Placement Following the Merger
Immediately following the Merger, we sold 3,482,500
shares of our common stock pursuant to an initial closing of a private placement offering at a purchase price of $2.00 per share (the
“Offering Price”). We held a second closing on June 28, 2021 for an additional 402,500 shares of our common stock and a third
and final closing on July 1, 2021 for an additional 115,000. Accordingly, we sold a total of 4,000,000 shares of our common stock. This
private placement offering is referred to herein as the “Merger Offering.”
The aggregate gross proceeds from the three closings
of the Merger Offering were $8,000,000 (before deducting placement agent fees and expenses of the Merger Offering).
The three closings of the Merger Offering were
exempt from registration under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated by the SEC
thereunder. The common stock in the Merger Offering was sold to “accredited investors,” as defined in Regulation D,
and was conducted on a “reasonable best efforts” basis.
In connection with the Merger Offering and subject
to the closing of the Merger Offering, we agreed to pay the placement agent, GP Nurmenkari Inc. (the “Placement Agent”),
a U.S. registered broker-dealer, a cash placement fee of 10% of the gross proceeds raised from investors in the Merger Offering (other
than the first $630,000 of common stock sold to pre-Merger Biond Photonics shareholders and their friends and family, for which the Placement
Agent received a 3% cash fee, and $170,000 of common stock sold to pre-Merger Biond Photonics friends and family for which the Placement
Agent received no cash fee) and to issue to it 50,000 shares of our common stock and warrants to purchase a number of shares of our common
stock equal to 10% of the number of shares of common stock sold in the Merger Offering (other than the first $800,000 of common stock
sold to pre-Merger Biond Photonics shareholders and their friends and family), with a term of five years and an exercise price of $2.00
per share (the “Placement Agent Warrants”). We also agreed to pay certain expenses of the Placement Agent in connection with
the Merger Offering.
7
As a result of the foregoing, we paid the Placement
Agent an aggregate commission of $748,900 and issued to it 50,000 shares of our common stock and Placement Agent Warrants to purchase
360,000 shares of our common stock in connection with the two closings of the Merger Offering. We have also reimbursed the Placement
Agent for approximately $265,000 for legal and other expenses incurred in connection with the Merger Offering.
A note payable to an officer of Parc Investments,
Inc. in the amount of $50,000 was repaid directly from the proceeds from the Merger Offering.
Subject to certain customary exceptions, we have
agreed to indemnify the Placement Agent to the fullest extent permitted by law against certain liabilities that may be incurred in connection
with the Offering, including certain civil liabilities under the Securities Act, and, where such indemnification is not available, to
contribute to the payments the Placement Agent and their sub-agents may be required to make in respect of such liabilities.
Recent Private Placement
Between December 2022 and May 2023, we entered
into subscription agreements (the “Subscription Agreement”) with certain accredited investors, pursuant to which we issued
an aggregate of 2,017,498 shares of our common stock, par value $0.0001 per share, at a per share purchase price of $3.00, for aggregate
gross proceeds of $6,052,500 (the “Offering”).
In connection with the Subscription Agreement,
we also entered into a Registration Rights Agreement with the Investors, pursuant to which we agreed to register all of the shares of
common stock issued in the Offering, including the shares of common stock underlying the warrant issued to the placement agent in this
registration statement. (See, Description of Securities – Registration Rights Agreement)
Pursuant to the Offering, we paid a cash placement
agent fee and expenses in the amount of $411,015 and issued placement agent warrants (“Placement Agent Warrants”) to purchase
up to an aggregate of 85,653 shares of common stock at an exercise price of $3.00 per share.
The Subscription Agreement also contains customary
representation and warranties of us and the Investors, indemnification obligations of us, termination provisions, and other obligations
and rights of the parties.
The foregoing description of the Subscription
Agreement, Registration Rights Agreement and form of Placement Agent Warrants is qualified by reference to the full text of the forms
of Subscription Agreement, Registration Rights Agreement and form of Placement Agent Warrants, which are filed as Exhibits hereto and
incorporated herein by reference.
