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, 2025 and 2024 F-3 Consolidated Statements of Operations for the Fiscal Years Ended June 30, 2025 and 2024 F-4 Consolidated Statements of Changes in Shareholders’ Equity for the Fiscal Years Ended June 30, 2025 and 2024 F-5 Consolidated Statements of Cash Flows for the Fiscal Years Ended June 30, 2025 and 2024 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, 2025 and 2024, 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, 2025, 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, 2025 and 2024, and the results of its operations and its cash flows for each of the years in the two-year period ended June 30, 2025, in conformity with accounting principles generally accepted in the United States of America. 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 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. /s/ Rose, Snyder & Jacobs LLP Rose, Snyder & Jacobs LLP We have served as the Company’s auditor since 2021 Encino, California September 9, 2025 F- 2 Aeluma, Inc. and Subsidiary Consolidated Balance Sheets ($ in thousands, except per share data) June 30, 2025 2024 Assets Current assets: Cash and cash equivalents $ 3,628 $ 1,291 Certificate of deposit 12,112 - Accounts receivable 962 60 Deferred compensation - 20 Prepaids and other current assets 633 22 Total current assets 17,335 1,393 Property and equipment: Equipment 1,692 1,531 Leasehold improvements 547 547 Accumulated depreciation ( 1,021 ) ( 609 ) Property and equipment, net 1,218 1,469 Intangible assets 4 7 Right of use asset - operating 836 962 Other assets 13 13 Total assets $ 19,406 $ 3,844 Liabilities and stockholders’ equity Current liabilities: Accounts payable $ 361 $ 317 Accrued expenses and other current liabilities 206 181 Lease liability - operating, current portion 138 129 Total current liabilities 705 627 Lease liability - operating, long-term portion 803 941 Total liabilities 1,508 1,568 Commitments and contingencies - - Stockholders’ equity: Preferred stock, $ 0.0001 par value: 10,000,000 authorized, and none issued and outstanding at June 30, 2025 and 2024 - - Common stock, $ 0.0001 par value: 50,000,000 shares authorized as of June 30, 2025 and 2024, and 15,864,360 and 12,178,424 shares issued and outstanding as of June 30, 2025 and 2024, respectively 2 1 Additional paid-in capital 34,542 15,899 Accumulated deficit ( 16,646 ) ( 13,624 ) Total stockholders’ equity 17,898 2,276 Total liabilities and stockholders’ equity $ 19,406 $ 3,844 The accompanying notes are an integral part of these financial statements F- 3 Aeluma, Inc. and Subsidiary Consolidated Statements of Operations ($ in thousands, except per share data) Year Ended June 30, 2025 2024 Revenue $ 4,665 $ 919 Operating expenses: Cost of revenue 1,884 619 Research and development 1,295 2,507 General and administrative 3,628 2,356 Total operating expenses 6,807 5,482 Loss from operations ( 2,142 ) ( 4,563 ) Other income (expense): Interest income 113 1 Amortization of discount on convertible notes ( 715 ) - Changes in fair value of derivative liabilities ( 278 ) - Total other income (expense), net ( 880 ) 1 Loss before income tax expense ( 3,022 ) ( 4,562 ) Income tax expense - - Net loss $ ( 3,022 ) $ ( 4,562 ) Net loss per share - basic and diluted $ ( 0.23 ) $ ( 0.37 ) Weighted average common shares outstanding - basic and diluted 13,168,345 12,298,355 The accompanying notes are an integral part of these financial statements F- 4 Aeluma, Inc. and Subsidiary Consolidated Statements of Stockholders’ Equity ($ in thousands) Common Stock Additional paid-in Accumulated Total Stockholders’ Shares Amount capital Deficit Equity Balance, July 1, 2023 12,817,500 $ 1 $ 15,171 $ ( 9,062 ) $ 6,110 Repurchase of common stock (Note 4) ( 649,570 ) - ( 4 ) - ( 4 ) Stock warrants exercised 10,494 - - - - Stock-based compensation - - 732 - 732 Net loss - - - ( 4,562 ) ( 4,562 ) Balance, June 30, 2024 12,178,424 $ 1 $ 15,899 $ ( 13,624 ) $ 2,276 Issuance of common stock, net of offering costs (Note 4) 2,628,571 1 12,587 - 12,588 Conversion of convertible notes (Note 3) 898,573 - 1,667 - 1,667 Conversion of derivative liabilities (Note 2) - - 2,471 - 2,471 Stock options exercised 151,028 - 25 - 25 Stock warrants exercised 8,034 - - - - Stock-based compensation - - 1,893 - 1,893 Net loss - - - ( 3,022 ) ( 3,022 ) Balance, June 30, 2025 15,864,630 $ 2 $ 34,542 $ ( 16,646 ) $ 17,898 The accompanying notes are an integral part of these financial statements F- 5 Aeluma, Inc. and Subsidiary Consolidated Statements of Cash Flows ($ in thousands) Year