Aeluma, Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS Aeluma, Inc. and Subsidiary Consolidated Balance Sheets December 31, 2022 June 30, (unaudited) 2022 Assets Current assets: Cash $ 3,062,316 $ 3,740,722 Deferred compensation, current portion 481,544 662,464 Prepaids & other current assets 219,300 27,662 Total current assets 3,763,160 4,430,848 Property and equipment: Equipment 646,242 619,613 Leasehold improvements 541,559 464,362 Accumulated depreciation ( 188,834 ) ( 96,987 ) Total fixed assets 998,967 986,988 Intangible assets 11,333 12,833 Right of use asset - facility 413,838 476,370 Deferred compensation, long term portion - 11,034 Other assets 13,014 13,014 Total assets $ 5,200,312 $ 5,931,087 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 171,383 $ 114,100 Accrued expenses & other current liabilities 97,706 101,351 Lease liability, current portion 159,582 156,988 Total current liabilities 428,671 372,439 Lease liability, long term portion 378,222 458,705 Commitments and contingencies - - Total liabilities 806,893 831,144 Stockholders’ equity: Preferred stock, par value $ 0.0001 , 10,000,000 authorized, none issued and outstanding. - - Common stock, par value $ 0.0001 , and 50,000,000 shares authorized, 11,317,002 and 10,650,002 shares issued and outstanding at December 31, 2022 and June 30, 2022, respectively. 1,132 1,066 Additional paid-in capital 10,685,361 8,781,361 Accumulated deficit ( 6,293,074 ) ( 3,682,484 ) Total stockholders’ equity 4,393,419 5,099,943 Total liabilities and stockholders’ equity $ 5,200,312 $ 5,931,087 The accompanying notes are an integral part of these financial statements 1 Aeluma, Inc. and Subsidiary Consolidated Statements of Operations (unaudited) Three Months Ended December 31, Six Months Ended December 31, 2022 2021 2022 2021 Revenue $ - $ - $ - $ - Operating expenses: Research & development 592,077 177,596 1,221,533 276,041 General & administrative 361,727 343,055 1,058,397 745,833 Facility 104,915 104,401 248,971 215,815 Insurance 96,175 79,762 192,680 161,901 Total expenses 1,154,894 704,814 2,721,581 1,399,590 Loss from operations ( 1,154,894 ) ( 704,814 ) ( 2,721,581 ) ( 1,399,590 ) Other income: Sub-lease rental income & other income 74,165 81,548 110,516 171,900 Interest income 180 571 475 1,345 Total other income 74,345 82,119 110,991 173,245 Loss before income tax expense ( 1,080,549 ) ( 622,695 ) ( 2,610,590 ) ( 1,226,345 ) Income tax expense - - - - Net income (loss) $ ( 1,080,549 ) $ ( 622,695 ) $ ( 2,610,590 ) $ ( 1,226,345 ) Basic and diluted loss per share $ ( 0.10 ) $ ( 0.06 ) $ ( 0.24 ) $ ( 0.12 ) Weighted average common shares outstanding - basic and diluted 10,795,872 10,650,002 10,722,937 10,650,002 The accompanying notes are an integral part of these financial statements 2 Aeluma, Inc. and Subsidiary Consolidated Statement of Stockholders’ Equity For the Three and Six Months Ended December 31, 2022 and 2021 (unaudited) Common Stock Additional paid-in Accumulated Total Stockholders’ Shares Amount capital Deficit Equity Balance, October 1, 2022 10,650,002 $ 1,066 $ 8,851,451 $ ( 5,212,525 ) $ 3,639,992 Issuance of common stock, net of offering costs of $ 124,385 517,000 51 1,426,564 - 1,426,615 Issuance of shares for services 150,000 15 299,985 - 300,000 Stock-based compensation - - 107,361 - 107,361 Net income - - - ( 1,080,549 ) ( 1,080,549 ) Balance, December 31. 2022 11,317,002 $ 1,132 $ 10,685,361 $ ( 6,293,074 ) $ 4,393,419 Balance, October 1, 2021 10,650,002 $ 1,066 $ 8,607,018 $ ( 834,572 ) $ 7,773,512 Net loss - - - ( 622,695 ) ( 622,695 ) Balance, December 31, 2021 10,650,002 $ 1,066 $ 8,607,018 $ ( 1,457,267 ) $ 7,150,817 Common Stock Additional paid-in Accumulated Total Stockholders’ Shares Amount capital Deficit Equity Balance, July 1, 2022 10,650,002 $ 1,066 $ 8,781,361 $ ( 3,682,484 ) $ 5,099,943 Issuance of common stock, net of offering costs of $ 124,385 517,000 51 1,426,564 - 1,426,615 Issuance of shares for services 150,000 15 299,985 - 300,000 Stock-based compensation - - 177,451 - 177,451 Net loss - - - ( 2,610,590 ) ( 2,610,590 ) Balance, December 31, 2022 11,317,002 $ 1,132 $ 10,685,361 $ ( 6,293,074 ) $ 4,393,419 Balance, July 1, 2021 10,535,002 $ 1,054 $ 8,415,432 $ ( 230,922 ) $ 8,185,564 Issuance of shares of common stock for cash, net of $ 23,070 in offering costs 115,000 12 206,918 - 206,930 Other offering costs - - ( 45,000 ) - ( 45,000 ) Stock-based compensation - - 29,668 - 29,668 Net loss - - - ( 1,226,345 ) ( 1,226,345 ) Balance, December 31, 2021 10,650,002 $ 1,066 $ 8,607,018 $ ( 1,457,267 ) $ 7,150,817 The accompanying notes are an integral part of these