Departure and Appointment of Directors and Officers
Our board of directors is authorized to have
five members. As of the effectiveness of the Merger, Mr. Ian Jacobs and Mr. Mark Tompkins resigned from our board of directors, and Mr.
Jonathan Klamkin, Mr. Lee McCarthy and Mr. Steven DenBaars were appointed to our board of directors. Mr. DenBaars is a Class I director.
Also, as of the effectiveness of the Merger,
Mr. Jacobs resigned from all officer positions with us, and Jonathan Klamkin was appointed as our President and Chief Executive Officer,
Lee McCarthy was appointed as our interim Chief Financial Officer and Chief Operating Officer.
8
Mr. McCarthy resigned from his position as interim
Chief Financial Officer on August 18, 2021 and from his directorship on December 1, 2021. To fill Mr. McCarthy’s vacancy on the
board, we appointed Ms. Palvi Mehta. Ms. Mehta is a Class II director.
On December 1, 2021, we also appointed Mr. John
Paglia to the board of directors; Mr. Paglia is a Class I director.
On November 8, 2022, Lee McCarthy provided notice
of his resignation as our Chief Operating Officer effective November 17, 2022. Mr. McCarthy’s decision to resign was not the
result of any disagreements with us on any matter related to the operations, policies, or practices of us.
Plan of Operations
We have been developing our materials and characterization
capabilities at our headquarters in Goleta, California, in connection with the further development of our business and the implementation
of our plan of operations. We have installed some key manufacturing equipment at our headquarters and will continue to develop relationships
with manufacturing partners to carry out certain steps of our manufacturing processes externally. We have gained access to a rapid prototyping
facility and are leveraging this access to fabricate early-stage prototypes. In the future, we intend to implement appropriate quality
and manufacturing controls. Some equipment was procured previously, and other equipment is being procured through purchase orders with
equipment vendors.
The primary sources of funding for equipment
procurement and installation are the seed funding raised prior to becoming a public company and the funding raised from our financings.
We have also leveraged funds to continue strengthening our intellectual property including patent applications, trademarks, and development
of trade secrets and manufacturing process recipes. We will continue to develop our manufacturing and product development strategy by
further engaging customers and strategic partners.
Limited Operating History
We cannot guarantee that the proceeds from the
Offering will be sufficient to carry out all of our business plans. Our business is subject to risks inherent in growing an enterprise,
including limited capital resources, risks inherent in the research and development process and possible rejection of our products in
development.
If financing is not available on satisfactory
terms, we may be unable to carry out all of our operations. Equity financing will result in dilution to existing stockholders.
Components of Results of Operations
Revenue
Our revenue currently consists of commercial
product sales and government contracts. For the year ended June 30, 2023, products are sold as samples and government contracts are primarily
for research and development.
Operating Expenses
The cost of revenue consists of costs of materials,
as well as direct compensation and expenses incurred to provide deliverables that resulted in payment of our success fee and wafers delivered.
We anticipate that our cost of revenue will vary substantially depending on the nature of products and/or services delivered in each
customer engagement.
Research and development
expenses consist primarily of compensation and related costs for personnel, including stock-based compensation and employee benefits
as well as costs associated with design, fabrication, packaging and testing of our devices. We expense research and development expenses
as incurred.
General and administrative expenses consist primarily
of compensation and related costs for personnel, including stock-based compensation and employee benefits. In addition, general
and administrative expenses include third-party consulting, legal, audit and accounting services.
9
Facility expenses consist primarily of lease
and utility expenses at our headquarters in Goleta, California and insurance expenses consist mainly of directors and officers insurance.
Other Income
Other income, net of other expenses, consists
primarily of income generated from subleasing a portion of our research and development facility.
Income Tax Expense
Income tax expense consists primarily of
income taxes in certain state jurisdictions in which we conduct business.
