Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
The following discussion of our financial
condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes included
elsewhere in this filing.
You should read the following discussion and
analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes
and other financial information included in this report. Some of the information contained in this discussion and analysis or set forth
elsewhere in this report, including information with respect to our plans and strategy for our business, includes forward-looking statements
that involve risks and uncertainties as described under the heading “Forward-Looking Statements” elsewhere in this report.
You should review the disclosure under the heading “Risk Factors” in other filings we make with the SEC for a discussion
of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking
statements contained in the following discussion and analysis.
Overview
On June 22, 2021, we, Acquisition Sub and Biond
Photonics, entered into an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”). Pursuant to the terms
of the Merger Agreement, on June 22, 2021, Biond Photonics merged with and into Acquisition Sub, with Acquisition Sub continuing as the
surviving corporation and our wholly owned subsidiary.
As a result of the Merger, we acquired the business
of Biond Photonics, a California corporation, doing business as Aeluma. See “ Description of Business ” above .
At the time the certificates of merger reflecting the Merger were filed with the Secretaries of State of California and Delaware,
each of Biond Photonics’ shares of capital stock issued and outstanding immediately prior to the closing of the Merger was converted
into the right to receive (a) 1.299135853 shares of our common stock (the “Common Share Conversion Ratio”), with the maximum
number of shares of our common stock issuable to the former holders of Biond Photonics’ capital stock equal to 4,100,002 after
adjustments due to rounding for fractional shares. Immediately prior to the effectiveness of the Merger, an aggregate of 2,500,000 shares
of our common stock owned by the stockholders of Parc Investments, Inc. prior to the Merger were forfeited and cancelled (the “Stock
Forfeiture”).
The issuance of shares of our common stock to
Biond Photonics’ former security holders are collectively referred to as the “Share Conversion.”
6
The Merger Agreement contained customary representations
and warranties and pre- and post-closing covenants of each party and customary closing conditions.
As a condition to the Merger, we entered into
an indemnity agreement with our former officer and directors (the “Pre-Merger Indemnity Agreement”), pursuant to which we
agreed to indemnify such former officer and directors for actions taken by them in their official capacities relating to the consideration,
approval and consummation of the Merger and certain related transactions.
The Merger was treated as a recapitalization
and reverse acquisition for us for financial reporting purposes. Biond Photonics is considered the acquirer for accounting purposes,
and our historical financial statements before the Merger were replaced with the historical financial statements of Biond Photonics before
the Merger in filings with the SEC. The Merger is intended to be treated as a tax-free reorganization under Section 368(a) of the Internal
Revenue Code of 1986, as amended.
The issuance of securities pursuant to the Share
Conversion was not registered under the Securities Act, in reliance upon the exemption from registration provided by Section 4(a)(2)
of the Securities Act, which exempts transactions by an issuer not involving any public offering, and Rule 506 of Regulation D
promulgated by the SEC thereunder. These securities may not be offered or sold in the U.S. absent registration or an applicable exemption
from the registration requirement and are subject to further contractual restrictions on transfer.
Prior to the Merger, our sole business purpose
was to seek the acquisition of or merger with, an existing company.
As a result of the consummation of the Merger,
on June 22, 2021, Biond Photonics, Inc. became our wholly owned subsidiary and the business of Biond Photonics, Inc. became our business
going forward. Accordingly, at the closing, we ceased to be a shell company.
Aeluma develops novel optoelectronic devices
for sensing and communications applications. Aeluma has pioneered a technique to manufacture devices using high performance compound
semiconductor materials on large diameter silicon wafers that are commonly used to manufacture mass market microelectronics. This enables
cost effective manufacturing of high-performance photodetector array circuits for imaging applications in mobile devices. These devices
may be used as image sensors that generate an image by detecting light, in a manner similar to a digital camera taking a picture. Our
devices may incorporate additional functionality and enhanced performance to enable 3D image capture when integrated into various system
architectures. This technology has the potential to greatly enhance the performance and capability of camera image sensors, Lidar, augmented
reality, facial recognition, and other applications. Aeluma has acquired a key piece of manufacturing equipment and has headquarter in
Goleta, California with a manufacturing cleanroom to house this equipment.
