Aeluma, Inc. 10-K

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, 2023 and 2022 F-3 Consolidated Statements of Operations for the Years Ended June 30, 2023 and 2022 F-4 Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended June 30, 2023 and 2022 F-5 Consolidated Statements of Cash Flows for the Years Ended June 30, 2023 and 2022 F-6 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, 2023 and 2022, 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, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the two-year period ended June 30, 2023, in conformity with accounting principles generally accepted in the United States of America. Explanatory Paragraph – Going Concern The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred significant operating losses and negative cash flows from operations, and has generated limited revenue. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) “PCAOB” and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audit provides a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below 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. Rose, Snyder & Jacobs LLP We have served as the Company’s auditor since 2021 Encino, California September 22, 2023 F- 2 Aeluma, Inc. and Subsidiary Consolidated Balance Sheets June 30, 2023 June 30, 2022 Assets Current assets: Cash and cash equivalents $ 5,071,690 $ 3,740,722 Accounts receivable 189,239 - Deferred compensation, current portion 53,034 662,464 Prepaids and other current assets 19,943 27,662 Total current assets 5,333,906 4,430,848 Property and equipment: Equipment 1,209,656 619,613 Leasehold improvements 546,864 464,362 Accumulated depreciation ( 300,445 ) ( 96,987 ) Property and equipment, net 1,456,075 986,988 Intangible assets 9,833 12,833 Right of use asset - facility 351,013 476,370 Deferred compensation, long term portion - 11,034 Other assets 13,014 13,014 Total assets $ 7,163,841 $ 5,931,087 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 461,797 $ 114,100 Accrued expenses and other current liabilities 133,092 101,351 Lease liability, current portion 162,210 156,988 Total current liabilities 757,099 372,439 Lease liability, long term portion 296,452 458,705 Commitments and contingencies - - Total liabilities 1,053,551 831,144 Stockholders’ equity: Preferred stock, $ 0.0001 par value; 10,000,000 shares authorized, and none issued and outstanding at June 30, 2023 and 2022 - - Common stock, $ 0.0001 par value; 50,000,000 shares authorized at June 30, 2023 and 2022, and 12,817,500 and 10,650,002 shares issued and outstanding at June 30, 2023 and 2022, respectively 1,282 1,066 Additional paid-in capital 15,171,074 8,781,361 Accumulated deficit ( 9,062,066 ) ( 3,682,484 ) Total stockholders’ equity 6,110,290 5,099,943 Total liabilities and stockholders’ equity $ 7,163,841 $ 5,931,087 The accompanying notes are an integral part of consolidated financial statements. F- 3 Aeluma, Inc. and Subsidiary Consolidated Statements of Operations Year Ended June 30, 2023 2022 Revenue $ 193,339 $ - Operating expenses: Cost of revenue 109,395 - Research and development 2,175,268 1,063,926 General and administrative 2,610,580 1906,530 Facility 421,626 435,814 Insurance 386,155 327.252 Total expenses 5,703,024 3,733,522 Loss from operations ( 5,509,685 ) ( 3,733,522 ) Other income: Sub-lease rental income and other income 128,913 279,727 Interest income 1,190 2,096 Total other income 130,103 281,823 Loss before provision for income tax ( 5,379,582 ) ( 3,451,699 ) Income tax expense - - Net loss $ ( 5,379,582 ) $ ( 3,451,699 ) Basic and diluted loss per share $ ( 0.47 ) $ ( 0.32 ) Weighted average common shares outstanding - basic and diluted 11,379,480 10,650,002 The accompanying notes are an integral part of consolidated financial statements. F- 4 Aeluma, Inc. and Subsidiary Consolidated Statements of Changes in Stockholders’ Equity Common Stock Additional paid-in Accumulated Total Stockholders’ Shares Amount capital Deficit Equity Balance, July 1, 2021 10,535,002 $ 1,054 $ 8,415,432 $ ( 230,922 ) $ 8,185,564 Issuance of common stock, net of offering cost of $ 1,059,505 (Note 3) 115,000 12 206,918 - 206.930 Other offering costs - - ( 45,000 ) - ( 45,000 ) Stock-based compensation - - 204,011 - 204,011 Net loss - - - ( 3,451,699 ) ( 3,451,699 ) Other - - - 137 137 Balance, June 30, 2022 10,650,002 1,066 8,781,361 ( 3,682,484 ) 5,099,943 Issuance of common stock, net of offering cost of $ 411,015 (Note 3) 2,017,498 201 5,641,284 - 5,641,485 Issuance of common stock for service (Note 4) 150,000 15 299,985 - 300,000 Stock-based compensation - - 448,444 - 448,444 Net loss - - - ( 5,379,582 ) ( 5,379,582 ) Balance, June 30 2023 12,817,500 $ 1,282 $ 15,171,074 $ ( 9,062,066 ) $ 6,110,290 The accompanying notes are an integral part of consolidated financial