Aeluma, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included elsewhere in this filing. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included in this report. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties as described under the heading “Forward-Looking Statements” elsewhere in this report. You should review the disclosure under the heading “Risk Factors” in other filings we make with the SEC for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Overview On June 22, 2021, the Company, Acquisition Sub and Biond Photonics entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”). Pursuant to the terms of the Merger Agreement, on June 22, 2021 (the “Closing Date”), Biond Photonics merged with and into Acquisition Sub, with Acquisition Sub continuing as the surviving corporation and our wholly owned subsidiary. As a result of the Merger, we acquired the business of Biond Photonics, a California corporation, doing business as Aeluma. See “ Description of Business ” above . At the time the certificates of merger reflecting the Merger were filed with the Secretaries of State of California and Delaware (the “Effective Time”), each of Biond Photonics’ shares of capital stock issued and outstanding immediately prior to the closing of the Merger was converted into the right to receive (a) 1.299135853 shares of our common stock (the “Common Share Conversion Ratio”), with the maximum number of shares of our common stock issuable to the former holders of Biond Photonics’ capital stock equal to 4,100,002 after adjustments due to rounding for fractional shares. Immediately prior to the Effective Time, an aggregate of 2,500,000 shares of our common stock owned by the stockholders of Parc Investments, Inc. prior to the Merger were forfeited and cancelled (the “Stock Forfeiture”). The issuance of shares of our common stock to Biond Photonics’ former security holders are collectively referred to as the “Share Conversion.” The Merger Agreement contained customary representations and warranties and pre- and post-closing covenants of each party and customary closing conditions. As a condition to the Merger, we entered into an indemnity agreement with our former officer and directors (the “Pre-Merger Indemnity Agreement”), pursuant to which we agreed to indemnify such former officer and directors for actions taken by them in their official capacities relating to the consideration, approval and consummation of the Merger and certain related transactions. The Merger was treated as a recapitalization and reverse acquisition for us for financial reporting purposes. Biond Photonics is considered the acquirer for accounting purposes, and our historical financial statements before the Merger were replaced with the historical financial statements of Biond Photonics before the Merger in filings with the SEC. The Merger is intended to be treated as a tax-free reorganization under Section 368(a) of the Internal Revenue Code of 1986, as amended. The issuance of securities pursuant to the Share Conversion was not registered under the Securities Act, in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act, which exempts transactions by an issuer not involving any public offering, and Rule 506 of Regulation D promulgated by the SEC thereunder. These securities may not be offered or sold in the U.S. absent registration or an applicable exemption from the registration requirement and are subject to further contractual restrictions on transfer. 7 Prior to the Merger, the sole business purpose of the Company was to seek the acquisition of or merger with, an existing company. As a result of the consummation of the Merger, on June 22, 2021, Biond Photonics, Inc. became our wholly owned subsidiary and the business of Biond Photonics, Inc. became the business of the Company going forward. Accordingly, at the closing, the Company ceased to be a shell company. 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 silicon wafers that are commonly used to manufacture mass market microelectronics. This enables cost effective manufacturing of high performance photodetector array circuits for imaging applications in mobile devices. These devices may be used as image sensors that generate an image by detecting light, in a manner similar to a digital camera taking a picture. Our devices may incorporate additional functionality and enhanced performance to enable 3D image capture when integrated into various system architectures. This technology has the potential to greatly enhance the performance and capability of camera image sensors, LiDAR, augmented reality, facial recognition, and other applications. Aeluma has acquired a key piece of manufacturing equipment and has headquarters in Goleta, CA with a manufacturing cleanroom to house this equipment. The Private Placement Offering Immediately following the Merger, we sold 3,482,500 shares of our common stock pursuant to an initial closing of a private placement offering at a purchase price of $2.00 per share. We held a second closing on June 28, 2021 for an additional 402,500 shares of our common stock and a third and final close on July 1, 2021 for an additional 115,000. Accordingly, we sold a total of 4,000,000 shares of our common stock. The private placement offering is referred to herein as the “Offering.” The aggregate gross proceeds from the three closings of the Offering were $8,000,000 (before deducting placement agent fees and expenses of the Offering). The three 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. In connection with the Offering and subject to the closing of the Offering, we agreed to pay the placement agent, GP Nurmenkari Inc. (the “Placement Agent”), a U.S. registered broker-dealer, a cash placement fee of 10% of the gross proceeds raised from investors in the Offering (other than the first $630,000 of common stock sold to pre-Merger Biond Photonics shareholders and their friends and family, for