Ended June 30, 2025 2024 Operating activities: Net loss $ ( 3,022 ) $ ( 4,562 ) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of deferred compensation 20 33 Stock-based compensation expense 1,893 732 Depreciation and amortization expense 415 311 Amortization of discount on convertible notes 715 - Changes in fair value of derivative liabilities 278 - Changes in operating assets and liabilities: Accounts receivable ( 902 ) 129 Prepaids and other current assets ( 611 ) ( 2 ) Accounts payable 44 ( 144 ) Accrued expenses and other current liabilities 22 48 Net cash used in operating activities ( 1,148 ) ( 3,455 ) Investing activities: Purchase of equipment ( 161 ) ( 322 ) Net cash used in investing activities ( 161 ) ( 322 ) Financing activities: Repurchase of common stock - ( 4 ) Proceeds from stock option exercise 25 - Proceeds from convertible notes issuance 3,145 - Proceeds from Public Offering, net of offering costs 12,588 - Net cash provided by (used in) financing activities 15,758 ( 4 ) Net change in cash and cash equivalents, and certificate of deposit 14,449 ( 3,781 ) Cash and cash equivalents, and certificate of deposit, beginning of period 1,291 5,072 Cash and cash equivalents, and certificate of deposit, end of period $ 15,740 $ 1,291 Supplemental non-cash disclosures: Conversion of convertible notes to stockholders’ equity $ 1,667 - Conversion of derivative liabilities to stockholders’ equity $ 2,471 - The accompanying notes are an integral part of these financial statements F- 6 Aeluma, Inc. and Subsidiary Notes to Consolidated Financial Statements Note 1 – The Company Aeluma, Inc. (the “Company”) develops novel optoelectronic and electronic devices for sensing, communication, and computing applications. Aeluma has pioneered a technique to produce semiconductor materials and chips using high-performance compound semiconductors on large-diameter substrates commonly used to manufacture mass-market microelectronics. This enables cost-effective manufacturing of high-performance photodetectors and photodetector arrays for imaging applications in mobile devices and other applications. Aeluma’s technology is broadly applicable across mobile, automotive, artificial intelligence (AI), defense & aerospace, communication, augmented reality (AR), virtual reality (VR), high-performance computing, and quantum computing. Aeluma is based in Goleta, California, where the Company operates in a 9,000 sq. ft. facility with a state-of-the-art research and development (“R&D”)/manufacturing cleanroom and access to world-class rapid prototyping capabilities. The facility houses unique equipment for scalable manufacturing. Aeluma also partners with production-scale fabrication foundries and packaging companies. Aeluma maintains extensive patent protection and trade secrets related to its materials, manufacturing technology, and applications. Note 2 – Summary of Significant Accounting Policies Basis of Presentation The accompanying consolidated financial statements have been presented in accordance with U.S. generally accepted accounting principles (“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. Reclassification of Prior Year Presentation Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported consolidated financial statements Cash and Cash Equivalents, and Certificate of Deposit 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 invests its excess cash in certificates of deposit issued by financial institutions with high credit ratings. As of June 30, 2025, the Company held a certificate of deposit with a carrying value of $ 12.1 million, including $ 112 thousand of interest income. The certificate of deposit bears interest at a rate of 3.74 %. 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. F- 7 The Company manages its credit risk associated with exposure to its direct customers on outstanding accounts receivable through the application of credit approvals and other monitoring procedures. The Company closely monitors the aging of accounts receivable from its direct customers. Significant customers are those that represent 10 % or more of revenue or accounts receivable. For the fiscal year ended June 30, 2025, 71 % of our revenue was derived from Customer E and, for the fiscal year ended June 30, 2024, 36 %, 31 % and 17 % of our revenue was derived from Customer A, B and C, respectively. As of June 30, 2025, 100 % of accounts receivable was attributable to Customer E and, as of June 30, 2024, 18 %, 28 % and 54 %. of accounts receivable were attributable to Customer C, D and F, respectively. Customers A, B, C, D and E