UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from _________ to _________
Commission File Number:
(Name of Small Business Issuer in its charter)
| (state or other jurisdiction of incorporation or organization) | (I.R.S. Employer ID. No.) |
(Address of principal executive offices)
Issuer’s telephone number
Securities registered pursuant to Section 12(g)
of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| None |
Indicate by check mark whether
the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Indicate by check mark whether
the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files).
Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer”, “accelerated filer” “smaller reporting
company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | |
| Smaller reporting company |
||
| Emerging growth company |
||
If an emerging growth company,
indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether
the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐
As of February 14, 2023, the registrant’s
outstanding stock consisted of common shares.
DALRADA FINANCIAL CORPORATION.
Table of Contents
| 2 |
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
DALRADA FINANCIAL CORPORATION
Condensed Consolidated Balance Sheets
(unaudited)
| December 31, | June 30, | |||||||
| 2022 | 2022 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Restricted cash | ||||||||
| Accounts receivable, net | ||||||||
| Accounts receivable, net – related parties | ||||||||
| Other receivables | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Long-term receivables | ||||||||
| Long-term receivables – related parties | ||||||||
| Property and equipment, net | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Right of use asset, net | ||||||||
| Right of use asset, net – related party | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Accrued payroll taxes, penalties and interest | ||||||||
| Accounts payable and accrued liabilities – related parties | ||||||||
| Deferred revenue | ||||||||
| Notes payable, current portion | ||||||||
| Notes payable – related parties | ||||||||
| Convertible notes payable, net of debt discount | ||||||||
| Right of use liability | ||||||||
| Right of use liability – related party | ||||||||
| Total current liabilities | ||||||||
| Long-term payables | ||||||||
| Notes payable | ||||||||
| Notes payable – related parties | ||||||||
| Contingent consideration | ||||||||
| Right of use liability | ||||||||
| Right of use liability – related party | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 14) | ||||||||
| Stockholders’ deficit: | ||||||||
| Series G preferred stock, $ par value, shares authorized, shares issued and outstanding as of both December 31, 2022 and June 30, 2022 | ||||||||
| Series F preferred stock, $ par value, and shares authorized, issued and outstanding as of both September 30, 2022 and June 30, 2022 | ||||||||
| Common stock, $ par value, shares authorized, and shares issued and outstanding at September 30, 2022 and June 30, 2022, respectively |
||||||||
| Common stock to be issued | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( |
) | ( |
) | ||||
| Accumulated other comprehensive income (loss) | ( |
) | ( |
) | ||||
| Total Dalrada Financial Corp’s stockholders’ deficit | ( |
) | ( |
) | ||||
| Noncontrolling interests | ||||||||
| Total stockholders’ deficit | ( |
) | ( |
) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
(The accompanying notes are an integral part of these
condensed consolidated financial statements)
| 3 |
DALRADA FINANCIAL CORPORATION
Condensed Consolidated Statements of Operations
(unaudited)
| Three Months Ended December 31, | Six Months Ended December 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenues | $ | $ | $ | $ | ||||||||||||
| Revenues – related party | ||||||||||||||||
| Total revenues | ||||||||||||||||
| Cost of revenue | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling, general and administrative (includes stock-based compensation of $ and $ for the three months and $ and $ for the six months ended 2022 and 2021 respectively) |
||||||||||||||||
| Research and development | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Other income (expense): | ||||||||||||||||
| Interest expense | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Interest income | ||||||||||||||||
| Other income (expense) | ( |
) | ( |
) | ( |
) | ||||||||||
| Gain on expiration of accrued tax liability | ||||||||||||||||
| Gain (loss) on foreign exchange | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Total other income (expenses) | ( |
) | ( |
) | ||||||||||||
| Net loss | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Other comprehensive (loss) income | ||||||||||||||||
| Foreign currency translation | ( |
) | ||||||||||||||
| Comprehensive (loss) income | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Net income (loss) attributable to noncontrolling interests | ( |
) | ||||||||||||||
| Net loss attributable to Dalrada Financial Corporation stockholders | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Net loss per common share to Dalrada stockholders – basic | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Net loss per common share to Dalrada stockholders – diluted | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
| Weighted average common shares outstanding – basic | ||||||||||||||||
| Weighted average common shares outstanding – diluted | ||||||||||||||||
(The accompanying notes are an integral part of these
condensed consolidated financial statements)
| 4 |
DALRADA FINANCIAL CORPORATION
Condensed Consolidated Statements of Stockholders’
Deficit
(unaudited)
| Preferred Stock | Common Stock | Preferred Stock | Additional | Accumulated Other Comprehensive |
Total Dalrada Financial Corp’s |
Total | ||||||||||||||||||||||||||||||||||