statements. F- 5 Aeluma, Inc. and Subsidiary Consolidated Statements of Cash Flows Year Ended June 30, 2023 2022 Operating activities: Net loss $ ( 5,379,582 ) $ ( 3,451,699 ) Adjustments to reconcile net loss to net cash used in operating activities: Issuance of shares for services 258,000 - Amortization of deferred compensation 662,464 662,464 Partial refund of facility lease deposit - 52,055 Lessor incentive - 134,625 Stock-based compensation expense 448,444 204,011 Depreciation and amortization expense 206,458 98,987 Change in accounts receivable ( 189,239 ) - Change in prepaids and other current assets 7,719 ( 5,141 ) Change in accounts payable 347,697 45,525 Change in accrued expenses and other current liabilities 67 6,382 Net cash used in operating activities ( 3,637,972 ) ( 2,252,791 ) Investing activities: Purchase of equipment ( 590,043 ) ( 503,725 ) Payment for leasehold improvements ( 82,502 ) ( 451,942 ) Net cash used in investing activities ( 672,545 ) ( 955,667 ) Financing activities: Proceeds from Private Placement, net of offering costs 5,641,485 206,930 Payment of other offering costs - ( 45,000 ) Net cash provided by financing activities 5,641,485 161,930 Net change in cash 1,330,968 ( 3,046,528 ) Cash, beginning of period 3,740,722 6,787,250 Cash, end of period $ 5,071,690 $ 3,740,722 The accompanying notes are an integral part of consolidated financial statements. F- 6 Aeluma, Inc. and Subsidiary Notes to Consolidated Financial Statements Note 1 – Business Aeluma, Inc., headquartered in Goleta, California, is engaged in the research and development of infrared (IR) optical sensors to disrupt the market for IR sensors, and using its proprietary technology aims to produce a much higher performance alternative to today’s low-cost sensors at much lower prices than would otherwise be possible. The focus of Aeluma, Inc. (“the Company”) will be the image sensor market. Initial efforts hope to penetrate the 3D imaging and sensing (mobile and consumer, defense and aerospace, industrial, medical, auto) and LiDAR (robotic vehicles, advanced driver assistance systems vehicles (ADAS), topography, wind, industrial) markets. 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 wholly owned subsidiary, and all the outstanding stock of Biond Photonics was converted into shares of our common stock. As a result of the Merger, the Company 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. Going Concern The Company incurred a net loss of $ 5,379,480 and $ 3,451,699 for the years ended June 30, 2023 and 2022, respectively, and has accumulated deficit of $ 9,062,066 at June 30, 2023. In addition, the Company is in the research and development stage and has generated limited revenue to date. In order to support its operations, the Company will require additional infusions of cash from the sale of equity instruments or the issuance of debt instruments, or the commencement of profitable revenue generating activities. If adequate funds are not available or are not available on acceptable terms, the Company’s ability to fund its operations, develop or enhance its sensors in the future or respond to competitive pressures would be significantly limited. Such limitations could require the Company to curtail, suspend or discontinue parts of its business plan. These conditions raise doubt about the Company’s ability to continue as a going concern. The accompanying financial statements have been prepared in conformity with GAAP, which contemplate continuation of the Company as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that could result from the outcome of this uncertainty. The financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. Note 2 – Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements have been presented in accordance with generally accepted accounting principles in the United States (“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. F- 7 Cash and Cash Equivalents The Company considers cash in banks, deposits in transit, and highly liquid debt instruments purchased with original maturities of three months or less to be cash and cash equivalents. Concentration of Risk The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company’s accounts are insured by the FDIC but at times may exceed federally insured limits. Fair Value of Financial Instruments As defined in Financial Accounting Standards Board (“FASB”) ASC Topic No. 820, “Fair Value Measurements and Disclosures” (“ASC 820”), fair value is the price that would be received to sell an asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses the market or income approach. Based on this approach, the Company utilizes certain assumptions about the risk inherent in the inputs to the valuation technique. These inputs can be readily observable, market-corroborated or generally unobservable inputs. