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. 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. You should not place undue reliance on
forward-looking statements as predictive of future results.
Overview
We develop 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 substrates that are commonly used to manufacture mass market microelectronics. This enables
cost-effective manufacturing of high-performance photodetectors and photodetector array circuits for imaging applications in mobile devices,
as well as other technologies. This technology has the potential to enhance the performance and capability of camera image sensors, LiDAR,
AR/VR, facial recognition, and other applications. Additionally, Aeluma’s technology may be used to manufacture other electronic
and optoelectronic devices in the future including lasers, transistors, and solar cells.
Private Placements
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”).
Pursuant to the Offering, we paid a cash placement
agent fee of $411,015 and issued placement agent warrants to purchase up to 85,653 shares of common stock at an exercise price of $3.00
per share. We also agreed to pay certain expenses of the placement agent in connection with 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.
The closings of the 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 Offering was sold to “accredited investors,” as defined in Regulation D, and was conducted on a “reasonable
best efforts” basis.
Between August 5, 2024
and August 27, 2024, we issued convertible promissory notes in the aggregate principal amount of $3,145,000 to 10 accredited investors,
pursuant to a private note financing. The Notes mature in June 2026 and do not carry any interest. The Notes are convertible into shares
of the Company’s common stock par value $0.0001 per share (the “Common Stock”) upon the occurrence of certain events,
(i.e., qualified financing resulting in at least $5,000,000 to the Company, if the Common Stock is uplisted to a national securities exchange
or if neither of those such events occur prior to the maturity date, (together with Sale of the Company (as hereinafter defined), a “Conversion
Event”)). The Note also provides that if there is a Sale of the Company, as defined in the Note, the Holder may elect to receive
a cash payment equal to the aggregate amount of principal then outstanding under such Holder’s Note or convert the Note into shares
of Common Stock equal to 85% of the VWAP of the Common Stock on the OTC Markets for the five trading days immediately prior to the Sale
of the Company. Although the conversion price is dependent upon the type of Conversion Event that occurs, the Note does carry a ceiling
and floor price: the applicable conversion price will not be lower than 85% of the 5-day VWAP on the applicable Closing Date (the “Floor
Price”) nor will the applicable conversion price be higher than $3.50 per share (the “Ceiling Price”); the Floor Price
and Ceiling Price shall automatically adjust in the event of a stock split or consolidation by the Company. The Floor Price for the investors
who participated in this initial closing is equal to $2.68 per share. Since the Floor Price is tied to the Closing Date, the Floor Price
may be different for investors that are part of a different closing, should the Company hold additional closings. The Investors were granted
piggyback registration rights for the shares of Common Stock underlying the Note.
7
The NPA also contains
customary representation and warranties of the Company and the Investors, indemnification obligations of the Company, termination provisions,
and other obligations and rights of the parties.
The foregoing description
of the NPA and the Note is qualified by reference to the full text of the forms of NPA and Note, which are filed as Exhibits hereto and
incorporated herein by reference.
Departure and Appointment of Directors and Officers
Mrs. Mehta decided not run for re-election in
2023; such decision was not the result of any disagreements with us on any matter related to the operations, policies, or practices of
us. The Board nominated Mr. Craig Ensley to fill the vacancy on the Board; on December 14, 2023, the shareholders voted to elect Mr. Ensley
to the board.
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 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.
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, costs associated with design, fabrication, packaging and testing of our devices, and facility lease
and utility expenses. We expense research and development expenses as incurred.
8
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, insurance, audit and accounting services.
Other Income
Other income, net of other expenses, consists
primarily of interest income and income generated from subleasing a portion of our research and development facility. The sub-lease ended
in March 2023
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, 2024 compared to the
year ended June 30, 2023
Our results of operations for the year ended June
30, 2024, as compared to the year ended June 30, 2023, were as follows:
Year Ended June 30,
Income tax expense - - - -
Revenue: Revenue increased $725,215, or
375.1 %, to $918,554, of which $64,756 was from commercial product and service contracts and $853,798 was from government contracts, for
the year ended June 30, 2024 from $193,339, of which $15,000 was from commercial product and service contracts and $178,339 was from government
contracts, for the same period in 2023.