which the Placement Agent received a 3% cash fee, and $170,000 of common stock sold to pre-Merger Biond Photonics friends and family for which the Placement Agent received no cash fee) and to issue to it 50,000 shares of our common stock and warrants to purchase a number of shares of our common stock equal to 10% of the number of shares of common stock sold in the Offering (other than the first $800,000 of common stock sold to pre-Merger Biond Photonics shareholders and their friends and family), with a term of five years and an exercise price of $2.00 per share (the “Placement Agent Warrants”). We also agreed to pay certain expenses of the Placement Agent in connection with the Offering. As a result of the foregoing, we paid the Placement Agent an aggregate commission of $725,900 during the six months ended June 30, 2021 and issued to it 50,000 shares of our common stock and Placement Agent Warrants to purchase 348,500 shares of our common stock in connection with the Offering during the six months ended June 30, 2021. We have also reimbursed the Placement Agent and paid for legal fees totaling $233,605 out of the proceeds from the capital raise in connection with the Offering. A note payable to an officer of Parc Investments, Inc. in the amount of $50,000 was repaid directly from the proceeds from the Offering. The aggregate gross proceeds from the Offering during the twelve months ended June 30, 2022 were $206,930, which is net of offering placement agent fees and expenses of $23,070. We also paid additional offering costs totaling $45,000 during the twelve months ended June 30, 2022. Subject to certain customary exceptions, we have agreed to indemnify the Placement Agent to the fullest extent permitted by law against certain liabilities that may be incurred in connection with the Offering, including certain civil liabilities under the Securities Act, and, where such indemnification is not available, to contribute to the payments the Placement Agent and their sub-agents may be required to make in respect of such liabilities. 8 Plan of Operations We have been developing our materials and characterization capabilities at our headquarters in Goleta, CA, in connection with the further development of our business and the implementation of our plan of operations. We have installed some key manufacturing equipment at our headquarters and will continue to develop relationships with manufacturing partners to carry out certain steps of our manufacturing processes externally. We have gained access to a rapid prototyping facility and are leveraging this access to fabricate early-stage prototypes. In the future, we intend to implement appropriate quality and manufacturing controls. Some equipment was procured previously, and other equipment is being procured through purchase orders with equipment vendors. The COVID-19 pandemic has adversely disrupted, and may further disrupt, the operations at certain of our suppliers and other third-party providers. Lead times for certain materials and parts ordered have been longer than anticipated and on-site support for equipment maintenance has been challenging to schedule. Spare parts have been procured to minimize disruption to our development. The rapid prototyping facility that we access for development was closed for a brief period of time at the start of the COVID-19 pandemic. It has been open for unlimited access since Aeluma has first gained access. 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 financing during June/July of 2021. 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. Change of Fiscal Year On June 30, 2021, we changed our fiscal year from the period beginning on January 1 and ending on December 31 to the period beginning on July 1 and ending on June 30 of each year, effective immediately. Accordingly, we filed a Transition Report on Form 10-K/T on September 27, 2021, to include audited consolidated financial information for the transition period from January 1, 2021 through June 30, 2021. Results of Operations Twelve months ended June 30, 2022, the six months ended June 30, 2021, and twelve months ended December 31, 2020 Our results of operations for the twelve months ended June 30, 2022, as compared to the six months ended June 30, 2021, and twelve months ended December 31, 2020, were as follows (some of the balances on the prior period’s combined financials statements have been reclassified to conform to the current period presentation): Twelve Months Ended June 30, 2022 Six Months Ended June 30, 2021 Twelve Months Ended December 31, 2020 Change ’22 vs. ’21 Change ’22 vs. ’20 Revenue $ - $ - $ - $ - $ - Operating expenses 3,733,522 255,853 11,670 3,477,669 3,721,852 Other income 281,823 39,450 1,000 242,373 280,823 Loss before provision for income tax (3,451,699 ) (216,403 ) (12,670 ) (3,235,296 ) (3,439,029 ) Provision for income tax - 800 800 (800 ) (800 ) Net loss $ (3,451,699 ) $ (217,203 ) $ (13,470 ) $ (3,234,496 ) $ (3,438,229 ) 9 Net Revenues : We are pre-revenue and, accordingly recorded no revenues for the twelve months ended June 30, 2022, the six months ended June 30, 2021, or the twelve months ended December 31, 2020. Operating Expenses : During the twelve months ended June 30, 2022, the six months ended June 30, 2021, and the twelve months ended December 31, 2020, we incurred $3,733,522, $255,853 and $11,670 of operating expenses, respectively. This increase was due to the start-up of operations and stock compensation expenses related to advisor and consulting agreements. Sub-lease rental income and other income : During the twelve months ended June 30, 2022, the six months ended June 30, 2021, and the twelve months ended December 31, 2020, the company recorded $281,823, $39,450, and $1,000 of rental and other income, respectively. The year over year increases were due to the rental of our new facility and a related sub-lease to our tenant. Provision for income tax : The Company recorded no provision for income tax for the twelve months ended June 30, 2022, $800 for the six months ended June 30, 2021, and the twelve months ended December 31, 2020. Net Loss : Net loss increased to $3,451,699 for the twelve months ended June 30, 2022, as compared to $217,203 for the six months ending June 30, 2021 and $13,470 for the twelve months ended December 31, 2020. The year over year increase was due to the start-up of operations and stock-based compensation expenses related to advisor and consulting agreements. 