financial statements 3 Aeluma, Inc. and Subsidiary Consolidated Statements of Cash Flows For the Six Months Ended December 31, 2022 and 2021 (unaudited) Six Months Ended December 31, 2022 2021 Operating activities: Net loss $ ( 2,610,590 ) $ ( 1,226,345 ) Adjustments to reconcile net loss to net cash used in operating activities: Issuance of shares for services 300,000 - Amortization of deferred compensation 191,954 333,955 Partial refund of facility lease deposit - 52,055 Stock based compensation expense 177,451 29,668 Depreciation and amortization expense 93,347 17,388 Change in prepaids & other current assets ( 191,638 ) ( 218,267 ) Change in accounts payable 57,283 16,439 Change in accrued expenses & other current liabilities ( 19,002 ) 99,923 Net cash used in operating activities ( 2,001,195 ) ( 895,184 ) Investing activities: Purchase of equipment ( 26,629 ) ( 265,741 ) Payment for leasehold improvements ( 77,197 ) ( 304,507 ) Net cash used in investing activities ( 103,826 ) ( 570,248 ) Financing activities: Proceeds from Private Placement 1,426,615 206,930 Payment of other offering costs - ( 45,000 ) Net cash provided by financing activities 1,426,615 161,930 Net change in cash ( 678,406 ) ( 1,303,502 ) Cash, beginning of period 3,740,722 6,787,250 Cash, end of period $ 3,062,316 $ 5,483,748 The accompanying notes are an integral part of these financial statements 4 Aeluma, Inc. and Subsidiary Notes to Consolidated Financial Statements (unaudited) Note 1 – The Company Aeluma is headquartered in Goleta, California. The Company 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 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. We were originally incorporated as Parc Investments, Inc. in the State of Delaware on August 21, 2020. Prior to the Merger (as defined below), we were a “shell company” (as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). On June 22, 2021, our board of directors and all of our pre-Merger stockholders approved a restated certificate of incorporation, which was effective upon its filing with the Secretary of State of the State of Delaware on June 22, 2021 and through which we changed our name to “Aeluma, Inc.” On June 22, 2021, our board of directors also adopted restated bylaws. On June 22, 2021, Biond Photonics, Inc., a privately held California corporation (“Biond Photonics”) merged with and into our wholly-owned subsidiary, Aeluma Operating Co., a corporation formed in the State of Delaware on June 22, 2021 (“Acquisition Sub”). Pursuant to this transaction (the “Merger”), Acquisition Sub was the surviving corporation and remained our whollyowned subsidiary, and all the outstanding stock of Biond Photonics was converted into shares of our common stock. As a result of the Merger, we acquired the business of Biond Photonics and continued the existing business operations of Biond Photonics as a public reporting company under the name Aeluma, Inc. In conjunction with the merger transaction, the company changed its year end to June 30. Biond Photonics was incorporated in February 2019. Merger Agreement On June 22, 2021, Parc Investments, Inc., 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. 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 4,100,000 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 our stockholders 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. 5 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 financial reporting purposes. Biond Photonics is considered the acquirer for accounting purposes, and our historical financial statements before the Merger will be replaced with the historical financial statements of Biond Photonics before the Merger in future 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. 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. Note 2 – Summary of Significant Accounting Policies Basis of Presentation The accompanying unaudited interim consolidated financial statements have been presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Article 8 of Regulation S-X. Accordingly, the financial statements do not include all of the information and notes required by GAAP for complete financial statements. The consolidated financial statements as of December 31, 2022 and 2021, are unaudited; however, in the opinion of management such interim condensed consolidated financial statements reflect all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of the results for the periods presented. The accompanying financial information should be read in conjunction with the financial statements and the notes thereto in the Company’s most recent Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (the “SEC”) on September 28, 2022. The results of operations for the period presented are not necessarily indicative of the results that might be expected for future interim periods or for the full year. 