Results of Operations
Year ended June 30, 2023 compared to the
year ended June 30, 2022
Our results of operations for the year ended
June 30, 2023, as compared to the same period of 2022, were as follows (some of the balances on the prior period’s combined financials
statements have been reclassified to conform to the current period presentation):
Year Ended June 30, Change ’23
Income tax expense - - -
Revenue: The company recognized its first
revenue of $193,339, consisting of $15,000 from product sales and $178,339 from a government contract.
Operating Expenses: During the years ended
June 30, 2023 and 2022, we incurred operating expenses of $5,703,024 and $3,733,522, respectively. This increase was mainly due to increased
salaries and stock-based compensation resulting from additional employees hired to support our growth and increased costs related to
research and development activities.
Other income: During the years ended June
30, 2023 and 2022, we recorded other income of $130,103 and $281,823, respectively. The decrease was primarily due to a decrease in sub-lease
rental income. The sub-lease ended in March 2023.
Income tax expense: We recorded no income
tax expense for the years ended June 30, 2023 and 2022.
Net Loss: Net loss increased to $5,379,582
for the year ended June 30, 2023, as compared to $3,451,699 for the same period of 2022. The increase was primarily due to increases
in operating expenses resulting increased salaries and stock-based compensation, and research and development activities.
Capital Resources and Liquidity
Our financial statements have been presented
on the basis that are a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course
of business. As presented in the financial statements, we incurred a net loss of $5,379,582 and $3,451,699 for the years ended June 30,
2023 and 2022, respectively, and losses are expected to continue in the near term. The accumulated deficit was $9,062,066 at June 30,
2023. We have been funding our operations through private loans and the sale of common stock in private placement transactions.
10
Management anticipates that significant additional
expenditures will be necessary to develop and expand our business before significant positive operating cash flows can be achieved. Our
ability to continue as a going concern is dependent upon our ability to raise additional capital and to ultimately achieve sustainable
revenues and profitable operations. At June 30, 2023, we had $5,071,690 of cash on hand. These funds are insufficient to complete our
business plan and as a consequence, we will need to seek additional funds, primarily through the issuance of debt or equity securities
for cash to operate our business. No assurance can be given that any future financing will be available or, if available, that it will
be on terms that are satisfactory to us. Even if we are able to obtain additional financing, it may contain undue restrictions on our
operations, in the case of debt financing or cause substantial dilution for our stockholders, in the case of equity financing.
Management has undertaken steps as part of a
plan to improve operations with the goal of sustaining our operations for the next twelve months and beyond. These steps include (a)
raising additional capital and/or obtaining financing; (b) controlling overhead and expenses; and (c) executing material sales or research
contracts. There can be no assurance that we can successfully accomplish these steps and it is uncertain that we will achieve a profitable
level of operations and obtain additional financing. There can be no assurance that any additional financing will be available to us
on satisfactory terms and conditions, if at all. As of the date of this Report, we have not entered into any formal agreements regarding
the above.
In the event we are unable to continue as a going
concern, the Company may elect or be required to seek protection from its creditors by filing a voluntary petition in bankruptcy or may
be subject to an involuntary petition in bankruptcy. To date, management has not considered this alternative, nor does management view
it as a likely occurrence.
We had working capital of $4,576,807 and $4,058,409
at June 30, 2023 and 2022, respectively. Current assets increased $903,058 to $5,333,906 at June 30, 2023 from $4,430,848 at June 30,
2022, primarily due to the private placement described above. Current liabilities increased $384,660 to $757,099 at June 30, 2023 from
$372,439 at June 30, 2022, due to increases in accounts payable.
The following table shows a summary of our cash
flows for the periods presented:
Year Ended June 30, Change ’23
Net cash (used in) provided by:
Net cash used in our operating activities increased
$1,385,181 to $3,637,972 for the year ended June 30, 2023, compared to $2,252,791 for the same period in 2022, primarily due to a $1,927,883
increase in net loss. The decrease was reduced mainly by non-cash expense increases of $258,000 in consultant expense, $244,433 in stock-based
compensation expense, and $302,172 in accounts payable.
Net cash used in our investing activities were
$672,545 and $955,667 for the years ended June 30, 2023 and 2022, respectively. Investing activities for the periods presented are related
to the equipment purchases and the setup of our facility.