are government agencies Segments Our chief operating decision maker (“CODM”), the Chief Executive Officer , manages the Company’s business activities as one single operating and reportable segment at the consolidated level. Accordingly, our CODM uses consolidated net income to measure segment profit or loss, allocate resources and assess performance. Further, the CODM reviews and utilizes revenue, operating expenses, and other income (expense) at the consolidated level to manage the Company’s operations. Convertible Debt Instruments The Company evaluates agreements, including any convertible debt instruments, to determine if those agreements or any embedded components of those agreements qualify as derivative financial instruments to be separately accounted for in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification(“ASC”) Topic 815 “ Derivatives and Hedging ” (“ASC 815” ). The accounting treatment of derivative financial instruments requires that the Company record any bifurcated embedded features at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded in earnings as non-operating, non-cash income or expense. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the agreement is reclassified as of the date of the event that caused the reclassification. Bifurcated embedded features are recorded at their initial fair values, which creates an additional debt discount to the host instrument. The Company amortizes the respective debt discount over the term of the notes, using the effective interest method. See Note 3 – Convertible Notes. Fair Value of Financial Instruments As defined in 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. 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 markets 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. F- 8 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. Financial assets and liabilities measured on a non-recurring basis are those that are adjusted to fair value when a significant event occurs. The Company had no financial assets or liabilities carried and measured on a nonrecurring basis during the reporting periods. Financial assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared. For recurring fair value measurement categorized within Level 3, assets and liabilities whose value is determined using a market standard valuation technique are included and described below. When observable inputs are not available, the market standard techniques for determining the estimated fair value of certain securities that trade infrequently, and therefore have little transparency, rely on inputs that are significant to the estimated fair value and that are not observable in the market or cannot be derived principally from or corroborated by observable market data. Management believes these inputs are based on assumptions deemed appropriate given the circumstances and consistent with what other market participants would use when pricing similar assets and liabilities. The Company’s embedded derivatives are classified in Level 3 using the Black-Scholes option-pricing model since their values include significant unobservable inputs. On March 25, 2025, holders of convertible promissory notes elected to convert the convertible notes into common stock. As part of the conversion, the Company remeasured the fair value of the embedded derivative liabilities immediately prior to conversion. The fair value of the embedded derivatives in our convertible notes as of the conversion date was determined based on a fair market value of $ 6.25 as of March 25, 2025. All derivative liabilities were exercised, and as of June 30, 2025, the Company had no remaining outstanding derivative liabilities. Fair Value of Embedded Derivatives ($ in thousands) Beginning balance at July 1, 2024 $ - New derivative liabilities 2,193 Change in fair value of derivative liabilities 278 Conversion of derivative liabilities ( 2,471 ) Ending balance at June 30, 2025 $ - 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 lesser of the remaining lease term or the estimated useful life of the improvements. Repairs and maintenance to these assets are charged to expenses 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. Revenue Recognition The Company follows a five-step approach for recognizing revenue: (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. Revenue is recognized when control of the promised goods or services is transferred to the customer. For performance obligations that are satisfied at a single point in time, the Company recognizes revenue at the point when control transfers, which is typically upon delivery, customer acceptance, or another specified milestone defined in the contract. For performance obligations satisfied over time, revenue is recognized as progress is made toward completion, using a measure that best depicts the transfer of control to the customer. 