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 their integrity and objectivity. Going Concern The Company incurred a net loss of $ 3,451,699 and $ 2,610,590 for the year ended June 30, 2022 and the six months ended December 31, 2022, respectively. In addition, the Company is in the research and development stage and has not generated 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 may raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements have been prepared in conformity with GAAP, which contemplate continuation of the Company as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that could result from the outcome of this uncertainty. The financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. 6 Basic Net 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. The number of shares prior to the merger have been restated to consider the conversion into the shares of the legal acquirer. 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. 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 payable, and accrued expenses approximate their fair value due to the relatively short maturity of these items. 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. 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. Equipment is depreciated over five years , and leasehold improvements are amortized over the remaining lease term. Repairs and maintenance to these assets are charged to expense as incurred; major improvements enhancing the function and/or the asset’s useful life are capitalized. When items are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gains or losses arising from such transactions are recognized. 7 Intangible Assets Intangible assets are associated with the Aeluma.com domain name and are amortized on a straight-line basis over five years . 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. The Company’s accounts are insured by the FDIC but at times may exceed federally insured limits. 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 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 form 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. 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 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. We account for forfeitures upon occurrence. 8 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 December 31, 2022. Common Stock 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 Offering during the six months ended December 31, 2021 were $ 230,000 (before deducting placement agent fees and expenses of the offering of $ 23,070 ). We also paid additional offering costs totaling $ 45,000 during the six months ended December 31, 2021. In December 2022, we sold an aggregate of 517,000 shares of common stock in a private placement offering at a price of $ 3.00 per share, with gross proceed of $ 1,551,000 (before deducting placement agent fees and expenses of the offering of $ 124,385 ). 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. Issued and Vested Shares to Officers On October 27 th , 2020, the Company issued 1,623,920 shares of common stock to Director and CEO Jonathan Klamkin and 1,623,920 shares of common stock to Director, interim CFO and COO, Lee McCarthy for an aggregate sum of $10,000 each. Initially 20% or 324,784 shares vested on October 27, 2020, and the remaining 1,299,136 shares vest in equal amounts, monthly over the subsequent 4 years. The stock purchase agreement contains a repurchase option whereby unvested shares may be repurchased by the Company, at the Company’s option, within 90 days after employee termination. At December 31, 2022, Jonathan Klamkin had 1,028,483 vested shares and 595,437 unvested shares, and Lee McCarthy had 974,350 vested shares and 649,570 unvested shares. Lee McCarthy left the Company in November 2022 and the Company intends to exercise its option to repurchase 649,750 unvested shares for a total consideration of $ 4,001.35 , 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. 9 Note 4 – Stock-Based Compensation Restricted Stock Awards During six months ended June 30, 2021, the Company sold 723,008 shares of common stock to certain individuals in exchange for future management advisory services, for discounted prices price ranging from $. 0104 to $. 