Our financing activities resulted in a cash inflow
of $5,641,485 and 161,930 for the years ended June 30, 2023 and 2022, respectively. Financing activities for the periods presented are
proceeds from the sale of common stock in private placements.
Recent Accounting Pronouncements
The Company has evaluated all issued but not yet effective accounting
pronouncements and determined that they are either immaterial or not relevant to the Company.
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk.
Not applicable.
11
Item 8. Financial Statements and Supplementary Data.
Index to Consolidated Financial Statements
Page
Report of Independent Registered Public Accounting Firm (PCAOB No. 00468) F-2
Consolidated Balance Sheets as of June 30, 2023 and 2022 F-3
Notes to Consolidated Financial Statements F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Board of Directors and Stockholders of
Aeluma, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated
balance sheets of Aeluma, Inc. and Subsidiary (the Company) as of June 30, 2023 and 2022, and the related consolidated statements of
operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended June 30, 2023, and the related
notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present
fairly, in all material respects, the consolidated financial position of the Company as of June 30, 2023 and 2022, and the results of
its operations and its cash flows for each of the years in the two-year period ended June 30, 2023, in conformity with accounting principles
generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements,
the Company has incurred significant operating losses and negative cash flows from operations, and has generated limited revenue. These
conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard
to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial
statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United
States) “PCAOB” and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the
standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were
we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an
understanding of internal control over financial reporting, 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.
Our audit included performing procedures to assess
the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides
a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below
are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated
to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and
(2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
Rose, Snyder & Jacobs LLP
We have served as the Company’s auditor
since 2021
Encino, California
September 22, 2023
F-2
Aeluma, Inc. and Subsidiary
Consolidated Balance Sheets
Assets
Current assets:
Property and equipment:
Deferred compensation, long term portion - 11,034
Liabilities and stockholders’ equity
Current liabilities:
Accrued expenses and other current liabilities 133,092 101,351
Commitments and contingencies - -
Stockholders’ equity:
The accompanying notes are an integral part of
consolidated financial statements.
F-3
Aeluma, Inc. and Subsidiary
Consolidated Statements of Operations
Year Ended June 30,
Operating expenses:
Other income:
Income tax expense - -
Basic and diluted loss per share $ (0.47 ) $ (0.32 )
The accompanying notes are an integral part of
consolidated financial statements.
F-4
Aeluma, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders’
Equity
Common Stock Additional paid-in Accumulated Total Stockholders’
Shares Amount capital Deficit Equity
The accompanying notes are an integral part of
consolidated financial statements.
F-5
Aeluma, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Year Ended June 30,
Operating activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Issuance of shares for services 258,000 -
Partial refund of facility lease deposit - 52,055
Change in accounts receivable (189,239 ) -
Change in prepaids and other current assets 7,719 (5,141 )
Change in accrued expenses and other current liabilities 67 6,382
Investing activities:
Financing activities:
Proceeds from Private Placement, net of offering costs 5,641,485 206,930
Payment of other offering costs - (45,000 )
The accompanying notes are an integral part of
consolidated financial statements.
F-6
Aeluma, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 1 – Business
Aeluma, Inc., headquartered in Goleta, California,
is engaged in the research and development of infrared (IR) optical sensors to disrupt the market for IR sensors, and using its proprietary
technology aims to produce a much higher performance alternative to today’s low-cost sensors at much lower prices than would otherwise
be possible. The focus of Aeluma, Inc. (“the Company”) will be the image sensor market. Initial efforts hope to penetrate
the 3D imaging and sensing (mobile and consumer, defense and aerospace, industrial, medical, auto) and LiDAR (robotic vehicles, advanced
driver assistance systems vehicles (ADAS), topography, wind, industrial) markets.
