Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of Operations.
Unless otherwise stated or the context otherwise
indicates, references to “Aeluma,” the “Company,” “we,” “our,” “us,” or similar
terms refer to Aeluma, Inc. and Subsidiary.
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.
31
Overview
Aeluma develops novel optoelectronic and electronic devices for sensing,
communication, and computing applications. Aeluma has pioneered a technique to produce semiconductor materials and chips using high-performance
compound semiconductors on large-diameter substrates that are commonly used to manufacture mass-market microelectronics. This enables
cost-effective manufacturing of high-performance photodetectors and photodetector arrays for imaging applications in mobile devices, as
well as other applications. Aeluma’s technology has the potential to impact a broad range of market verticals. Aeluma is based in
Goleta, California, where we operate in a 9,000 sq. ft. facility with a state-of-the-art R&D/manufacturing cleanroom and access to
world-class rapid prototyping capabilities. The facility houses unique equipment for scalable manufacturing. Aeluma also partners with
production-scale fabrication foundries and packaging companies. Aeluma maintains extensive patent protection and trade secrets that relate
to its materials, manufacturing technology, and applications.
Aeluma is a transformative semiconductor company specializing in high-performance
technology that scales. Applications include mobile, automotive, AI, defense & aerospace, communication, AR/VR, high-performance commuting,
and quantum computing. Aeluma aims to break out of traditional manufacturing to expand the reach of its technology into mass markets.
The demand for higher-performance semiconductors in consumer markets is increasing (https://www.marketsandmarkets.com/Market-Reports/shortwave-ir-market-52975079.html).
Aeluma’s disruptive technology is scalable, cost-effective, while not sacrificing performance.
Additionally, Aeluma’s technology may be
used to manufacture other electronic and optoelectronic devices including lasers, transistors, and solar cells.
Recent Government Contracts
In August 2024, we received a contract by NASA
to develop quantum dot photonic integrated circuits (PICs) on silicon. This advanced technology targets next-generation space and aerospace
applications, enabling capabilities such as free-space laser communication, autonomous navigation, and precision sensing.
In September 2024, we received an $11.7 million contract with
DARPA to develop heterogeneous integration technology for nano-scale semiconductors that is compatible with leading-edge and future advanced-node
semiconductors. Technology applications include AI, mobile devices, and 5G/6G wireless networking. This DARPA contract to Aeluma is structured
with $6.0 million expected to be invoiced over the first 18 months and the remaining $5.7 million invoiced over the following
18 months, contingent on Aeluma meeting certain milestones.
In April 2025, we received a contract with the
U.S. Department of Energy to develop commercially viable, low-cost shortwave infrared (SWIR) photodetectors. The award will accelerate
commercialization of Aeluma’s wafer-scale platform for high-sensitivity, energy-efficient photodetector sensors applicable across
critical growth sectors.
In June 2025, we received a contract with the
U.S. Navy that could accelerate development of high-speed photodetectors for government and commercial applications. The new contract
is for up to $1.3 million in funding, includes a major global interconnect manufacturer as a proposed subcontractor, and involves support
from a top-tier government prime contractor.
In June 2025, we received a contract with the
U.S. Navy that could accelerate development and commercialization for next-generation quantum computing and sensing systems. The new contract
will support Aeluma’s low size, weight, and power imaging sensors for next-generation submarine systems.
Private Placements and Conversion of Notes
Between August 5, 2024 and August 27, 2024, we issued convertible promissory
notes in the aggregate principal amount of $3.1 million to 10 accredited investors, pursuant to a private note financing. The Notes were
to mature in June 2026 and did not carry any interest. The Notes were 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 $5.0 million 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”)). In
the event the Company did not complete qualified financing or uplist at or before the maturity date, the outstanding balance of the Notes
would automatically convert without any further action by the Holder into shares of the Company’s common stock equal to eighty-five
percent (85%) to the VWAP of the Common Stock on the OTC Markets for the five trading days immediately prior to maturity date. The Note
also provided that if there was 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 was dependent upon the type of Conversion Event that occurs, the Note carried a ceiling and floor price: the applicable
conversion price would not be lower than 85% of the 5-day VWAP on the applicable Closing Date (the “Floor Price”) nor would
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 was equal to $2.68 per share. Since the Floor Price is tied to the Closing Date, the Floor Price may be different
for investors who 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.