The Private Placement Following the Merger
Immediately following the Merger, we sold 3,482,500
shares of our common stock pursuant to an initial closing of a private placement offering at a purchase price of $2.00 per share (the
“Offering Price”). We held a second closing on June 28, 2021 for an additional 402,500 shares of our common stock and a third
and final closing on July 1, 2021 for an additional 115,000. Accordingly, we sold a total of 4,000,000 shares of our common stock. This
private placement offering is referred to herein as the “Merger Offering.”
The aggregate gross proceeds from the three closings
of the Merger Offering were $8,000,000 (before deducting placement agent fees and expenses of the Merger Offering).
The three closings of the Merger Offering were
exempt from registration under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated by the SEC
thereunder. The common stock in the Merger Offering was sold to “accredited investors,” as defined in Regulation D,
and was conducted on a “reasonable best efforts” basis.
In connection with the Merger Offering and subject
to the closing of the Merger Offering, we agreed to pay the placement agent, GP Nurmenkari Inc. (the “Placement Agent”),
a U.S. registered broker-dealer, a cash placement fee of 10% of the gross proceeds raised from investors in the Merger Offering (other
than the first $630,000 of common stock sold to pre-Merger Biond Photonics shareholders and their friends and family, for which the Placement
Agent received a 3% cash fee, and $170,000 of common stock sold to pre-Merger Biond Photonics friends and family for which the Placement
Agent received no cash fee) and to issue to it 50,000 shares of our common stock and warrants to purchase a number of shares of our common
stock equal to 10% of the number of shares of common stock sold in the Merger Offering (other than the first $800,000 of common stock
sold to pre-Merger Biond Photonics shareholders and their friends and family), with a term of five years and an exercise price of $2.00
per share (the “Placement Agent Warrants”). We also agreed to pay certain expenses of the Placement Agent in connection with
the Merger Offering.
7
As a result of the foregoing, we paid the Placement
Agent an aggregate commission of $748,900 and issued to it 50,000 shares of our common stock and Placement Agent Warrants to purchase
360,000 shares of our common stock in connection with the two closings of the Merger Offering. We have also reimbursed the Placement
Agent for approximately $265,000 for legal and other expenses incurred in connection with the Merger Offering.
A note payable to an officer of Parc Investments,
Inc. in the amount of $50,000 was repaid directly from the proceeds from the Merger Offering.
Subject to certain customary exceptions, we have
agreed to indemnify the Placement Agent to the fullest extent permitted by law against certain liabilities that may be incurred in connection
with the Offering, including certain civil liabilities under the Securities Act, and, where such indemnification is not available, to
contribute to the payments the Placement Agent and their sub-agents may be required to make in respect of such liabilities.
Recent Private Placement
Between December 2022 and May 2023, we entered
into subscription agreements (the “Subscription Agreement”) with certain accredited investors, pursuant to which we issued
an aggregate of 2,017,498 shares of our common stock, par value $0.0001 per share, at a per share purchase price of $3.00, for aggregate
gross proceeds of $6,052,500 (the “Offering”).
In connection with the Subscription Agreement,
we also entered into a Registration Rights Agreement with the Investors, pursuant to which we agreed to register all of the shares of
common stock issued in the Offering, including the shares of common stock underlying the warrant issued to the placement agent in this
registration statement. (See, Description of Securities – Registration Rights Agreement)
Pursuant to the Offering, we paid a cash placement
agent fee and expenses in the amount of $411,015 and issued placement agent warrants (“Placement Agent Warrants”) to purchase
up to an aggregate of 85,653 shares of common stock at an exercise price of $3.00 per share.
The Subscription Agreement also contains customary
representation and warranties of us and the Investors, indemnification obligations of us, termination provisions, and other obligations
and rights of the parties.
The foregoing description of the Subscription
Agreement, Registration Rights Agreement and form of Placement Agent Warrants is qualified by reference to the full text of the forms
of Subscription Agreement, Registration Rights Agreement and form of Placement Agent Warrants, which are filed as Exhibits hereto and
incorporated herein by reference.
Departure and Appointment of Directors and Officers
Our board of directors is authorized to have
five members. As of the effectiveness of the Merger, Mr. Ian Jacobs and Mr. Mark Tompkins resigned from our board of directors, and Mr.
Jonathan Klamkin, Mr. Lee McCarthy and Mr. Steven DenBaars were appointed to our board of directors. Mr. DenBaars is a Class I director.
Also, as of the effectiveness of the Merger,
Mr. Jacobs resigned from all officer positions with us, and Jonathan Klamkin was appointed as our President and Chief Executive Officer,
Lee McCarthy was appointed as our interim Chief Financial Officer and Chief Operating Officer.