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 expenses. The Company does not have any significant financing components associated with its revenue contracts, as payment is received within one year. The Company currently draws revenue from two primary sources: ● Commercial product and service contracts: Revenue is currently generated from multiple customers for R&D-related services and small-volume orders. F- 9 ● Government contracts: Revenue is principally generated under R&D contracts with agencies of the U.S. government or with prime contractors. These contracts may include cost-reimbursement or fixed-price terms. The Company capitalizes certain incremental costs incurred to obtain or fulfill a contract when such costs are expected to be recoverable. Prepaid costs, such as advance payments to vendors or subcontractors directly related to a customer contract, are recorded as assets and subsequently expensed consistent with the transfer of goods or services to the customer. Government contracts include both cost-reimbursement and fixed-price contracts. Cost-reimbursement contracts provide for the reimbursement of allowable costs plus the payment of a fee. These contracts fall into four basic types: (i) cost-sharing contract under which government reimburses only a portion of the incurred costs, (ii) cost plus fixed fee contracts which provide for the payment of a fixed fee irrespective of the final cost of performance, (iii) cost plus incentive fee contracts which provide for increases or decreases in the fee, within specified limits, based upon actual results as compared to contractual targets relating to such factors as cost, performance and delivery schedule, and (iv) cost plus award fee contracts which provide for the payment of an award fee determined at the discretion of the customer based upon the performance of the contractor against pre-established criteria. Under cost-reimbursement type contracts, the contractor is reimbursed periodically for allowable costs and is paid a portion of the fee based on contract progress. Fixed-price contracts establish a set price for goods or services, which may be firm or adjustable under specific conditions. Adjustable fixed-price contracts can include elements such as ceiling or target prices, which are only subject to change through contract clauses that allow for equitable adjustments. Firm-fixed-price contracts do not permit any price changes based on the contractor’s actual costs, placing full financial risk and responsibility on the contractor. In contrast, fixed-price contracts with economic price adjustments allow for price changes either increases or decreases based on predefined events or conditions. For the fiscal year ended June 30, 2025, the Company was awarded six government contracts totaling $ 13.8 million for the provision of services and delivery of materials. These awards are cost-reimbursement and firm-fixed-price contracts, under which payments are made upon completion of specified performance milestones. Revenue associated with these contracts will be recognized upon achievement of designated milestones. For the fiscal year ended June 30, 2025, the Company recognized total revenue of $ 4.7 million, consisting of $ 4.4 million from all obligated government contracts and $ 266 thousand from product sales related to sampling or development activities. For the fiscal year ended June 30, 2024, the Company recognized total revenue of $ 919 thousand, consisting of $ 854 thousand from government contracts and $ 65 thousand from product sales related to sampling or development activities. As of June 30, 2025, total remaining performance obligations under all obligated government contracts amounted to $ 10.2 million. 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. Diluted income (loss) per share is computed by dividing the net income (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. The dilutive impact of potential common shares resulting from common stock equivalents is determined by applying the treasury stock method. For the fiscal year ended June 30, 2025, 1,546,675 stock options were excluded from the calculation of diluted income per share as their inclusion would have been anti-dilutive. F- 10 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 Securities and Exchange Commission (“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. 