32
The Note Purchase Agreement (“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.
On March 25, 2025, we determined that a Conversion
Event had occurred pursuant to the terms of the Notes. As a result, all holders elected to convert their Notes at the applicable Ceiling
Price of $3.50 per share, resulting in the issuance of an aggregate of 898,573 shares of Common Stock in exchange for $3.1 million in
outstanding principal under the Notes. Following the conversion, we have no further obligations under the converted Notes. The shares
issued upon conversion are subject to piggyback registration rights previously granted to the investors. See Public Offering of Common
Stock in Note 3 – Convertible Notes
Public Offering of Common Stock
On March 26, 2025, we entered into an Underwriting
Agreement (“UA”) with Craig-Hallum Capital Group LLC in connection with a public offering of 2,285,714 shares of its common
stock at a price of $5.25 per share (the “Offering”). We also granted the Underwriter a 30-day option to purchase up to an
additional 342,857 shares to cover over-allotments, which was exercised in full on March 27, 2025. The Offering closed on March 28, 2025.
The Offering was conducted pursuant to our registration
statements on Form S-1 (File No. 333-285469), declared effective by the SEC on March 25, 2025, and on Form S-1MEF filed under Rule 462(b),
effective March 26, 2025.
Under the terms of the UA, we provided a 7.0%
underwriting discount per share and issued to the Underwriter warrants to purchase up to 5.0% of the total shares sold in the Offering
(including the over-allotment shares), with an exercise price equal to 115% of the public offering price.
Total gross proceeds from the Offering, including the over-allotment
option, were $13.8 million. Net proceeds, after underwriting discounts and Offering expenses, were $12.6 million. We intend to use the
proceeds for business development, scaling manufacturing operations, and general corporate purposes.
In connection with the Offering, we, as well as
our directors and officers, agreed to a 90-day lock-up period restricting sales or transfers of Company securities, subject to customary
exceptions. The Underwriter has the discretion to release these restrictions at any time.
Executive Officer Announcements
As of March 18, 2025,
Mr. James Seo agreed to serve as Aeluma’s interim Chief Financial Officer/Principal Accounting Officer until we hire a full-time
CFO. Mr. Seo has been serving as our Controller since May 2023. As of August 4, 2025, Mr. Christopher Stewart agreed to serve as Aeluma’s
Chief Financial Officer/Principal Accounting Officer, replacing Mr. James Seo, our Interim CFO.
33
Plan of Operations
Our technology is based on heterogeneous integration
of compound semiconductor materials on large-diameter substrates such as silicon. This heterogeneous integration enables the subsequent
device fabrication and manufacturing in large-scale manufacturing environments that are suited to mass markets.
We will continue to develop our technology that
includes novel materials and devices based on our core intellectual property. Our primary focus is to manufacture high-performance semiconductor
technologies that scale for mass markets. Aeluma operates R&D/manufacturing facilities at its headquarters in Goleta, California,
and has developed relationships with volume fabrication foundries and packaging partners. We will continue to mature our manufacturing
processes to further our commercialization traction. We have generated revenue through various customer and government contracts, including
small-volume orders, engineering sample evaluations, non-recurring engineering (NRE) development efforts, and R&D projects. We will
continue to perform on these various efforts, expand our business development and marketing efforts, further engage with our manufacturing
partners, and continue our efforts toward volume production and commercialization. We expect to rely on such external capabilities to
scale our production capacity in support of high-volume markets.
Limited Operating History
We have a limited operating history, and our future
success is subject to numerous uncertainties and risks inherent in the development of a new business. Although we successfully completed
our public offering on March 26, 2025, raising gross proceeds of $13.8 million, there can be no assurance that these funds will be sufficient
to carry out all aspects of our business plan.