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on the observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and the reliability of the information used to determine fair values. As a basis for considering these assumptions, ASC 820 defines a three-tier value hierarchy that prioritizes the inputs used in the valuation methodologies in measuring fair value. Level 1 – Unadjusted quoted prices in active, accessible market for identical assets or liabilities Level 2 – Other inputs that are directly or indirectly observable in the marketplace Level 3 – Unobservable inputs which are supported by little or no market activity The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The carrying values of the Company’s cash, accounts receivable, accounts payable, accrued expenses and other current liabilities approximate their fair value due to the relatively short maturity of these items. Property and Equipment Property, equipment and leasehold improvements are reported at historical cost, net of accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the 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. Intangible Assets Intangible assets are associated with the Aeluma.com domain name and are amortized on a straight-line basis over 10 years. F- 8 Revenue Recognition The Company follows a five-step approach for recognizing revenue, consisting of the following: (1) identifying the contract with a customer; (2) identifying the performance obligations in the contract; (3) determining the transaction price; (4) allocating the transaction price to the performance obligations in the contract; and (5) recognizing revenue when, or as, the entity satisfies a performance obligation. Sales and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue. Incidental items that are immaterial in the context of the contract are recognized as expense. The Company does not have any significant financing components associated with its revenue contracts, as payment is received within one year. ● Product sales: Revenue will be recognized at a point in time when the product is shipped or is delivered to the customer’s location. ● Government contract: Revenue is principally generated under research and development contracts with agencies of the U.S. government or with prime contractors. These contracts may include cost reimbursement and fixed firm price terms. The company recogni zed its revenue of $ 193,339 , consisting of $ 15,000 from product sales and $ 178,339 from a government contract, primarily for sampling purchases and research and development, for the year ended June 30, 2023. Loss Per Share Basic loss per share is computed by dividing net loss available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted loss per share is computed by dividing the net loss attributable to common stockholders by the sum of the weighted average number of common shares outstanding plus potential dilutive common shares outstanding during the period. Potential dilutive securities, comprised of stock warrants and stock options, are not reflected in diluted loss per share because such shares are anti–dilutive. Dilutive impact of potential common shares resulting from common stock equivalents is determined by applying the treasury stock method. Stock-Based Compensation The Company accounts for stock-based compensation arrangements in accordance with guidance issued by the FASB, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees, consultants, and directors based on estimated fair values. The Company estimates the fair value of stock-based compensation awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company’s consolidated statements of operations. The Company estimates the fair value of stock-based compensation awards using the Black-Scholes model. This model requires the Company to estimate the expected volatility and value of its common stock and the expected term of the stock options, all of which are highly complex and subjective variables. For employees and directors, the expected life was calculated based on the simplified method as described by the SEC Staff Accounting Bulletin No. 110, Share-Based Payment. For other service providers, the expected life was calculated using the contractual term of the award. The Company’s estimate of expected volatility was based on the volatility of peers. The Company has selected a risk-free rate based on the implied yield available on U.S. Treasury securities with a maturity equivalent to the expected term of the options. The Company accounts for forfeitures upon occurrence. F- 9 Income Taxes The Company is expected to have net operating loss carryforwards that it can use to offset a certain amount of taxable income in the future. The Company is currently analyzing the amount of loss