8
Mr. McCarthy resigned from his position as interim
Chief Financial Officer on August 18, 2021 and from his directorship on December 1, 2021. To fill Mr. McCarthy’s vacancy on the
board, we appointed Ms. Palvi Mehta. Ms. Mehta is a Class II director.
On December 1, 2021, we also appointed Mr. John
Paglia to the board of directors; Mr. Paglia is a Class I director.
On November 8, 2022, Lee McCarthy provided notice
of his resignation as our Chief Operating Officer effective November 17, 2022. Mr. McCarthy’s decision to resign was not the
result of any disagreements with us on any matter related to the operations, policies, or practices of us.
Plan of Operations
We have been developing our materials and characterization
capabilities at our headquarters in Goleta, California, in connection with the further development of our business and the implementation
of our plan of operations. We have installed some key manufacturing equipment at our headquarters and will continue to develop relationships
with manufacturing partners to carry out certain steps of our manufacturing processes externally. We have gained access to a rapid prototyping
facility and are leveraging this access to fabricate early-stage prototypes. In the future, we intend to implement appropriate quality
and manufacturing controls. Some equipment was procured previously, and other equipment is being procured through purchase orders with
equipment vendors.
The primary sources of funding for equipment
procurement and installation are the seed funding raised prior to becoming a public company and the funding raised from our financings.
We have also leveraged funds to continue strengthening our intellectual property including patent applications, trademarks, and development
of trade secrets and manufacturing process recipes. We will continue to develop our manufacturing and product development strategy by
further engaging customers and strategic partners.
Limited Operating History
We cannot guarantee that the proceeds from the
Offering will be sufficient to carry out all of our business plans. Our business is subject to risks inherent in growing an enterprise,
including limited capital resources, risks inherent in the research and development process and possible rejection of our products in
development.
If financing is not available on satisfactory
terms, we may be unable to carry out all of our operations. Equity financing will result in dilution to existing stockholders.
Components of Results of Operations
Revenue
Our revenue currently consists of commercial
product sales and government contracts. For the year ended June 30, 2023, products are sold as samples and government contracts are primarily
for research and development.
Operating Expenses
The cost of revenue consists of costs of materials,
as well as direct compensation and expenses incurred to provide deliverables that resulted in payment of our success fee and wafers delivered.
We anticipate that our cost of revenue will vary substantially depending on the nature of products and/or services delivered in each
customer engagement.
Research and development
expenses consist primarily of compensation and related costs for personnel, including stock-based compensation and employee benefits
as well as costs associated with design, fabrication, packaging and testing of our devices. We expense research and development expenses
as incurred.
General and administrative expenses consist primarily
of compensation and related costs for personnel, including stock-based compensation and employee benefits. In addition, general
and administrative expenses include third-party consulting, legal, audit and accounting services.
9
Facility expenses consist primarily of lease
and utility expenses at our headquarters in Goleta, California and insurance expenses consist mainly of directors and officers insurance.
Other Income
Other income, net of other expenses, consists
primarily of income generated from subleasing a portion of our research and development facility.
Income Tax Expense
Income tax expense consists primarily of
income taxes in certain state jurisdictions in which we conduct business.
Results of Operations
Year ended June 30, 2023 compared to the
year ended June 30, 2022
Our results of operations for the year ended
June 30, 2023, as compared to the same period of 2022, were as follows (some of the balances on the prior period’s combined financials
statements have been reclassified to conform to the current period presentation):
Year Ended June 30,
Change ’23
2023
2022
vs. ’22
Revenue
$ 193,339
$ -
$ 193,339
Operating expenses
(5,703,024 )
(3,733,522 )
(1,969,502 )
Other income
130,103
281,823
(151,720 )
Loss before income tax expense
(5,379,582 )
(3,451,699 )
(1,927,883 )
Income tax expense
-
-
-
Net loss
$ (5,379,582 )
$ (3,451,699 )
$ (1,927,883 )
Revenue : The company recognized its first
revenue of $193,339, consisting of $15,000 from product sales and $178,339 from a government contract.
Operating Expenses : During the years ended
June 30, 2023 and 2022, we incurred operating expenses of $5,703,024 and $3,733,522, respectively. This increase was mainly due to increased
salaries and stock-based compensation resulting from additional employees hired to support our growth and increased costs related to
research and development activities.
