Aeluma, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Unless otherwise stated or the context otherwise indicates, references to “Aeluma,” the “Company,” “we,” “our,” “us,” or similar terms refer to Aeluma, Inc. and Subsidiary. You should read the following discussion and analysis of our financial condition and results of operations together with our consolidated financial statements and the related notes and other financial information included in this report. Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the disclosure under the heading “Risk Factors” in other filings we make with the SEC for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. You should not place undue reliance on forward-looking statements as predictive of future results. Overview We develop novel optoelectronic devices for sensing and communications applications. Aeluma has pioneered a technique to manufacture devices using high performance compound semiconductor materials on large-diameter substrates 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, as well as other technologies. Photodetector devices may be used as image sensors that generate an image by detecting light, in a manner similar to a digital camera taking pictures. Our devices may incorporate additional functionality for 3D image capture when integrated into various system architectures. This technology has the potential to enhance the performance and capability of camera image sensors, light detection and ranging (LiDAR), augmented reality/virtual reality (AR/VR), facial recognition, and other applications. Aeluma has acquired key manufacturing equipment, and has headquarters in Goleta, California with a manufacturing cleanroom to house this equipment. Because we will leverage compound semiconductor materials, our devices may operate out to longer wavelengths, up to at least 1600 nm, which is advantageous for a number of reasons including eye safety. Beyond 1400 nm is considered eye safe at significantly higher optical power levels relative to that at shorter wavelengths. Therefore, for LiDAR sensing systems, the range (the detectable object distance) can be increased significantly. Operating at specific longer wavelengths (for example, near 1550 nm) also enables imaging both in low light (dark) conditions, as well as in direct sunlight. Therefore, images could be captured outdoors and in various conditions. 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”). Pursuant to the Offering, we paid a cash placement agent fee of $389,200 and issued placement agent warrants to purchase up to 85,653 shares of common stock at an exercise price of $3.00 per share. We also agreed to pay certain expenses of the placement agent in connection with 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. The closings of the Offering were exempt from registration under Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated by the SEC thereunder. The common stock in the Offering was sold to “accredited investors,” as defined in Regulation D, and was conducted on a “reasonable best efforts” basis. 13 Departure and Appointment of Directors and Officers Lee 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. 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, costs associated with design, fabrication, packaging and testing of our devices, and facility lease and utility expenses. 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, insurance, audit and accounting services. 14 Other Income Other income, net of other expenses, consists primarily of income generated from subleasing a portion of our research and development facility and interest income. Income Tax Expense Income tax expense consists primarily of income taxes in certain state jurisdictions in which we conduct business. Results of Operations Three months ended September 30, 2023 compared to the three months ended September 30, 2022 Our results of operations for the three-month period ended September 30, 2023, as compared to the three-month period ended September 30, 2022, were as follows: Three Months Ended September 30, Change 2023 2022 ’23 vs. ’22 Revenue $ 32,400 $ - $ 32,400 Operating expenses (1,515,111 ) (1,566,687 ) 51,576 Other income 402 36,646 (36,244 ) Loss before income tax expense (1,482,309 ) (1,530,041 ) 47,732 Income tax expense - - - Net loss $ (1,482,309 ) $ (1,530,041 ) $ 47,732 Revenue : We recognized our revenue of $32,400 from product sales for sampling purchases for the three months ended September 30, 2023. Operating expenses : Operating expense decreased $51,576 to $1,515,111 for the three months ended September 30, 2023 from $1,566,687 for the same period in 2022, due primarily to a reduction in insurance expense offset by increased research and development activities and stock-based compensation expenses. Other income: Other income decreased $36,244 to $402 for the three months ended September 30, 2023 from $36,646 for the same period in 2022. The decrease was due primarily to a $31,351 decrease in sub-lease income as the sublease ended in March 2023. Income tax expense : We did not record income tax expense for either of the three months ended September 30, 2023 and 2022. Impact of COVID-19 With the exception of some lingering supply chain challenges, the residual effects of the COVID-19 pandemic did not have a significant impact on the Company's results of operations or financial condition for the three months ended September 30, 2023. 15 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 $1,482,309 and $1,530,041 for the three months ended September 30, 2023 and 2022, respectively, and losses are expected to continue in the near term. The accumulated deficit was $10,544,375 at September 30, 2023. We have been funding our operations through private loans and the sale of common stock in private placement transactions. 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 September 30, 2023, we had $3,757,227 of cash and cash equivalents. 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 $3,421,346 and $4,576,807 at September 30, 2023 and 2022, respectively. Current assets decreased $1,313,839 to $4,020,067 at September 30, 2023 from $5,333,906 at June 30, 2023, primarily due to a $1,314,463 decrease in cash. Current liabilities decreased $158,378 to $598,721 at September 30, 2023 from $757,099 at June 30, 2022, due primarily to decreases in accounts payable. The following table shows a summary of our cash flows for the periods presented: Three Months Ended September 30, Change 2023 2022 ’23 vs. ’22 Net cash (used in) provided by: Operating activities $ (1,303,362 ) $ (1,316,739 ) $ 13,377 Investing activities (7,100 ) (52,660 ) 45,560 Financing activities (4,001 ) - (4,001 ) (Decrease) increase in cash $ (1,314,463 ) $ (1,369,399 ) $ 54,936 Net cash used in our operating activities were $1,303,362 and $1,316,739 for the three months ended September 30, 2023 and 2022, respectively, due primarily to net losses of $1,482,309 and $1,530,041, respectively. Net cash used in our investing activities was $7,100 and $52,660 for the three months ended September 30, 2023 and 2022, respectively. Investing activities include purchase of equipment and payment for leasehold improvements. Net cash used in our financing activities was $4,001 for the three months ended September 30, 2023, compared to none for the same period of 2022. We paid $4,001 to purchase Lee McCarthy’s unvested restricted shares. 16 Critical Accounting Policies A summary of our other critical accounting policies is included in our Annual Report on Form 10-K for the year ended June 30, 2023. During the three months ended September 30, 2023, there were no significant changes in our critical accounting policies. Item 3. Quantitative and Qualitative Disclosures about Market Risk Not applicable.