On June 22, 2021, Biond Photonics, Inc.,
a privately held California corporation (“Biond Photonics”) merged with and into our wholly owned subsidiary, Aeluma Operating
Co., a corporation formed in the State of Delaware on June 22, 2021 (“Acquisition Sub”). Pursuant to this transaction
(the “Merger”), Acquisition Sub was the surviving corporation and remained our wholly owned subsidiary, and all the outstanding
stock of Biond Photonics was converted into shares of our common stock. As a result of the Merger, the Company acquired the business
of Biond Photonics and continued the existing business operations of Biond Photonics as a public reporting company under the name Aeluma,
Inc.
Going Concern
The Company incurred a net loss of $5,379,480
and $3,451,699 for the years ended June 30, 2023 and 2022, respectively, and has accumulated deficit of $9,062,066 at June 30, 2023.
In addition, the Company is in the research and development stage and has generated limited revenue to date. In order to support its
operations, the Company will require additional infusions of cash from the sale of equity instruments or the issuance of debt instruments,
or the commencement of profitable revenue generating activities. If adequate funds are not available or are not available on acceptable
terms, the Company’s ability to fund its operations, develop or enhance its sensors in the future or respond to competitive pressures
would be significantly limited. Such limitations could require the Company to curtail, suspend or discontinue parts of its business plan.
These conditions raise doubt about the Company’s
ability to continue as a going concern. The accompanying financial statements have been prepared in conformity with GAAP, which contemplate
continuation of the Company as a going concern. The financial statements do not include any adjustments relating to the recoverability
and classification of recorded asset amounts or the amounts and classification of liabilities that could result from the outcome of this
uncertainty. The financial statements do not include any adjustments that might be necessary should the Company be unable to continue
as a going concern.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements
have been presented in accordance with generally accepted accounting principles in the United States (“GAAP”).
The summary of significant accounting policies
presented below is designed to assist in understanding the Company’s financial statements. Such financial statements and accompanying
notes are the representations of the Company’s management, who is responsible for the Company’s integrity and objectivity.
Use of Estimates and Assumptions
The preparation of financial statements in conformity
with 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 revenues and expenses during the reporting period. The Company bases its estimates
and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities. The actual results experienced
by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between
the estimates and the actual results, future results of operations will be affected.
F-7
Cash and Cash Equivalents
The Company considers cash in banks, deposits
in transit, and highly liquid debt instruments purchased with original maturities of three months or less to be cash and cash equivalents.
Concentration of Risk
The Company maintains its cash in bank deposit
accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company’s
accounts are insured by the FDIC but at times may exceed federally insured limits.
Fair Value of Financial Instruments
As defined in Financial Accounting Standards
Board (“FASB”) ASC Topic No. 820, “Fair Value Measurements and Disclosures” (“ASC 820”), fair value
is the price that would be received to sell an asset or paid to transfer the liability in an orderly transaction between market participants
at the measurement date. In determining fair value, the Company uses the market or income approach. Based on this approach, the Company
utilizes certain assumptions about the risk inherent in the inputs to the valuation technique. These inputs can be readily observable,
market-corroborated or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs
and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, the Company is
required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and the
reliability of the information used to determine fair values. As a basis for considering these assumptions, ASC 820 defines a three-tier
value hierarchy that prioritizes the inputs used in the valuation methodologies in measuring fair value.
Level 1 – Unadjusted
quoted prices in active, accessible market for identical assets or liabilities
Level 2 – Other inputs
that are directly or indirectly observable in the marketplace
Level 3 – Unobservable
inputs which are supported by little or no market activity
The fair value hierarchy also requires an entity
to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The carrying values of the Company’s cash,
accounts receivable, accounts payable, accrued expenses and other current liabilities approximate their fair value due to the relatively
short maturity of these items.
Property and Equipment
Property, equipment and leasehold improvements
are reported at historical cost, net of accumulated depreciation and amortization. Depreciation is computed using the straight-line method
over the estimated useful lives of the assets. Leasehold improvements are amortized over the remaining lease term. Repairs and maintenance
to these assets are charged to expense as incurred; major improvements enhancing the function and/or the asset’s useful life are
capitalized. When items are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gains
or losses arising from such transactions are recognized.