Following the Offering, management has assessed
our financial position and operating plan and determined that the previously reported substantial doubt about our ability to continue
as a going concern has been alleviated. The proceeds from the Offering have provided near-term capital to support our operations and ongoing
development efforts. However, we continue to face risks typical of early-stage companies, including limited capital resources, operational
and financial challenges, and uncertainty in product development.
Components of Results of Operations
Revenue
Our revenue currently consists of commercial product
sales and government contracts.
Operating Expenses
Cost of revenue consists of costs of materials,
as well as direct compensation and other expenses incurred to provide deliverables that resulted in payment of our services performed
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.
R&D 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 R&D 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, insurance, audit and accounting services, and office lease and utility
expenses.
Other (Income) Expense
Interest income consists primarily of interest
earned in interest-bearing savings accounts and certificates of deposit placed in a bank.
Amortization of discount on convertible notes
represents the non-cash interest expense associated with the amortization of convertible notes issued to our debtholders.
34
Changes in the fair value of derivative liabilities
reflect valuation changes in the derivatives held by us.
Income Tax Expense
Income tax expense consists primarily of income taxes in certain state
jurisdictions in which we conduct business.
Results of Operations
Our results of operations for the fiscal year
ended June 30, 2025, as compared to the same period of 2024, were as follows ($ in thousands):
Year Ended June 30,
Other (income) expense (880 ) 1 (881 ) n/m
Income tax expense - - - -
Revenue: Revenue increased $3.7 million to $4.7 million, of which $4.4 million
was derived from government contracts and $266 thousand from commercial product and service contracts for the fiscal year ended June 30,
2025. Revenue was $919 thousand, of which $854 thousand was derived from government contracts and $65 thousand from commercial product
and service contracts, for the fiscal year ended June 30, 2024.
Operating expenses: Operating expenses
increased $1.3 million, or 24.2%, to $6.8 million for the fiscal year ended June 30, 2025, compared to $5.5 million for the same period
in 2024. The increase was primarily driven by an increase in material purchases to support the delivery of our products and services associated
with revenue, as well as higher compensation and related costs, including salaries, stock-based compensation and employee benefits.
Other (income) expense: Other (income)
expense consists of amortization of discount on convertible notes of ($715) thousand, changes in fair value of derivative liabilities
of ($278) thousand, and interest income of $113 thousand for the fiscal year ended June 30, 2025.
Income tax expense: No income tax expense was recorded for the
fiscal years ended June 30, 2025 and 2024.
Liquidity and Capital Resources
As of June 30, 2025, we had cash, cash equivalents, and a certificate
of deposit totaling $15.7 million, compared to $1.3 million as of June 30, 2024. The increase in cash was primarily attributable to the
net proceeds from the Offering, which generated gross proceeds of $13.8 million, offset by underwriting discounts and offering expenses
totaling $1.2 million.
Prior to the Offering, our operations were primarily
financed through the issuance of convertible notes and sales of common stock in private placement transactions. As previously disclosed,
we had expressed substantial doubt about our ability to continue as a going concern due to recurring losses and negative operating cash
flows. With the successful completion of the Offering, we believe that substantial doubt about our ability to continue as a going concern
has been alleviated for at least the next twelve months.
We intend to use the net proceeds from the Offering
to support operational growth, invest in product development, and fund working capital and general corporate purposes. Based on our current
operating plan, we believe that our existing cash, cash equivalents, and certificate of deposit, combined with projected revenues and
cost management strategies, will be sufficient to meet our working capital and capital expenditure requirements for at least the next
twelve months.
35
We will continue to assess our capital requirements
and may pursue additional financing opportunities to support long-term growth initiatives or respond to changes in market conditions.
As of June 30, 2025, we had working capital of $16.6 million, compared
to $766 thousand as of June 30, 2024. The increase was primarily driven by a $15.9 million increase in current assets, which rose to $17.3
million from $1.4 million over the same period, largely due to a $14.4 million increase in cash, cash equivalents, and a certificate of
deposit. Current liabilities totaled $706 thousand and $627 thousand as of June 30, 2025 and 2024, respectively, and the balances primarily
consisted of accounts payable, along with accrued expenses and other short-term obligations expected to be settled within one year.