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 their 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. New Accounting Pronouncements Adopted FASB Accounting Standards Updates (“ASU”) No. 2023-07 - Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures . This expands disclosures about a public entity’s reportable segments and requires more enhanced information about a reportable segment’s expenses, interim segment profit or loss, and how a public entity’s chief operating decision maker uses reported segment profit or loss information in assessing segment performance and allocating resources. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024 and should be applied retrospectively. The Company adopted ASU 2023-07 in 2025 and it did not have an impact on the Company’s financial position or results of operation as it impacts disclosures only. F- 11 Recent Accounting Pronouncements under Evaluation In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures . This ASU amends the disclosure requirements for income taxes, including the requirement for further disaggregation of the income tax rate reconciliation and income taxes paid disclosures. The amendments in this guidance must be applied prospectively, with the option to apply retrospectively. This guidance is effective for fiscal years beginning after December 15, 2024. The Company is currently evaluating the impact of this new standard on its consolidated financial statements, and the adoption is not expected to have a significant impact on the consolidated financial statements. In November 2024, the FASB issued ASU No. 2024-03, Disaggregation of Income Statement Expenses (DISE) . The ASU requires additional disclosure regarding specific types of expenses included in the income statement. This guidance applies to all public business entities and is effective for annual reporting periods beginning after December 15, 2026 and interim reporting periods within annual reporting periods beginning after December 15, 2027. The requirements will be applied prospectively with the option for retrospective application. The Company is currently evaluating the impact of this new standard on its consolidated financial statements, and the adoption is not expected to have a significant impact on the consolidated financial statements. Note 3 – Convertible Notes Between August 5, 2024 and August 27, 2024, we issued convertible promissory notes in the aggregate principal amount of $ 3.1 million to 10 accredited investors, pursuant to a private note financing. The Notes were set to mature in June 2026 and did not carry any interest. The Notes were convertible into shares of the Company’s common stock par value $ 0.0001 per share (the “Common Stock”) upon the occurrence of certain events, (i.e., qualified financing resulting in at least $ 5.0 million to the Company, if the Common Stock was uplisted to a national securities exchange or if neither of those such events occurred prior to the maturity date, (together with Sale of the Company (as hereinafter defined), a “Conversion Event”)). In the event the Company did not complete a qualified financing or uplist at or before the maturity date, the outstanding balance of the Notes shall automatically convert without any further action by the Holder into shares of the Company’s common stock at a conversion price equal to eighty-five percent ( 85 %) to the VWAP of the Common Stock on the OTC Markets for the five trading days immediately prior to maturity date. The Note also provided that if there was a Sale of the Company, as defined in the Note, the Holder could elect to receive a cash payment equal to the aggregate amount of principal then outstanding under such Holder’s Note or convert the Note into shares of Common Stock equal to 85 % of the VWAP of the Common Stock on the OTC Markets for the five trading days immediately prior to the Sale of the Company. Although the conversion price was dependent upon the type of Conversion Event that occurred, the Note carried a ceiling and floor price: the applicable conversion price was not lower than 85 % of the 5-day VWAP on the applicable Closing Date (the “Floor Price”) nor was the applicable conversion price be higher than $ 3.50 per share (the “Ceiling Price”); the Floor Price and Ceiling Price shall automatically adjust in the event of a stock split or consolidation by the Company. Since the Floor Price was tied to the Closing Date, the Floor Price differed for investors who were part of different closings. The Floor