Intangible Assets
Intangible assets are associated with the Aeluma.com
domain name and are amortized on a straight-line basis over 10 years.
F-8
Revenue Recognition
The Company follows a five-step approach for
recognizing revenue, consisting of the following: (1) identifying the contract with a customer; (2) identifying the performance obligations
in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations in the contract;
and (5) recognizing revenue when, or as, the entity satisfies a performance obligation. Sales and other taxes the Company collects concurrent
with revenue-producing activities are excluded from revenue. Incidental items that are immaterial in the context of the contract are
recognized as expense. The Company does not have any significant financing components associated
with its revenue contracts, as payment is received within one
year.
The
company recognized its revenue of $193,339, consisting of $15,000 from product sales and $178,339 from a government contract,
primarily for sampling purchases and research and development, for the year ended June 30, 2023.
Loss Per Share
Basic loss per share is computed by dividing net
loss available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted loss per
share is computed by dividing the net loss attributable to common stockholders by the sum of the weighted average number of common shares
outstanding plus potential dilutive common shares outstanding during the period. Potential dilutive securities, comprised of stock warrants
and stock options, are not reflected in diluted loss per share because such shares are anti–dilutive. Dilutive impact of potential
common shares resulting from common stock equivalents is determined by applying the treasury stock method.
Stock-Based Compensation
The Company accounts for stock-based compensation
arrangements in accordance with guidance issued by the FASB, which requires the measurement and recognition of compensation expense for
all share-based payment awards made to employees, consultants, and directors based on estimated fair values.
The Company estimates the fair value of stock-based
compensation awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected
to vest is recognized as an expense over the requisite service periods in the Company’s consolidated statements of operations. The
Company estimates the fair value of stock-based compensation awards using the Black-Scholes model. This model requires the Company to
estimate the expected volatility and value of its common stock and the expected term of the stock options, all of which are highly complex
and subjective variables. For employees and directors, the expected life was calculated based on the simplified method as described by
the SEC Staff Accounting Bulletin No. 110, Share-Based Payment. For other service providers, the expected life was calculated using the
contractual term of the award. The Company’s estimate of expected volatility was based on the volatility of peers. The Company has
selected a risk-free rate based on the implied yield available on U.S. Treasury securities with a maturity equivalent to the expected
term of the options. The Company accounts for forfeitures upon occurrence.
F-9
Income Taxes
The Company is expected to have net operating
loss carryforwards that it can use to offset a certain amount of taxable income in the future. The Company is currently analyzing the
amount of loss carryforwards that will be available to reduce future taxable income. The resulting deferred tax assets will be offset
by a valuation allowance due to the uncertainty of its realization. The primary difference between income tax expense attributable to
continuing operations and the amount of income tax expense that would result from applying domestic federal statutory rates to income
before income taxes relates to the recognition of a valuation allowance for deferred income tax assets.
The Company has adopted FASB ASC 740-10, “Income
Taxes” which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements
and prescribes a recognition threshold of more likely than not as a measurement process for financial statement recognition and measurement
of a tax position taken or expected to be taken in a tax return. In making this assessment, a Company must determine whether it is more
likely than not that a tax position will be sustained upon examination, based solely on the technical merits of the position and must
assume that the tax position will be examined by taxing authorities. The Company’s policy is to include interest and penalties related
to unrecognized tax benefits in income tax expense. Interest and penalties totaled $0 for the periods presented. The Company’s
net operating loss carryforwards are subject to IRS examination until they are fully utilized, and such tax years are closed.
The Company will file tax returns in the U.S.
federal jurisdiction and the state of California. The Company’s federal and state return forms are subject to review by the taxing
authorities. The Company is not currently under examination by any taxing authority, nor has it been notified of an impending examination.
Recent Accounting Pronouncements
The Company has evaluated all issued but not yet effective accounting
pronouncements and determined that they are either immaterial or not relevant to the Company.