The following table shows a summary of our cash
flows for the periods presented ($ in thousands):
Year Ended June 30,
Net cash provided by (used in)
Net cash used in our operating activities were
$1.1 million and $3.5 million for the fiscal years ended June 30, 2025 and 2024, respectively. For the fiscal year ended June 30, 2025,
the net cash used in operating activities primarily resulted from a net loss of $3.0 million and decreases in accounts receivable of $1.0
million, and prepaid and other current assets of $609 thousand. These amounts were partially offset by non-cash expenses including stock-based
compensation expense of $1.9 million, amortization of discount on convertible notes of $715 thousand, depreciation and amortization expense
of $416 thousand, and a change in fair value of derivative liabilities of $278 thousand. For the fiscal year ended June 30, 2024, the
net cash used in operating activities was primarily attributable to a net loss of $4.6 million, partially offset by non-cash stock-based
compensation expense of $732 thousand and depreciation and amortization expense of $311 thousand.
Net cash used in our investing activities totaled
$161 thousand and $322 thousand for the fiscal years ended June 30, 2025 and 2024, respectively. These investing activities primarily
consisted of purchases of equipment.
Net cash provided by our financing activities
was $15.8 million for the fiscal year ended June 30, 2025, compared to net cash used in our financing activities of $4 thousand for the
same period in 2024. We received $3.1 million from the issuance of convertible notes, $12.6 million from the Offering, and $25 thousand
from the exercise of stock options for the fiscal year ended June 30, 2025, compared to $4 thousand we used to purchase unvested
restricted shares during the same period in 2024.
Critical Accounting Policies
The accompanying discussion and analysis of our
financial condition and results of operations is based upon our audited consolidated financial statements, which have been prepared in
accordance with GAAP. We believe certain of our accounting policies are critical to understanding our financial position and results of
operations. Our significant accounting policies and estimates are discussed in the “Notes to Consolidated Financial Statements,
Note 2 — Summary of Significant Accounting Policies.”
Recent Accounting Pronouncements
New accounting pronouncements adopted and under
evaluation are discussed in the “Notes to Consolidated Financial Statements, Note 2 — Summary of Significant Accounting Policies.”
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
36
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, 2025 and 2024 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, 2025 and 2024, 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, 2025, 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, 2025 and 2024, and the results of its operations and its cash
flows for each of the years in the two-year period ended June 30, 2025, in conformity with accounting principles generally accepted in
the United States of America.
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 9, 2025
F-2
Aeluma, Inc. and Subsidiary
Consolidated Balance Sheets
($ in thousands, except per share data)
Assets
Current assets:
Cash and cash equivalents $ 3,628 $ 1,291
Certificate of deposit 12,112 -
Accounts receivable 962 60
Deferred compensation - 20
Prepaids and other current assets 633 22
Property and equipment:
Accumulated depreciation (1,021 ) (609 )
Intangible assets 4 7
Right of use asset - operating 836 962
Liabilities and stockholders’ equity
Current liabilities:
Accrued expenses and other current liabilities 206 181
Lease liability - operating, current portion 138 129
Total current liabilities 705 627
Lease liability - operating, long-term portion 803 941
Commitments and contingencies - -
Stockholders’ equity:
Total liabilities and stockholders’ equity $ 19,406 $ 3,844
The accompanying notes are an integral part of
these financial statements
F-3
Aeluma, Inc. and Subsidiary
Consolidated Statements of Operations
($ in thousands, except per share data)
Year Ended June 30,
Operating expenses:
Other income (expense):
Interest income 113 1
Amortization of discount on convertible notes (715 ) -
Changes in fair value of derivative liabilities (278 ) -
Total other income (expense), net (880 ) 1
Loss before income tax expense (3,022 ) (4,562 )
Income tax expense - -
Net loss per share - basic and diluted $ (0.23 ) $ (0.37 )
The accompanying notes are an integral part of
these financial statements
F-4
Aeluma, Inc. and Subsidiary
Consolidated Statements of Stockholders’
Equity