Price for the investors who participated in the closings was equal to $ 2.47 or $ 2.68 per share. The Investors were granted piggyback registration rights for the shares of Common Stock underlying the Note. The Note Purchase Agreement also contained customary representations and warranties of the Company and the Investors, indemnification obligations of the Company, termination provisions, and other obligations and rights of the parties. The Company analyzed the embedded features of the convertible notes and the debt discount is being amortized over the term of the convertible notes using the effective interest method and the derivative liabilities are marked-to-market at each reporting date. See Fair Value of Financial Instruments in Note 2 – Summary of Significant Accounting Policies for additional information. On March 25, 2025, the Company determined that a Conversion Event had occurred pursuant to the terms of the Notes. As a result, certain holders elected to convert their Notes at the applicable Ceiling Price of $ 3.50 per share, resulting in the issuance of an aggregate of 898,573 shares of Common Stock in exchange for $ 3.1 million in outstanding principal under the Notes. Following the conversion, the Company has no further obligations under the converted Notes. The shares issued upon conversion are subject to piggyback registration rights previously granted to the investors. See Public Offering of Common Stock in Note 4 – Stockholders’ Equity F- 12 For the fiscal year ended June 30, 2025, the Company recorded amortization of discount on convertible notes of $ 715 thousand. The carrying amount of convertible notes, totaling $ 1.7 million, including unamortized debt discount of $ 1.5 million, was reclassed to equity. As of June 30, 2025, the Company’s convertible notes are as follows ($ in thousands): Principal amounts of convertible notes $ 3,145 Less: unamortized debt discount ( 1,478 ) Convertible notes, net of discount 1,667 Conversion of convertible notes ( 1,667 ) Principal amounts of convertible notes $ - Note 4 – 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, 2025. Issued and Vested Shares to Officers On October 27, 2020, the Company issued 1,623,920 shares of common stock each to Jonathan Klamkin, Director and Chief Executive Officer, and Lee McCarthy, Director, Interim Chief Financial Officer and Chief Operations Officer, for $ 10 thousand from 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. On November 17, 2022, Lee McCarthy left the Company, and on September 10, 2023, the Company exercised its option to purchase 649,570 unvested restricted shares Lee McCarthy held for a total consideration of $ 4 thousand, the initial purchase price of these shares. At June 30, 2025, all of Jonathan Klamkin’s shares vested. 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. The Company filed the Registration Statement on Form S-1 with the SEC, and it was declared effective on March 26, 2025. As a result, the Company has satisfied the applicable filing and effectiveness obligations under the Registration Rights Agreement and does not expect to pay any damages pursuant to this agreement. Therefore, no liability has been recorded. F- 13 Public Offering of Common Stock On March 26, 2025, the Company entered into an Underwriting Agreement (“UA”) with Craig-Hallum Capital Group LLC in connection with a public offering of 2,285,714 shares of its common stock at a price of $ 5.25 per share. The Company also granted the Underwriter a 30-day option to purchase up to an additional 342,857 shares to cover over-allotments, which was exercised in full on March 27, 2025. The offering closed on March 28, 2025. The offering was conducted pursuant to the Company’s registration statements on Form S-1 (File No. 333-285469), declared effective by the SEC on March 25, 2025, and on Form S-1MEF filed under Rule 462(b), effective March 26, 2025. Total gross proceeds from the offering, including the over-allotment option, were $ 13.8 million. Net proceeds, after underwriting discounts and offering expenses, were $ 12.6 million. The Company intends to use the proceeds for business development, scaling manufacturing operations, and general corporate purposes. Under the terms of the UA, the Company provided a 7.0 % underwriting discount per share and issued to the Underwriter warrants to purchase up to 5.0 % of the total shares sold in the offering (including the over-allotment shares), with an exercise price equal to 115 % of the public offering price. See Note 7 - Warrants In connection with the offering, the Company, as well as its