Operating expenses: Operating expense decreased
$221,162, or 3.9%, to $5,481,862 for the year ended June 30, 2024 from $5,703,024 for the same period in 2023, due primarily to a reduction
in consulting expenses, offset partially by increased salaries and stock-based compensation expenses.
Other income: Other income decreased $129,090,
99.2%, to $1,013 for the year ended June 30, 2024 from $130,103 for the same period in 2023. The decrease was due primarily to a $128,921
decrease in sub-lease income as the sublease ended in March 2023.
Income tax expense: We did not record income
tax expense for either of the years ended June 30, 2024 and 2023.
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 $4,562,295 and $5,379,582 for the years ended June 30,
2024 and 2023, respectively, and losses are expected to continue in the near term. The accumulated deficit was $13,624,361 at June 30,
2024. We have been funding our operations through the sale of common stock in private placement transactions.
9
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, 2024, we had $1,291,072 of cash and cash equivalents.
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; (c) executing material sales or research contracts;
and (d) pursuing additional sales and 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 $766,160and $4,576,807 at June 30, 2024
and 2023, respectively. Current assets decreased $3,941,060 to $1,392,846 at June 30, 2024 from $5,333,906 at June 30, 2023, primarily
due to a $3,780,618 decrease in cash. Current liabilities decreased $130,413 to $626,686 at June 30, 2024 from $757,099 at June 30, 2023,
due primarily to decreases in accounts payable.
The following table shows a summary of our cash
flows for the periods presented:
Year Ended June 30,
Net cash provided by (used in)
Net cash used in our operating activities were
$3,454,779 and $3,637,972 for the years ended June 30, 2024 and 2023, respectively, due primarily to net losses of $4,562,295 and $5,379,582
for the years ended June 30, 2024 and 2023, respectively.
Net cash used in our investing activities was
$321,838 and $672,545 for the years ended June 30, 2024 and 2023, respectively. Investing activities include purchase of equipment and
payment for leasehold improvements.
Net cash used in our financing activities was
$4,001 for the year ended June 30, 2024 and net cash provided by our financing activities was $5,641,485 for the year ended June 30, 2023.
We paid $4,001 to purchase Lee McCarthy’s unvested restricted shares for the year ended June 30, 2024 and received $5,641,284
from Private Placements, net of $411,015 offering cost.
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.
10
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, 2024 and 2023 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, 2024 and 2023, 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, 2024, 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, 2024 and 2023, and the results of
its operations and its cash flows for each of the years in the two-year period ended June 30, 2024, 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
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.
/s/ Rose,
Snyder & Jacobs LLP
Rose, Snyder &
Jacobs LLP
We have served as the
Company’s auditor since 2021
Encino, California
September 27, 2024
F-2
Aeluma, Inc. and Subsidiary
Consolidated Balance Sheets
Assets
Current assets:
Property and equipment:
Liabilities and stockholders’ equity
Current liabilities:
Accrued expenses and other current liabilities 180,706 133,092
Commitments and contingencies - -
Stockholders’ equity:
The accompanying notes are an integral part of
these financial statements
F-3
Aeluma, Inc. and Subsidiary
Consolidated Statements of Operations
Operating expenses:
Other income:
Sub-lease rental income and other income - 128,913
Income tax expense - -
Loss per share - basic and diluted $ (0.37 ) $ (0.47 )
The accompanying notes are an integral part of
these financial statements
F-4
Aeluma, Inc. and Subsidiary
Consolidated Statement of Stockholders’
Equity
Common Stock Additional paid-in Accumulated Total Stockholders’
Shares Amount capital Deficit Equity
Stock warrant exercised 10,494 1 (1 ) - -
The accompanying notes are an integral part of
these 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
Change in prepaids and other current assets (1,694 ) 7,719
Change in accrued expenses and other current liabilities 48,282 67
Investing activities:
Payment for leasehold improvements - (82,502 )
Financing activities:
Repurchase of common stock (4,001 ) -
Proceeds from Private Placement, net of offering costs - 5,641,485
Net cash (used in) provided by financing activities (4,001 ) 5,641,485
The accompanying notes are an integral part of
these financial statements
F-6
Aeluma, Inc. and Subsidiary
Notes to Consolidated Financial Statements
Note 1 – The Company
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.