Other income : During the years ended June
30, 2023 and 2022, we recorded other income of $130,103 and $281,823, respectively. The decrease was primarily due to a decrease in sub-lease
rental income. The sub-lease ended in March 2023.
Income tax expense : We recorded no income
tax expense for the years ended June 30, 2023 and 2022.
Net Loss : Net loss increased to $5,379,582
for the year ended June 30, 2023, as compared to $3,451,699 for the same period of 2022. The increase was primarily due to increases
in operating expenses resulting increased salaries and stock-based compensation, and research and development activities.
Capital Resources and Liquidity
Our financial statements have been presented
on the basis that are a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course
of business. As presented in the financial statements, we incurred a net loss of $5,379,582 and $3,451,699 for the years ended June 30,
2023 and 2022, respectively, and losses are expected to continue in the near term. The accumulated deficit was $9,062,066 at June 30,
2023. We have been funding our operations through private loans and the sale of common stock in private placement transactions.
10
Management anticipates that significant additional
expenditures will be necessary to develop and expand our business before significant positive operating cash flows can be achieved. Our
ability to continue as a going concern is dependent upon our ability to raise additional capital and to ultimately achieve sustainable
revenues and profitable operations. At June 30, 2023, we had $5,071,690 of cash on hand. These funds are insufficient to complete our
business plan and as a consequence, we will need to seek additional funds, primarily through the issuance of debt or equity securities
for cash to operate our business. No assurance can be given that any future financing will be available or, if available, that it will
be on terms that are satisfactory to us. Even if we are able to obtain additional financing, it may contain undue restrictions on our
operations, in the case of debt financing or cause substantial dilution for our stockholders, in the case of equity financing.
Management has undertaken steps as part of a
plan to improve operations with the goal of sustaining our operations for the next twelve months and beyond. These steps include (a)
raising additional capital and/or obtaining financing; (b) controlling overhead and expenses; and (c) executing material sales or research
contracts. There can be no assurance that we can successfully accomplish these steps and it is uncertain that we will achieve a profitable
level of operations and obtain additional financing. There can be no assurance that any additional financing will be available to us
on satisfactory terms and conditions, if at all. As of the date of this Report, we have not entered into any formal agreements regarding
the above.
In the event we are unable to continue as a going
concern, the Company may elect or be required to seek protection from its creditors by filing a voluntary petition in bankruptcy or may
be subject to an involuntary petition in bankruptcy. To date, management has not considered this alternative, nor does management view
it as a likely occurrence.
We had working capital of $4,576,807 and $4,058,409
at June 30, 2023 and 2022, respectively. Current assets increased $903,058 to $5,333,906 at June 30, 2023 from $4,430,848 at June 30,
2022, primarily due to the private placement described above. Current liabilities increased $384,660 to $757,099 at June 30, 2023 from
$372,439 at June 30, 2022, due to increases in accounts payable.
The following table shows a summary of our cash
flows for the periods presented:
Year Ended June 30,
Change ’23
2023
2022
vs. ’22
Net cash (used in) provided by:
Operating activities
$ (3,637,972 )
$ (2,252,791 )
$ (1,385,181 )
Investing activities
(672,545 )
(955,667 )
283,122
Financing activities
5,641,485
161,930
5,479,555
Increase (decrease) in cash
$ 1,330,968
$ (3,046,528 )
$ 4,377,496
Net cash used in our operating activities increased
$1,385,181 to $3,637,972 for the year ended June 30, 2023, compared to $2,252,791 for the same period in 2022, primarily due to a $1,927,883
increase in net loss. The decrease was reduced mainly by non-cash expense increases of $258,000 in consultant expense, $244,433 in stock-based
compensation expense, and $302,172 in accounts payable.
Net cash used in our investing activities were
$672,545 and $955,667 for the years ended June 30, 2023 and 2022, respectively. Investing activities for the periods presented are related
to the equipment purchases and the setup of our facility.
Our financing activities resulted in a cash inflow
of $5,641,485 and 161,930 for the years ended June 30, 2023 and 2022, respectively. Financing activities for the periods presented are
proceeds from the sale of common stock in private placements.
Recent Accounting Pronouncements
The Company has evaluated all issued but not yet effective accounting
pronouncements and determined that they are either immaterial or not relevant to the Company.
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk.
Not applicable.
11