0195 per share. The shares are subject to restrictions that allow for repurchase of the shares by the Company due to a termination of the service agreement or other certain provisions. This repurchase right declines on a pro-rata basis over vesting periods (corresponding to the service period) ranging from 2 - 4 years. Related to these issuances, the Company has recorded deferred stock-based compensation for the value of the shares in excess of the purchase price paid by the advisors. The stock-based compensation is expensed over the service period. For the three months ended December 31, 2022 and 2021, $ 166,977 and $ 168,793 , respectively, have been amortized in the statements of operations and, for the six months ended December 31, 2022 and 2021, $ 333,954 and $ 333,955 , respectively, have been amortized in the statement of operations. At December 31, 2022, $ 339,544 included in the deferred compensation amount on the balance sheets is expected to be expensed in the next nine months. 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. For the three and six months ended December 31, 2022, $ 50,000 and $ 158,000 , respectively, has been expensed in the statements of operations. At December 31, 2022, $ 142,000 included in the deferred compensation amount on the balance sheets is expected to be expensed in the next nine months. The 150,000 shares of common stock are issued during three and six months ended December 31, 2022. The following is a schedule summarizing restricted stock awards for the periods indicated: December 31, 2022 Three Months Ended Six Months Ended Number of Shares Weighted Average Grant Date Fair Value per Price Number of Shares Weighted Average Grant Date Fair Value per Price Beginning balance 257,724 $ 1.90 344,426 $ 1.90 Issued 150,000 $ 2.00 150,000 $ 2.00 Vested ( 111,702 ) $ 1.90 ( 198,404 ) $ 1.90 Forfeited - - - - Ending balance 296,022 $ 1.95 296,022 $ 1.95 December 31, 2021 Three Months Ended Six Months Ended Number of Shares Weighted Average Grant Date Fair Value per Price Number of Shares Weighted Average Grant Date Fair Value per Price Beginning balance 604,530 $ 1.90 691,232 $ 1.90 Issued - - - - Vested ( 86,702 ) $ 1.90 ( 173,404 ) $ 1.90 Forfeited - - - - Ending balance 517,828 $ 1.90 517,828 $ 1.90 Stock Options In July of 2021, the Company issued an option to purchase 10,000 shares of common stock to a director at a price of $2.00 per share, expiring in 10 years, and an option to purchase 10,000 shares of common stock to an advisor at a price of $2.00 per share expiring in 5 years. These options vested over periods ranging from one month to three months. In December of 2021, the Company issued options to purchase common stock to two directors in increments of 125,000 each. The options have an exercise price of $2.00, expire in 10 years, vest 12,500 options per quarter in the first year and 9,375 per quarter for the following two years. In February of 2022, the company granted 16,750 in options to one director and 15,500 to another director at a price of $2.00 per share, for committee service. These options are subject to quarterly vesting over four quarters and expire in 10 years. 10 On February 1, 2022, the Company entered into a consulting advisory agreement which grants 2,500 options with every patent filing. On February 4, 2022, the advisor was granted 2,500 options with an exercise price of $2.00 and an expiration date of ten years. In April of 2022, the Company issued 513,000 options to purchase common stock to employees. The options have an exercise price of $2.00 and expire in 10 years with 25% vesting after one year and the remainder scheduled to vest each quarter for three years, subject to the continued status as an employee to the Company through each vesting date. In December of 2022, the Company issued 161,000 options to purchase common stock to employees. The options have an exercise price of $2.00 or $2.10 and expire in 10 years with various vesting schedules from six months to 48 months, subject to the continued status as an employee to the Company through each vesting date. 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 directors issued for the six months ended December 31, 2022 and 2021: Six Months Ended December 31, 2022 2021 Weighted-average fair value $ 2.57 $ 1.50 Expected volatility 100 % 100 % Expected term 5.17 years - 7.0 years 5.0 years Dividend yield 0.00 % 0.00 % Risk-free interest rate 3.68 % - 4.24 % 0.80 % For the three months ended December 31, 2022, stock-based compensation expenses for options granted were $ 107,361 compared to none for the same period of 2021. For the six months ended December 31, 2022 and 2021, stock-based compensation expenses for options granted were $ 177,451 and $ 29,668 , respectively. Unrecognized stock-based compensation expense was $ 1,067,915 and average expected recognition period was 3.0 years as of December 31, 2022. 