carryforwards that will be available to reduce future taxable income. The resulting deferred tax assets will be offset by a valuation allowance due to the uncertainty of its realization. The primary difference between income tax expense attributable to continuing operations and the amount of income tax expense that would result from applying domestic federal statutory rates to income before income taxes relates to the recognition of a valuation allowance for deferred income tax assets. The Company has adopted FASB ASC 740-10, “ Income Taxes” which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold of more likely than not as a measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In making this assessment, a Company must determine whether it is more likely than not that a tax position will be sustained upon examination, based solely on the technical merits of the position and must assume that the tax position will be examined by taxing authorities. The Company’s policy is to include interest and penalties related to unrecognized tax benefits in income tax expense. Interest and penalties totaled $ 0 for the periods presented. The Company’s net operating loss carryforwards are subject to IRS examination until they are fully utilized, and such tax years are closed. The Company will file tax returns in the U.S. federal jurisdiction and the state of California. The Company’s federal and state return forms are subject to review by the taxing authorities. The Company is not currently under examination by any taxing authority, nor has it been notified of an impending examination. Recent Accounting Pronouncements The Company has evaluated all issued but not yet effective accounting pronouncements and determined that they are either immaterial or not relevant to the Company. Note 3 – Stockholders’ Equity Authorized Shares The Company’s Articles of Incorporation authorize the issuance of two classes of shares of stock. The total number of shares which this corporation is authorized to issue is 50,000,000 shares of $ 0.0001 par value common stock and 10,000,000 of $ 0.0001 par value preferred stock. No preferred shares were issued as of June 30, 2023. Common Stock Offering Immediately following the Merger, on June 22, 2021, the Company sold 3,482,500 shares of common stock pursuant to an initial closing of a private placement offering at a purchase price of $ 2.00 per share, with gross proceed of $ 6,965,000 (before deducting placement agent fees and expenses of $ 949,736 ). The Company held a second closing on June 28, 2021 for an additional 402,500 shares of common stock, with gross proceed of $ 805,000 (before deducting placement agent fees and expenses of $ 109,769 ), and a third and final close on July 1, 2021 for an additional 115,000 , with gross proceed of $ 230,000 (before deducting placement agent fees and expenses of $ 23,070 ). Accordingly, the Company sold a total of 4,000,000 shares of common stock with total gross proceeds of $ 8,000,000 (before deducting total placement agent fees and expenses of $ 1,082,577 ). On December 12, 2022, the Company 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 proceeds of $ 1,551,000 (before deducting placement agent fees and expenses of $ 124,385 ). On January 10, 2023, the Company held a second closing for an additional 214,667 shares of common stock, with gross proceeds of $ 644,000 (before deducting placement agent fees and expenses of $ 28,640 ). On March 31, 2023, the Company held a third closing for an additional 715,665 shares of common stock, with gross proceeds of $ 2,147,000 (before deducting placement agent fees and expenses of $ 117,830 ). On May 10, 2023, the Company held a fourth and final close for additional 570,166 shares of its common, with gross proceeds of $ 1,710,500 (before deducting placement agent fees and expenses of $ 140,160 ) . Accordingly, the Company sold a total of 2,017,498 shares of common stock with a total gross proceeds of $ 6,052,500 (before deducting total placement agent fees and expenses of $ 411,015 ) in this private placement. The two private placement offerings held above are together referred to herein as the “Offering.” The Offering was exempt from registration under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated by the SEC thereunder. The common stock in the Offering was sold to “accredited investors,” as defined in Regulation D, and was conducted on a “reasonable best efforts” basis. F- 10 Issued and Vested Shares to Officers On October 27, 2020, the Company issued 1,623,920 shares of common stock to Jonathan Klamkin, Director and Chief Executive Officer, and 1,623,920 shares of common stock to Lee McCarthy, Director, interim Chief Financial Officer and Chief Operations Officer, for an aggregate sum of $10,000 each. Initially 20% or 324,784 