Going Concern
The Company incurred a net loss of $4,562,295
and $5,379,582 for the years ended June 30, 2024 and 2023, respectively, and has accumulated deficit of $13,624,361 at June 30, 2024.
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 U.S. Generally Accepted
Accounting Principles (“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 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.
Reclassification of Prior Year Presentation
Certain prior year amounts have been reclassified
for consistency with the current year presentation. These reclassifications had no effect on the reported consolidated financial statements.
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 less of the remaining lease term or the estimated
useful lie of the improvements. Repairs and maintenance to these assets are charged to expenses 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 expenses. The Company does not have any significant financing components associated with its revenue contracts, as payment is received
within one year.
For
the year ended June 30, 2024, the Company was awarded six government contracts of $1,323,237for
providing services and delivering materials. The awards are firm fixed contracts that shall be paid upon completion of performance and
recognized as revenue over an expected term of 12 months.
For the year ended June 30, 2024, the Company
recognized its revenue of $918,554, of which $853,798 was from government contracts and $64,756 was from product sales for sampling purchases.
As of June 30, 2024, the aggregate amount to remaining performance obligations for the government contracts was $690,825.
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, 2024.
On December 12, 2022, the Company sold an aggregate
of 517,000 shares of common stock in a private placement offering (the “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 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. At June 30 2024, Jonathan Klamkin had 1,515,659 vested shares and 108,261 unvested shares, and Lee McCarthy
had 974,350 vested shares. On November 17, 2022, Lee McCarthy left the Company and, on September 10, 2023, the Company exercised
its option to purchase 649,570 unvested restricted shares Lee McCarthy held for a total consideration of $4,001, the initial
purchase price of these shares.
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
In June 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 was expensed
as consulting expense in the consolidated statements of operation over the service period.
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 $300,000 which was expensed as consulting
expense in the consolidated statements of operation over the eighteen months.
For the years ended June 30, 2024 and 2023, $32,900
and $920,464, respectively, have been amortized in the consolidated statements of operations. At June 30, 2024, $20,133 of deferred compensation
included in the balance sheets is expected to be expensed within 12 months.
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
Forfeited - -
Granted - -
Forfeited - -
Stock Options
During the three months ended December 31, 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 nine months to 48 months, subject to the continued status as an employee to the Company
through each vesting date.
During the three months ended June 30, 2023, the
Company issued 163,000 options to purchase common stock to a consultant and employees. The options expire in 10 years and have
an exercise price of $2.60 with immediate vesting or $3.00 with a vesting schedule of 48 months. Stock options granted to employees are
subject to the continued status as an employee to the Company through each vesting date.
During the three months ended September 30, 2023,
the Company issued 6,500 options to purchase common stock to consultants. The options expire in 10 years and have an exercise
price that range from $2.90 to $3.90 with immediate vesting.
During the three months ended December 31, 2023,
the Company issued 7,000 options to purchase common stock to a consultant. The options expire in 10 years and have an exercise
price that ranges from $2.50 to $3.43 with immediate vesting.
During the three months ended March 31, 2024,
the Company issued 6,500 options to purchase common stock to consultants. The options expire in 10 years and have an exercise
price that range from $2.99 to $3.50 with immediate vesting. During the three months ended March 31, 2024, the Company issued 100,821
options to purchase common stock to board of directors. The options expire 10 year and vest in nine months with an exercise price of $2.99.
The Company estimates the fair value of each option
award using the Black-Scholes option-pricing model. The Company used the following assumptions for to estimate the fair value of stock
options for the period presented:
Year Ended June 30,
Weighted-average fair value $ 2.52 $ 2.45
Expected term 5.0 years - 6.2 years 5.0 years - 7.0 years
For the years ended June 30, 2024 and 2023, stock-based
compensation expenses for options granted were $732,167 and $448,444, respectively. Unrecognized stock-based compensation expense was
$857,026 and average expected recognition period was 1.1 years as of June 30, 2024.