11 The following is a schedule summarizing employee and non-employee stock option activity for the period presented: Number of Options Weighted Average Exercise Price Aggregate Intrinsic Value (1) Outstanding at October 1, 2022 697,750 $ 2.00 $ - Granted 161,000 $ 2.08 Exercised - - Expired/cancelled - - Outstanding at December 31, 2022 858,750 $ 2.01 $ 846,250 Exercisable at December 31, 2022 193,875 $ 2.00 $ 193,875 (1) Represents the excess of the fair value of $ 3.00 on the last day of period over the exercise price, multiplied by the number of options. Number of Options Weighted Average Exercise Price Aggregate Intrinsic Value Outstanding at October 1, 2021 20,000 $ 2.00 $ - Granted 250,000 $ 2.00 Exercised - - Expired/cancelled - - Outstanding at December 31, 2021 270,000 $ 2.00 $ - Exercisable at December 31, 2021 20,000 $ 2.00 $ - Number of Options Weighted Average Exercise Price Aggregate Intrinsic Value (1) Outstanding at July 1, 2022 817,750 $ 2.00 $ - Granted 161,000 $ 2.08 Exercised - - Expired/cancelled ( 120,000 ) $ 2.00 Outstanding at December 31, 2022 858,750 $ 2.01 $ 846,250 Exercisable at December 31, 2022 193,875 $ 2.00 $ 193,875 (1) Represents the excess of the fair value of $ 3.00 on the last day of the period over the exercise price, multiplied by the number of options. Number of Options Weighted Average Exercise Price Aggregate Intrinsic Value Outstanding at July 1, 2021 - $ - $ - Granted 270,000 $ 2.00 Exercised - - Expired/cancelled - $ 2.00 Outstanding at December 31, 2021 270,000 $ 2.00 $ - Exercisable at December 31, 2021 20,000 $ 2.00 $ - The aggregate intrinsic value represents the difference between the exercise price of the options and the estimated fair value of the Company’s common stock for each of the respective periods. 12 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 value of the asset will be amortized on a straight-line basis over the 60-month period and amortization began at the start of the lease. Additionally, the lease agreement waived the first three months of rent with payments commencing July 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. The lease payments for these additional periods are not included in the lease liability amount presented on the balance sheet. The following table presents maturities of operating lease liabilities on an undiscounted basis as of December 31, 2022: Fiscal 2023 $ 81,035 Fiscal 2024 165,096 Fiscal 2025 169,224 Fiscal 2026 129,283 Total 544,638 Less imputed interest ( 6,834 ) Total operating lease liability 537,804 Less: current portion 159,582 Lease liability, long term $ 378,222 The lease term and the discount rate for the lease at December 31, 2022 is 3.3 years and 0.75 %, respectively. The total lease payments were $ 32,359 and $ 46,490 for the three months ended December 31, 2022 and 2021, respectively and $ 64,719 and $ 78,083 for the six months ended December 31, 2022 and 2021, respectively. The variable costs for common area operating expenses and electricity were $ 70,016 and $ 61,169 for the three months ended December 31, 2022 and 2021, respectively, and $ 173,811 , and $ 117,972 for the six months ended December 31, 2022 and 2021, respectively. Beginning April 1, 2021, the Company began subleasing a portion of their facility. The sub-lease provides 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. Of rental income, including reimbursement of common area operating and utility costs, the Company recognized $ 74,165 and $ 81,548 for the three months ended December 31, 2022 and 2021, respectively, and $ 110,516 and $ 171,900 for the six months ended December 31, 2022 and 2021, respectively. Note 6 – Warrants to Purchase Common Stock In connection with the Offering in June 2021, the Company issued 360,000 warrants to purchase common stock to the Placement Agents. The warrants carry a term of 5 years and an exercise price of $2.00. In connection with the Offering in December 2022 and January 2023, the Company issued warrants of 29,067 and 4,933, respectively, to purchase common stock to the Placement Agents. The warrants carry a term of 5 years and an exercise price of $3.00. Note 7 – Subsequent Events On January 10, 2023, we sold 214,667 shares of common stock in a private placement offering at a price of $ 3.00 per share, with gross proceed of $ 644,000 (before deducting placement agent fees and expenses of the offering of $ 28,640 ), and issued 4,933 warrants to purchase common stock, which carry a term of 5 years and an exercise price of $ 3.00 . 13