directors and officers, agreed to a 90-day lock-up period restricting sales or transfers of Company securities, subject to customary exceptions. The Underwriter has the discretion to release these restrictions at any time. Note 5 – Stock-Based Compensation Restricted Stock Awards The Company has entered into various consulting agreements that involved the issuance of common stock in exchange for future services. These agreements included time-based vesting provisions and repurchase rights tied to service terms. In connection with these agreements, the Company recorded deferred compensation for the fair value of the shares in excess of the amounts paid. The deferred compensation is recognized as consulting expense in the consolidated statements of operations over the respective service periods. For the fiscal years ended June 30, 2025 and 2024, $ 20 thousand and $ 33 thousand, respectively, have been amortized in the consolidated statements of operations. As of June 30, 2025, there was no deferred compensation included in the consolidated balance sheets, as all deferred compensation had been fully expensed. 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, 2023 75,293 $ 1.97 Granted - - Vested ( 64,696 ) 1.98 Forfeited - - Outstanding at June 30, 2024 10,597 $ 1.90 Granted - - Vested ( 10,597 ) 1.90 Forfeited - - Outstanding at June 30, 2025 - $ - F- 14 Common Stock Options For the fiscal year ended June 30, 2024, the Company granted stock options of 20,000 and 100,821 to consultants and members of the board of directors, respectively. The stock options granted to consultants expire in 10 years have exercise prices ranging from $ 2.50 to $ 3.90 , and vest immediately. Stock options granted to members of the board of directors expire in 10 years have an exercise price of $ 2.99 , and vest in nine months. For the fiscal year ended June 30, 2025, the Company granted stock options of 78,000 and 723,354 to consultants, and employees and members of the Company’s board of directors, respectively. The stock options granted to consultants expire in 10 years, have exercise prices ranging from $ 2.97 to $ 3.51 and vest in six months to 2 years. Stock options granted to employees and members of board of the Company’s directors expire in 10 years, have exercise prices ranging from $ 5.93 to $ 18.99 , and vest in one month to forty-eight months. The Company estimates the fair value of each option granted using the Black-Scholes option-pricing model. The Company used the following assumptions to estimate the fair value of stock options for the period presented: Year Ended June 30, 2025 2024 Weighted-average fair value $ 6.53 $ 2.52 Expected volatility 113.9 % - 138.3 % 104.9 % - 113.9 % Expected term 0.9 years - 6.1 years 5.0 years - 6.2 years Dividend yield 0.00 % 0.00 % Risk-free interest rate 3.87 % - 4.65 % 3.94 % - 4.92 % For the fiscal years ended June 30, 2025 and 2024, stock-based compensation expenses for options granted were $ 1.9 million and $ 732 thousand, respectively. Unrecognized stock-based compensation expense was $ 4.1 million, and the average expected recognition period was 1.5 years as of June 30, 2025. The following is a schedule summarizing stock option activities for the periods presented ($ in thousands, except per share data): Number of Options Weighted Average Exercise Price Aggregate Intrinsic Value (1) Outstanding at July 1, 2024 953,821 $ 2.45 $ 1,087 Granted 801,354 8.08 Exercised ( 267,957 ) 2.28 Reversal of Expired/forfeited 83,457 2.89 Outstanding at June 30, 2025 1,570,675 $ 5.33 $ 17,410 Exercisable at June 30, 2025 837,754 $ 3.65 $ 10,656 Outstanding at July 1, 2023 1,034,000 $ 2.31 $ 640 Granted 120,821 3.01 Exercised - - Expired/forfeited ( 201,000 ) 2.08 Outstanding at June 30, 2024 953,821 $ 2.45 $ 1,087 Exercisable at June 30, 2024 550,116 $ 2.36 $ 674 (1) Represents the excess of the fair value on the last day of the period (which was $ 16.37 and $ 3.59 as of June 30, 2025 and 2024, respectively) over the exercise price, multiplied by the number of options. F- 15 Note 6 – 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 $782 thousand. 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 lease agreement waived the first three months of rent with payments commencing July 1, 2021. At the commencement of the lease, the net present value of the lease payments was $ 768 thousand. 