shares vested on October 27, 2020, and the remaining 1,299,136 shares vest in equal amounts, monthly over the subsequent 4 years. The stock purchase agreement contains a repurchase option whereby unvested shares may be repurchased by the Company, at the Company’s option, within 90 days after employee termination. At June 30 2023, Jonathan Klamkin had 1,190,875 vested shares and 433,045 unvested shares, and Lee McCarthy had 974,350 vested shares and 649,570 unvested shares. Lee McCarthy left the Company in November 2022. Registration Rights Agreement The Company entered into a registration rights agreement that provides for certain liquidated damages upon the occurrence of a “Registration Event,” which is defined as the occurrence of any of the following events: (a) the Company fails to file with the Commission the Registration Statement on or before the Registration Filing Date; (b) the Registration Statement is not declared effective by the Commission on or before the Registration Effectiveness Date; (c) after the SEC Effective Date, the Registration Statement ceases for any reason to remain effective or the Holders of Registrable Securities covered thereby are otherwise not permitted to utilize the prospectus therein to resell the Registrable Securities covered thereby, except for Blackout Periods permitted herein; or (d) following the listing or inclusion for quotation on an Approved Market, the Registrable Securities, if issued and outstanding, are not listed or included for quotation on an Approved Market, or trading of the Common Stock is suspended or halted on the Approved Market, which at the time constitutes the principal markets for the Common Stock, for more than three (3) full, consecutive Trading Days (other than as a result of (A) actions or inactions of parties other than the Company or its affiliates or of the Approved Market not reasonably in the control of the Company, or (B) suspension or halt of substantially all trading in equity securities (including the Common Stock) on the Approved Market). The maximum amount of liquidated damages that may be paid by the Company shall be an amount equal to eight percent ( 8 %) of the shares covered by the registration rights agreement. This filing covered 11,010,002 shares. The Company currently expects to satisfy all of its obligations under the Registration Agreement and does not expect to pay any damages pursuant to this agreement; therefore, no liability has been recorded. Note 4 – Stock-Based Compensation Restricted Stock Awards During the 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 compensation of $ 1,372,435 for the value of the shares in excess of the purchase price paid by the advisors. The deferred compensation will be expensed as consulting expense in the consolidated statements of operation over the service period. For each of the years ended June 30, 2023 and 2022, $ 662,464 has been amortized in the consolidated statements of operations, and $ 11,034 is presented as part of the current portion of deferred compensation on the consolidated balance sheets at June 30, 2023. In March 2022, the Company signed an agreement to issue 150,000 shares of common stock valued at $ 300,000 to a consultant for providing consulting services to the Company for eighteen months. Related to these issuances, the Company has recorded deferred compensation of $ 300,00 which will be expensed as consulting expense in the consolidated statements of operation over the eighteen months. For the year ended June 30, 2023, $ 258,000 has been amortized in the consolidated statements of operations and $ 42,000 is presented as part of the current portion of deferred compensation on the consolidated balance sheet at June 30, 2023. F- 11 The following is a schedule summarizing restricted stock awards for the periods indicated: Number of Shares Weighted Average Grant Date Fair Value Per Share Outstanding at July 1, 2021 Granted 691,232 $ 1.90 Vested ( 346,806 ) $ 1.90 Forfeited - - Outstanding at June 30, 2022 344,426 $ 1.90 Granted 150,000 $ 2.00 Vested ( 419,133 ) $ 1.92 Forfeited - - Outstanding at June 30, 2023 75,293 $ 1.97 Stock Options In July 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 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 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. 