($ in thousands)
Common Stock Additional paid-in Accumulated Total Stockholders’
Shares Amount capital Deficit Equity
Repurchase of common stock (Note 4) (649,570 ) - (4 ) - (4 )
Stock warrants exercised 10,494 - - - -
Stock-based compensation - - 732 - 732
Conversion of derivative liabilities (Note 2) - - 2,471 - 2,471
Stock warrants exercised 8,034 - - - -
Stock-based compensation - - 1,893 - 1,893
The accompanying notes are an integral part of
these financial statements
F-5
Aeluma, Inc. and Subsidiary
Consolidated Statements of Cash Flows
($ in thousands)
Year Ended June 30,
Operating activities:
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of deferred compensation 20 33
Stock-based compensation expense 1,893 732
Depreciation and amortization expense 415 311
Amortization of discount on convertible notes 715 -
Changes in fair value of derivative liabilities 278 -
Changes in operating assets and liabilities:
Prepaids and other current assets (611 ) (2 )
Accounts payable 44 (144 )
Accrued expenses and other current liabilities 22 48
Net cash used in operating activities (1,148 ) (3,455 )
Investing activities:
Purchase of equipment (161 ) (322 )
Net cash used in investing activities (161 ) (322 )
Financing activities:
Repurchase of common stock - (4 )
Proceeds from stock option exercise 25 -
Proceeds from convertible notes issuance 3,145 -
Proceeds from Public Offering, net of offering costs 12,588 -
Net cash provided by (used in) financing activities 15,758 (4 )
Supplemental non-cash disclosures:
Conversion of convertible notes to stockholders’ equity $ 1,667 -
Conversion of derivative liabilities to stockholders’ equity $ 2,471 -
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. (the “Company”) develops novel optoelectronic
and electronic devices for sensing, communication, and computing applications. Aeluma has pioneered a technique to produce semiconductor
materials and chips using high-performance compound semiconductors on large-diameter substrates commonly used to manufacture mass-market
microelectronics. This enables cost-effective manufacturing of high-performance photodetectors and photodetector arrays for imaging applications
in mobile devices and other applications. Aeluma’s technology is broadly applicable across mobile, automotive, artificial intelligence
(AI), defense & aerospace, communication, augmented reality (AR), virtual reality (VR), high-performance computing, and quantum computing.
Aeluma is based in Goleta, California, where the Company operates in a 9,000 sq. ft. facility with a state-of-the-art research and development
(“R&D”)/manufacturing cleanroom and access to world-class rapid prototyping capabilities. The facility houses unique equipment
for scalable manufacturing. Aeluma also partners with production-scale fabrication foundries and packaging companies. Aeluma maintains
extensive patent protection and trade secrets related to its materials, manufacturing technology, and applications.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements
have been presented in accordance with U.S. generally accepted accounting principles (“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
Cash and Cash Equivalents, and Certificate of Deposit
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.
The Company invests its excess cash in certificates of deposit issued by financial institutions with high credit ratings. As of June 30,
2025, the Company held a certificate of deposit with a carrying value of $12.1 million, including $112 thousand of interest income. The
certificate of deposit bears interest at a rate of 3.74%.
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.
F-7
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. For the fiscal year ended June 30, 2025, 71% of our revenue was derived from
Customer E and, for the fiscal year ended June 30, 2024, 36%, 31% and 17% of our revenue was derived from Customer A, B and C, respectively.
As of June 30, 2025, 100% of accounts receivable was attributable to Customer E and, as of June 30, 2024, 18%, 28% and 54%. of accounts
receivable were attributable to Customer C, D and F, respectively. Customers A, B, C, D and E are government agencies
Segments
Our chief operating decision maker (“CODM”),
the Chief Executive Officer, manages the Company’s business activities as one single operating and reportable segment
at the consolidated level. Accordingly, our CODM uses consolidated net income to measure segment profit or loss, allocate resources and
assess performance. Further, the CODM reviews and utilizes revenue, operating expenses, and other income (expense) at the consolidated
level to manage the Company’s operations.