F-12
The following is a schedule summarizing stock
option activities for the periods presented:
Number of Options Weighted Average Exercise Price Aggregate Intrinsic Value (1)
Exercised - -
Number of Options Weighted Average Exercise Price Aggregate Intrinsic Value (1)
Exercised - -
Note 5 – Facility Operating Lease
On April 1, 2021, the Company commenced a 5-year
operating lease for a facility in Santa Barbara, California with total lease payments of $781,813. The Company determined the lease
constitutes a Right of Use (ROU) asset and has recorded the present value of the lease payments as an asset and liability per ASC 842.
The lease agreement waived the first three months of rent with payments commencing July 1, 2021. At the commencement of the lease, the
net present value of the lease payments was $767,553. In addition to these lease payments, the Company is also responsible for its shares
of common area operating expenses and electricity. Such expenses are considered variable costs and are not included in the measurement
of the lease liability. The lease agreement also provides for the option to extend the lease for two additional sixty-month periods. On
July 1, 2023, one of the two options to extend was considered reasonably certain of exercise and the Company remeasured the ROU asset
and lease liability. The Company recorded the net present value of $1,189,606 for both the ROU asset and lease liability on July 1, 2023.
The following table presents maturities of operating
lease liabilities on an undiscounted basis as of June 30, 2024:
For the years ending June 30,
Less imputed interest (157,284 )
Less: lease liability, current portion 128,743
Lease liability, long term portion $ 941,200
F-13
The lease term and the discount rate for the lease
at June 30, 2024 is 6.8 years and 4.00%, respectively. The total lease expenses were $167,097 and $129,437 for the years ended June 30,
2024 and 2023, respectively. The variable costs for common area operating expenses and electricity were $240,431 and $264,280 for the
years ended June 30, 2024 and 2023, respectively.
In April 1, 2021, the Company subleased a
portion of their facility. The sub-lease provided for base monthly rent of $13,013 through May 31, 2021 and $8,400 starting June 1,
2021 plus common area operating and utility costs. The sublease was amended again on May 17, 2022 to sublease a smaller portion of the
property at a base rental rate of $5,200 per month effective June 1, 2022. The Company recognized sub-lease income of $128,921, including
reimbursement of common area operating and utility costs, for the year ended June 30, 2023. The sub-lease ended in March 2023.
Note 6 – Warrants to Purchase Common
Stock
In connection with the Offering held from December
2022 through May 2023, the Company issued warrants of 85,653 to purchase common stock to the Placement Agents. The warrants carry a term
of 5 years and an exercise price of $3.00.
The following warrants to purchase common stock
were outstanding as of June 30, 2024:
Number of Shares Exercise Price Expiration Date
Note 7 – Concentration of Credit Risk and Significant Customers
The Company manages its credit risk associated
with exposure to its direct customers on outstanding accounts receivable through the application of credit approvals and other monitoring
procedures. The Company closely monitors the aging of accounts receivable from its direct customers. Significant customers are those that
represent 10% or more of revenue or accounts receivable.
Total revenues, by percentage, from individual
customers representing 10% or more of total revenues in the respective periods were as follows:
Year Ended June 30,
Customer B 30.5 *
Customer C 17.3 *
Customer D * *
Customer E * *
* Less than 10% of total
F-14
Accounts receivable, by percentage, from individual
customers representing 10% or more of accounts receivable are set forth in the following table:
As of June 30,
Customer A * 94.2 %
Customer B * *
Customer C 18.3 % *
Customer D 27.7 *
Customer E 53.9 *
* Less than 10% of total
Customer A, B, C and D are government agencies.
Note 8 – Subsequent Event
The Company has evaluated subsequent events through
the issuance of these financial statements, and determined that there have been no events that have occurred that would require adjustments
to our disclosures in the consolidated financial statements except for the following:
Note Purchase Agreements
On August 5, 2024, the Company entered into note