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 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 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. During the three months ended March 31, 2023, the Company issued 109,750 options to purchase common stock to employees and directors. The options have an exercise price of $ 3.00 and expire in 10 years with various vesting schedules from 12 months to 48 months. Stock options granted to employees are subject to the continued status as an employee to the Company through each vesting date. During the three months ended March 31, 2023, the Company also issued 37,500 conditional options to purchase common stock to non-employee advisors. The options have an exercise price of $ 3.00 and expire in 10 years, vesting on the date when certain vesting conditions are met. During the three months ended June 30, 2023, the Company issued 163,000 options to purchase common stock to employees. The options expire in 10 years and have an exercise price of $ 2.60 with immediate vesting or $ 3.00 with a vesting schedule of 48 months. Stock options granted to employees are subject to the continued status as an employee to the Company through each vesting date. F- 12 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 years ended June 30, 2023 and 2022: Year Ended June 30, 2023 2022 Weighted-average fair value $ 2.45 $ 1.48 Expected volatility 100 % - 134 % 100 % Expected term 5.0 years - 7.0 years 5.0 years Dividend yield 0.00 % 0.00 % Risk-free interest rate 1.26 % - 4.24 % 1.15 % - 2.41 % For the years ended June 30, 2023 and 2022, stock-based compensation expenses for options granted were $ 448,444 and $ 204,011 , respectively. Unrecognized stock-based compensation expense was $ 1,342,964 and average expected recognition period was 1.6 years as of June 30, 2023. The following is a schedule summarizing stock option activities for the periods presented: Number of Options Weighted Average Exercise Price Aggregate Intrinsic Value (1) Outstanding at July 1, 2022 817,750 $ 2.00 $ - Granted 471,250 $ 2.68 Exercised - - Expired/cancelled ( 255,000 ) $ 2.00 Outstanding at June 30, 2023 1,034,000 $ 2.31 $ 639,775 Exercisable at June 30, 2023 360,060 $ 2.05 $ 309,248 (1) Represents the excess of the fair value on the last day of period (which was $ 2.90 as of June 30, 2023) 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 817,750 $ 2.00 Exercised - - Expired/cancelled - - Outstanding at June 30, 2022 817,750 $ 2.00 $ - Exercisable at June 30, 2022 83,250 $ 2.00 $ - Note 5 – Facility Operating Lease On April 1, 2021, the Company commenced a 5-year operating lease for a facility in Goleta, 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. F- 13 The following table presents maturities of operating lease liabilities on an undiscounted basis as of June 30, 2023: Fiscal 2024 $ 165,096 Fiscal 2025 169,224 Fiscal 2026 129,282 Total 463,602 Less imputed interest ( 4,940 ) Total operating lease liability 485,662 Less: current portion 162,210 Lease liability, long term $ 296,452 The lease term and the discount rate for the lease at June 30, 2023 is 2.8 years and 0.75 %, respectively. The total lease payments were $ 129,437 and $ 157,141 for the years ended June 30, 2023 and 2022, respectively. The variable costs for common area operating expenses and electricity were $ 264,280 , and $ 240,421 for the years ended June 30, 2023 and 2022, respectively. Beginning April 1, 2021, the Company began subleasing a portion of their facility. The sub-lease provided for base monthly rent of $13,013 through May 31, 2021 and $8,400 starting June 1, 2021 plus common area operating and utility costs. The sublease was amended again on May 17, 2022 to sublease a smaller portion of the property at a base rental rate of $5,200 per month effective June 1, 2022. Of rental income, including reimbursement of common area operating and utility costs, the Company recognized $ 128,921 and $ 279,727 for the years ended June 30, 2023 and 2022, respectively. The sub-lease ended in March 2023. Note 6 – Warrants to Purchase Common Stock In connection with the Offering held from December 2022 through May 2023, the Company issued warrants of 85,653 to purchase common stock to the Placement Agents. The warrants carry a term of 5 years and an exercise price of $ 3.00 . The following warrants to purchase common stock were outstanding as of June 30, 2023: Number of Shares Exercise Price Expiration Date 360,000 $ 2.00 June 28, 2026 29,067 3.00 December 22, 2027 4,933 3.00 January 10, 2028 6,720 3.00 March 31, 2028 44,933 3.00 May 10, 2028 445,653 Note 7 – 401(k) Plan The Company has a 401(k) savings plan (the 401(k) plan). The 401(k) plan is a defined contribution plan intended to qualify under Section 401(k) of the Internal Revenue Code. All full-time employees of the Company are eligible to participate pursuant to the terms of the 401(k) plan. The Company made c ontributions of $ 50,034 and $ 15,484 for the years ended June 30, 2023 and 2022, respectively. Note 8 – Subsequent Events On September 10, 2023, the Company exercised its option to purchase 649,750 unvested restricted shares of Lee McCarthy for a total consideration of $ 4,001 , the initial purchase price of these shares. F- 14 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.