Note 3 – Stockholders’ Equity
Authorized
Shares
The Company’s
Articles of Incorporation authorize the issuance of two classes of shares of stock. The total number of shares which this corporation
is authorized to issue is 50,000,000 shares of $0.0001 par value common stock and 10,000,000 of $0.0001 par
value preferred stock. No preferred shares were issued as of June 30, 2023.
Common
Stock Offering
Immediately
following the Merger, on June 22, 2021, the Company sold 3,482,500 shares of common stock pursuant to an initial closing of
a private placement offering at a purchase price of $2.00 per share, with gross proceed of $6,965,000 (before deducting placement
agent fees and expenses of $949,736). The Company held a second closing on June 28, 2021 for an additional 402,500 shares of
common stock, with gross proceed of $805,000 (before deducting placement agent fees and expenses of $109,769), and a third and final
close on July 1, 2021 for an additional 115,000, with gross proceed of $230,000 (before deducting placement agent fees and expenses
of $23,070). Accordingly, the Company sold a total of 4,000,000 shares of common stock with total gross proceeds of $8,000,000 (before
deducting total placement agent fees and expenses of $1,082,577).
On
December 12, 2022, the Company sold an aggregate of 517,000 shares of common stock in a private placement offering at a price
of $3.00 per share, with gross proceeds of $1,551,000 (before deducting placement agent fees and expenses of $124,385). On January
10, 2023, the Company held a second closing for an additional 214,667 shares of common stock, with gross proceeds of $644,000 (before
deducting placement agent fees and expenses of $28,640). On March 31, 2023, the Company held a third closing for an additional 715,665 shares
of common stock, with gross proceeds of $2,147,000 (before deducting placement agent fees and expenses of $117,830). On May
10, 2023, the Company held a fourth and final close for additional 570,166 shares of its common, with gross proceeds of $1,710,500(before deducting placement agent fees and expenses of $140,160). Accordingly,
the Company sold a total of 2,017,498 shares of common stock with a total gross proceeds of $6,052,500 (before deducting
total placement agent fees and expenses of $411,015) in this private placement. The two private placement offerings held above are together
referred to herein as the “Offering.”
The Offering
was exempt from registration under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated by the SEC
thereunder. The common stock in the Offering was sold to “accredited investors,” as defined in Regulation D, and was conducted
on a “reasonable best efforts” basis.
F-10
Issued
and Vested Shares to Officers
On October 27,
2020, the Company issued 1,623,920 shares of common stock to Jonathan Klamkin, Director and Chief Executive Officer, and 1,623,920
shares of common stock to Lee McCarthy, Director, interim Chief Financial Officer and Chief Operations Officer, for an aggregate sum of
$10,000 each. Initially 20% or 324,784 shares vested on October 27, 2020, and the remaining 1,299,136 shares vest in equal amounts, monthly
over the subsequent 4 years. The stock purchase agreement contains a repurchase option whereby unvested shares may be repurchased by the
Company, at the Company’s option, within 90 days after employee termination. At June 30 2023, Jonathan Klamkin had 1,190,875 vested
shares and 433,045 unvested shares, and Lee McCarthy had 974,350 vested shares and 649,570 unvested shares.
Lee McCarthy left the Company in November 2022.
Registration
Rights Agreement
The Company
entered into a registration rights agreement that provides for certain liquidated damages upon the occurrence of a “Registration
Event,” which is defined as the occurrence of any of the following events: (a) the Company fails to file with the Commission the
Registration Statement on or before the Registration Filing Date; (b) the Registration Statement is not declared effective by the Commission
on or before the Registration Effectiveness Date; (c) after the SEC Effective Date, the Registration Statement ceases for any reason to
remain effective or the Holders of Registrable Securities covered thereby are otherwise not permitted to utilize the prospectus therein
to resell the Registrable Securities covered thereby, except for Blackout Periods permitted herein; or (d) following the listing or inclusion
for quotation on an Approved Market, the Registrable Securities, if issued and outstanding, are not listed or included for quotation on
an Approved Market, or trading of the Common Stock is suspended or halted on the Approved Market, which at the time constitutes the principal
markets for the Common Stock, for more than three (3) full, consecutive Trading Days (other than as a result of (A) actions or inactions
of parties other than the Company or its affiliates or of the Approved Market not reasonably in the control of the Company, or (B) suspension
or halt of substantially all trading in equity securities (including the Common Stock) on the Approved Market). The maximum amount of
liquidated damages that may be paid by the Company shall be an amount equal to eight percent (8%) of the shares covered by the registration
rights agreement. This filing covered 11,010,002 shares. The Company currently expects to satisfy all of its obligations under
the Registration Agreement and does not expect to pay any damages pursuant to this agreement; therefore, no liability has been recorded.