Convertible Debt Instruments
The Company evaluates agreements, including any convertible debt instruments,
to determine if those agreements or any embedded components of those agreements qualify as derivative financial instruments to be
separately accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification(“ASC”)
Topic 815 “Derivatives and Hedging” (“ASC 815”). The accounting treatment
of derivative financial instruments requires that the Company record any bifurcated embedded features at their fair values as of the inception
date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded in earnings as
non-operating, non-cash income or expense. The Company reassesses the classification of its derivative instruments at each balance sheet
date. If the classification changes as a result of events during the period, the agreement is reclassified as of the date of the
event that caused the reclassification. Bifurcated embedded features are recorded at their initial fair values, which creates an additional
debt discount to the host instrument. The Company amortizes the respective debt discount over the term of the notes, using the effective
interest method. See Note 3 – Convertible Notes.
Fair Value of Financial Instruments
As defined in 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. 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 markets 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.
F-8
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. Financial assets and liabilities measured on a non-recurring basis are those that are adjusted to fair
value when a significant event occurs. The Company had no financial assets or liabilities carried and measured on a nonrecurring basis
during the reporting periods. Financial assets and liabilities measured on a recurring basis are those that are adjusted to fair value
each time a financial statement is prepared.
For recurring fair value measurement categorized
within Level 3, assets and liabilities whose value is determined using a market standard valuation technique are included and described
below. When observable inputs are not available, the market standard techniques for determining the estimated fair value of certain securities
that trade infrequently, and therefore have little transparency, rely on inputs that are significant to the estimated fair value and that
are not observable in the market or cannot be derived principally from or corroborated by observable market data. Management believes
these inputs are based on assumptions deemed appropriate given the circumstances and consistent with what other market participants would
use when pricing similar assets and liabilities. The Company’s embedded derivatives are classified in Level 3 using the Black-Scholes
option-pricing model since their values include significant unobservable inputs.
On March 25, 2025, holders of convertible promissory
notes elected to convert the convertible notes into common stock. As part of the conversion, the Company remeasured the fair value of
the embedded derivative liabilities immediately prior to conversion. The fair value of the embedded derivatives in our convertible notes
as of the conversion date was determined based on a fair market value of $6.25 as of March 25, 2025.
All derivative liabilities were exercised, and
as of June 30, 2025, the Company had no remaining outstanding derivative liabilities.
Fair Value of Embedded Derivatives ($ in thousands)
Beginning balance at July 1, 2024 $ -
New derivative liabilities 2,193
Change in fair value of derivative liabilities 278
Conversion of derivative liabilities (2,471 )
Ending balance at June 30, 2025 $ -
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 lesser of the remaining lease term or the estimated useful life 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.
Revenue Recognition
The Company follows a five-step approach for recognizing
revenue: (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. Revenue is recognized when control of the promised goods or services is transferred
to the customer. For performance obligations that are satisfied at a single point in time, the Company recognizes revenue at the point
when control transfers, which is typically upon delivery, customer acceptance, or another specified milestone defined in the contract.
For performance obligations satisfied over time, revenue is recognized as progress is made toward completion, using a measure that best
depicts the transfer of control to the customer. 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. The
Company currently draws revenue from two primary sources:
F-9
The Company capitalizes certain incremental costs
incurred to obtain or fulfill a contract when such costs are expected to be recoverable. Prepaid costs, such as advance payments to vendors
or subcontractors directly related to a customer contract, are recorded as assets and subsequently expensed consistent with the transfer
of goods or services to the customer.