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 $3,451,699, $217,203 and $13,470 for the twelve months ended June 30, 2022, the six months ended June 30, 2021 and the twelve months ended December 31, 2020, respectively, and losses are expected to continue in the near term. The accumulated deficit was $3,586,435 at June 30, 2022. We have been funding our operations through private loans and the sale of common stock in private placement transactions. Refer to Notes 4 through 6 in the financial statements for our discussion of notes payable and shares issued. 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, 2022, we had $3,740,722 of cash on hand. These funds are insufficient to complete our business plan and as a consequence, we will need to seek additional funds, primarily through the issuance of debt or equity securities for cash to operate our business. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to us. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stockholders, in the case of equity financing. Management has undertaken steps as part of a plan to improve operations with the goal of sustaining our operations for the next twelve months and beyond. These steps include (a) raising additional capital and/or obtaining financing; (b) controlling overhead and expenses; and (c) executing material sales or research contracts. There can be no assurance that the Company can successfully accomplish these steps and it is uncertain that the Company will achieve a profitable level of operations and obtain additional financing. There can be no assurance that any additional financing will be available to the Company 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 the Company is 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. 10 Cash, total current assets, total assets, total current liabilities and total liabilities as of June 30, 2022, June 30, 2021 and December 31, 2020, were as follows: We had working capital (deficit) of $4,058,409, $7,185,135 and ($109,607) at June 30, 2022, June 30, 2021 and December 31, 2020, respectively. Current assets decreased $3,041,387 to $4,430,848 at June 30, 2022 from $7,472,235 at June 30, 2021, primarily due to $3,451,699 net loss for the twelve months ended June 30, 2022. Current assets increased $7,433,933 to $7,472,235 at June 30, 2021 from $38,302 at December 31, 2020, primarily as a result of the private placement described above. Current liabilities increased $85,339 to $372,439 at June 30, 2022 from $287,100 at June 30, 2021, due to increases in accounts payable and accrued expenses. Current liabilities increased $139,191 to $287,100 at June 30, 2021 from $147,909 at December 31, 2020, primarily as a result of the facility lease agreement the Company entered into. Twelve Months Ended June 30, 2022 Six Months Ended June 30, 2021 Twelve Months Ended December 31, 2020 Change ’22 vs. ’21 Change ’22 vs. ’20 Net cash (used in) provided by: Operating activities $ (2,252,791 ) $ (68,394 ) $ (1,377 ) $ (2,184,397 ) $ (2,251,414 ) Investing activities (955,667 ) (27,253 ) (106,228 ) (928,414 ) (849,439 ) Financing activities 161,930 6,844,595 145,701 (6,682,665 ) 16,229 Decrease in cash $ (3,046,528 ) $ 6,748,948 $ 38,096 $ (9,795,476 ) $ (3,084,624 ) Net cash used in our operating activities were $2,252,791, $68,394 and $1,377 for the twelve months ended June 30, 2022, the six months ended June 30, 2021 and the twelve months ended December 31, 2020, respectively, primarily due to net losses of $3,451,699, $217,203 and $13,470 for the twelve months ended June 30, 2022, the six months ended June 30, 2021 and the twelve months ended December 31, 2020, respectively, Net cash used in our investing activities were $955,667, $27,253 and $106,228 for the twelve months ended June 30, 2022, the six months ended June 30, 2021 and the twelve months ended December 31, 2020, respectively. Investing activity for the periods presented related to the setup of our new facility. Our financing activities resulted in a cash inflow of $161,930, $6,844,595 and $145,701 for the twelve months ended June 30, 2022, the six months ended June 30, 2021 and the twelve months ended December 31, 2020, respectively. Financing activities for the twelve months ended June 30, 2022 and the six months ended June 30, 2021 are primarily from Offering described above. Financing activities for the twelve months ended December 31, 2020 are proceeds from advances and sale of common stock. Recent Accounting Pronouncements Changes to accounting principles are established by the FASB in the form of ASU’s to the FASB’s Codification. We consider the applicability and impact of all ASU’s on our consolidated financial position, results of operations, stockholders’ deficit, cash flows, or presentation thereof. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes existing guidance on accounting for leases in “Leases (Topic 840)” and generally requires all leases to be recognized in the balance sheet. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606), which amends certain aspects of the Board’s new revenue standard, ASU 2014-09, Revenue from Contracts with Customers. The Company does not currently generate revenue. All other newly issued accounting pronouncements but not yet effective have been deemed either immaterial or not applicable. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Not applicable. 11