Note 4 – Stock-Based Compensation
Restricted Stock Awards
During the six months ended June 30, 2021, the
Company sold 723,008 shares of common stock to certain individuals in exchange for future management advisory services, for
discounted prices price ranging from $.0104 to $.0195 per share. The shares are subject to restrictions that allow for repurchase
of the shares by the Company due to a termination of the service agreement or other certain provisions. This repurchase right declines
on a pro-rata basis over vesting periods (corresponding to the service period) ranging from 2-4 years. Related to these issuances,
the Company has recorded deferred compensation of $1,372,435 for the value of the shares in excess of the purchase price paid by
the advisors. The deferred compensation will be expensed as consulting expense in the consolidated statements of operation over the service
period. For each of the years ended June 30, 2023 and 2022, $662,464 has been amortized in the consolidated statements of operations,
and $11,034 is presented as part of the current portion of deferred compensation on the consolidated balance sheets at June 30, 2023.
In March
2022, the Company signed an agreement to issue 150,000 shares of common stock valued at $300,000 to a consultant for providing
consulting services to the Company for eighteen months. Related to these issuances, the Company has recorded deferred compensation
of $300,00 which will be expensed as consulting expense in the consolidated statements of operation over the eighteen months. For
the year ended June 30, 2023, $258,000 has been amortized in the consolidated statements of operations and $42,000 is presented
as part of the current portion of deferred compensation on the consolidated balance sheet at June 30, 2023.
F-11
The following is a schedule summarizing restricted
stock awards for the periods indicated:
Number of Shares Weighted Average Grant Date Fair Value Per Share
Outstanding at July 1, 2021
Forfeited - -
Forfeited - -
Stock Options
In July
2021, the Company issued an option to purchase 10,000 shares of common stock to a director at a price of $2.00 per share,
expiring in 10 years, and an option to purchase 10,000 shares of common stock to an advisor at a price of $2.00 per
share expiring in 5 years. These options vested over periods ranging from one month to three months.
In December
2021, the Company issued options to purchase common stock to two directors in increments of 125,000 each. The options have an exercise
price of $2.00, expire in 10 years, vest 12,500 options per quarter in the first year and 9,375 per quarter for the following two years.
In February
2022, the company granted 16,750 in options to one director and 15,500 to another director at a price of $2.00 per share, for committee
service. These options are subject to quarterly vesting over four quarters and expire in 10 years. On February 1, 2022, the
Company entered into a consulting advisory agreement which grants 2,500 options with every patent filing. On February 4,
2022, the advisor was granted 2,500 options with an exercise price of $2.00 and an expiration date of ten years.
In April
2022, the Company issued 513,000 options to purchase common stock to employees. The options have an exercise price of $2.00 and
expire in 10 years with 25% vesting after one year and the remainder scheduled to vest each quarter for three
years, subject to the continued status as an employee to the Company through each vesting date.
In December
2022, the Company issued 161,000 options to purchase common stock to employees. The options have an exercise price of $2.00 or $2.10 and
expire in 10 years with various vesting schedules from six months to 48 months, subject to the continued status as an employee to the
Company through each vesting date.
During the
three months ended March 31, 2023, the Company issued 109,750 options to purchase common stock to employees and directors. The
options have an exercise price of $3.00 and expire in 10 years with various vesting schedules from 12 months to 48 months.
Stock options granted to employees are subject to the continued status as an employee to the Company through each vesting date. During