Government contracts include both cost-reimbursement
and fixed-price contracts. Cost-reimbursement contracts provide for the reimbursement of allowable costs plus the payment of a fee. These
contracts fall into four basic types: (i) cost-sharing contract under which government reimburses only a portion of the incurred costs,
(ii) cost plus fixed fee contracts which provide for the payment of a fixed fee irrespective of the final cost of performance, (iii) cost
plus incentive fee contracts which provide for increases or decreases in the fee, within specified limits, based upon actual results as
compared to contractual targets relating to such factors as cost, performance and delivery schedule, and (iv) cost plus award fee contracts
which provide for the payment of an award fee determined at the discretion of the customer based upon the performance of the contractor
against pre-established criteria. Under cost-reimbursement type contracts, the contractor is reimbursed periodically for allowable costs
and is paid a portion of the fee based on contract progress. Fixed-price contracts establish a set price for goods or services, which
may be firm or adjustable under specific conditions. Adjustable fixed-price contracts can include elements such as ceiling or target prices,
which are only subject to change through contract clauses that allow for equitable adjustments. Firm-fixed-price contracts do not permit
any price changes based on the contractor’s actual costs, placing full financial risk and responsibility on the contractor. In contrast,
fixed-price contracts with economic price adjustments allow for price changes either increases or decreases based on predefined events
or conditions.
For the fiscal year ended June 30, 2025, the Company was awarded six
government contracts totaling $13.8 million for the provision of services and delivery of materials. These awards are cost-reimbursement
and firm-fixed-price contracts, under which payments are made upon completion of specified performance milestones. Revenue associated
with these contracts will be recognized upon achievement of designated milestones.
For the fiscal year ended June 30, 2025, the Company
recognized total revenue of $4.7 million, consisting of $4.4 million from all obligated government contracts and $266 thousand from product
sales related to sampling or development activities. For the fiscal year ended June 30, 2024, the Company recognized total revenue of
$919 thousand, consisting of $854 thousand from government contracts and $65 thousand from product sales related to sampling or development
activities.
As of June 30, 2025, total remaining performance
obligations under all obligated government contracts amounted to $10.2 million.
Income (Loss) Per Share
Basic income (loss) per share is computed by dividing
net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted
income (loss) per share is computed by dividing the net income (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.
The dilutive impact of potential common shares resulting from common stock equivalents is determined by applying the treasury stock method.
For the fiscal year ended June 30, 2025, 1,546,675 stock options were excluded from the calculation of diluted income per share as their
inclusion would have been anti-dilutive.
F-10
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 Securities and Exchange Commission (“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.
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 their 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.
New Accounting Pronouncements Adopted
FASB Accounting Standards Updates (“ASU”)
No. 2023-07 - Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This expands disclosures about
a public entity’s reportable segments and requires more enhanced information about a reportable segment’s expenses, interim
segment profit or loss, and how a public entity’s chief operating decision maker uses reported segment profit or loss information
in assessing segment performance and allocating resources. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023
and interim periods within fiscal years beginning after December 15, 2024 and should be applied retrospectively. The Company adopted ASU
2023-07 in 2025 and it did not have an impact on the Company’s financial position or results of operation as it impacts disclosures only.
F-11
Recent Accounting Pronouncements under Evaluation
In December 2023, the FASB issued ASU No. 2023-09, Income
Taxes (Topic 740): Improvements to Income Tax Disclosures. This ASU amends the disclosure requirements for income taxes, including
the requirement for further disaggregation of the income tax rate reconciliation and income taxes paid disclosures. The amendments in
this guidance must be applied prospectively, with the option to apply retrospectively. This guidance is effective for fiscal years beginning
after December 15, 2024. The Company is currently evaluating the impact of this new standard on its consolidated financial statements,
and the adoption is not expected to have a significant impact on the consolidated financial statements.
In November 2024, the FASB issued ASU No. 2024-03, Disaggregation
of Income Statement Expenses (DISE). The ASU requires additional disclosure regarding specific types of expenses included in the income
statement. This guidance applies to all public business entities and is effective for annual reporting periods beginning after December
15, 2026 and interim reporting periods within annual reporting periods beginning after December 15, 2027. The requirements will be applied
prospectively with the option for retrospective application. The Company is currently evaluating the impact of this new standard on its
consolidated financial statements, and the adoption is not expected to have a significant impact on the consolidated financial statements.
Note 3 – Convertible Notes
Between August 5, 2024 and August 27, 2024, we