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. On July 1, 2023, one of the two options to extend was considered reasonably certain of exercise, and the Company remeasured the ROU asset and lease liability. The Company recorded the net present value of $ 1.2 million for both the ROU asset and lease liability on July 1, 2023. The following table presents maturities of operating lease liabilities on an undiscounted basis as of June 30, 2025 ($ in thousands): For the years ending June 30, 2026 $ 173 2027 178 2028 182 2029 187 2030 191 Thereafter 146 Total 1,058 Less imputed interest ( 117 ) Total lease liability - operating 941 Less: lease liability - operating, current portion 138 Lease liability - operating, long-term portion $ 803 The lease term and the discount rate for the lease at June 30, 2025 are 5.8 years and 4.00 %, respectively. The total lease expenses were $ 168 thousand and $ 167 thousand for the years ended June 30, 2025 and 2024, respectively. The variable costs for common area operating expenses and electricity were $ 231 thousand and $ 240 thousand for the years ended June 30, 2025 and 2024, respectively. Note 7 – Warrants to Purchase Common Stock In connection with the public offering completed on March 26, 2025, the Company issued warrants to the underwriter to purchase up to 131,427 shares, representing 5.0 % of the total shares sold in the offering (including any shares issued pursuant to the underwriter’s over-allotment option). The warrants are exercisable at a price of $ 6.04 per share, which is equal to 115 % of the public offering price of $ 5.25 per share. The following warrants to purchase common stock were outstanding as of June 30, 2025: Number of Shares Exercise Price Expiration Date 279,255 $ 2.00 June 22, 2026 37,433 2.00 June 28, 2026 11,500 2.00 July 1, 2026 27,032 3.00 December 22, 2027 4,588 3.00 January 10, 2028 6,720 3.00 March 31, 2028 44,933 3.00 May 10, 2028 131,427 6.04 March 26, 2030 542,888 F- 16 Note 8 – Income Taxes The Company reported a pre-tax loss of $ 3.0 million and $ 4.5 million for the years ended June 30, 2025 and 2024, respectively. There is no federal or state provision for income taxes because the Company has incurred operating losses since inception and is in a full valuation allowance position. Deferred income taxes reflect the net tax effects primarily of the net operating losses and the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. As of June 30, 2025, the Company has approximately $ 7.6 million in federal net operating loss carryforwards available to offset future taxable income. Deferred tax assets are calculated using combined federal and state statutory tax rates. For federal purposes, the statutory corporate tax rate is 21 %, as set by the Tax Cuts and Jobs Act of 2017 and effective through 2025. The California state income tax rate is 7 %, net of federal deduction. Accordingly, the combined effective rate applied to statutory income tax rates is offset by a change in the deferred income tax valuation allowance of approximately 28 %. Note 9 – Subsequent Events On August 4, 2025, the Company appointed Christopher Stewart as its Chief Financial Officer. Pursuant to Mr. Stewart’s employment agreement, was granted 110,000 stock options and 55,000 restricted stock units (“RSUs”). The stock options have an exercise price of $ 21.04 , with 25 % of the stock options vesting on the twelve (12) month anniversary of Mr. Stewart’s employment with the Company. The balance of the stock options will vest in equal monthly increments, on each monthly anniversary of Mr. Stewart’s employment start date with the Company, over the next thirty-six (36) months. The stock options expire on the 10-year anniversary of their vesting date. 25 % of the shares underlying the RSUs will vest at the end of the fiscal quarter following the twelve (12) month anniversary of Mr. Stewart’s employment start date with the Company, with a pro-rated amount for any partial quarter preceding the twelve (12) month anniversary. The balance of the RSUs will vest in equal quarterly increments, with a pro-rated amount for any partial final quarter. Each restricted stock unit represents the contingent right to receive, at settlement, one share of common stock. On June 6, 2025, the Company entered into a lease agreement for additional corporate office space in Goleta, California. The lease was cancellable unless certain conditions were met by the lessor. On September 5, 2025, those conditions were met and the lease became non-cancellable. The lease has a term of 5 years commencing in September 2025, with a total lease commitment of approximately $ 476 thousand. The Company is currently evaluating the accounting impact of this agreement under ASC 842, Leases. F- 17 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.