| Series G | Series F | Common Stock | to be | to be | Paid-in | Accumulated | Income | Stockholders’ | Noncontrolling | Stockholders’ | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Issued | Issued | Capital | Deficit | (Loss) | Deficit | Interests | Deficit | |||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | $ | $ | $ | ( |
) | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | |||||||||||||||||||||
| Conversion of related party notes into preferred stock | – | – | – | |||||||||||||||||||||||||||||||||||||
| Common stock issued pursuant to acquisitions | – | – | ( |
) | ||||||||||||||||||||||||||||||||||||
| Joint ventures | – | – | – | |||||||||||||||||||||||||||||||||||||
| Repurchase of common shares from subsidiary | – | – | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||
| Stock-based compensation | – | – | ||||||||||||||||||||||||||||||||||||||
| Net income (loss) | – | – | – | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||||||||||
| Foreign currency translation | – | – | – | |||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||||
| Issuance of preferred stock | – | – | ( |
) | ||||||||||||||||||||||||||||||||||||
| Common stock issued pursuant to acquisitions | – | – | ( |
) | ||||||||||||||||||||||||||||||||||||
| Joint venture | – | – | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||
| Reversal of shares previously issued to directors | – | – | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | – | – | ||||||||||||||||||||||||||||||||||||||
| Net income (loss) | – | – | – | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||||||||||
| Foreign currency translation | – | – | – | |||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | $ | $ | $ | ( |
) | $ | $ | ( |
) | $ | $ | ( |
) | |||||||||||||||||||||||
| 5 |
| Preferred Stock | Common Stock | Preferred Stock | Additional | Accumulated Other Comprehensive | Total Dalrada Financial Corp’s | Total | ||||||||||||||||||||||||||||||||||
| Series G | Series F | Common Stock | to be | to be | Paid-in | Accumulated | Income | Stockholders’ | Noncontrolling | Stockholders’ | ||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Issued | Issued | Capital | Deficit | (Loss) | Deficit | Interests | Deficit | |||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | |||||||||||||||||||||
| Common stock issued for conversion of convertibles notes, accrued interest and premium | – | – | ||||||||||||||||||||||||||||||||||||||
| Common stock issued pursuant to acquisitions | – | – | ( |
) | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | – | – | ( |
) | ||||||||||||||||||||||||||||||||||||
| Net income (loss) | – | – | – | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||||||||||
| Foreign currency translation | – | – | – | |||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||||
| Common stock issued for conversion of convertibles notes, accrued interest and premium | – | – | ||||||||||||||||||||||||||||||||||||||
| Common stock issued pursuant to acquisitions | – | – | ( |
) | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | – | – | – | |||||||||||||||||||||||||||||||||||||
| Net income (loss) | – | – | – | ( |
) | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||||||||
| Foreign currency translation | – | – | – | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | $ | ( |
) | |||||||||||||||||||||
(The accompanying notes are an integral part of
these condensed consolidated financial statements)
| 6 |
DALRADA FINANCIAL CORPORATION
Condensed Consolidated Statements of Cash Flows
(unaudited)
| Six Months Ended December 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( |
) | $ | ( |
) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Stock compensation | ||||||||
| Change in fair value of contingent consideration | ||||||||
| Bad debt expense | ||||||||
| Gain on expiration of accrued tax liability | ( |
) | ||||||
| Changes in operating assets and liabilities, net of amounts acquired or assumed in connection with acquisition: | ||||||||
| Accounts receivable | ( |
) | ||||||
| Other receivables | ( |
) | ( |
) | ||||
| Inventories | ( |
) | ( |
) | ||||
| Prepaid expenses and other current assets | ||||||||
| Long-term receivables | ||||||||
| Accounts payable | ||||||||
| Long-term payables | ( |
) | ||||||
| Accounts payable and accrued liabilities – related parties | ( |
) | ||||||
| Accrued liabilities | ||||||||
| Accrued payroll taxes, penalties and interest | ||||||||
| Deferred revenue | ||||||||
| Net cash used in operating activities | ( |
) | ( |
) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | ( |
) | ( |
) | ||||
| Purchase of intangibles | ( |
) | ( |
) | ||||
| Acquisition of business, net of cash | ||||||||
| Net cash used in investing activities | ( |
) | ( |
) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from related party notes payable | ||||||||
| Repayments of related party notes payable | ( |
) | ( |
) | ||||
| Distributions to noncontrolling interest | ( |
) | ||||||
| Net proceeds (repayments) from notes payable | ( |
) | ||||||
| Repurchase of common shares from subsidiary | ( |
) | ||||||
| Net cash provided by financing activities | ||||||||
| Net change in cash and cash equivalents | ||||||||
| Effect of exchange rate changes on cash | ||||||||
| Cash and cash equivalents at beginning of period | ||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Conversion of related party notes and interest into preferred stock | $ | $ | ||||||
| Contribution of property and equipment into joint venture | $ | $ | ||||||
| Issuance of shares to joint venture partner | $ | $ | ||||||
| Conversion of accounts payable-related parties to note payable-related parties | $ | $ | ||||||
| Conversion of convertible note payable, accrued interest and premium into common stock | $ | $ | ||||||
| Increase in right of use asset and liability | $ | $ | ||||||
| Net liabilities assumed in acquisition: | ||||||||
| Assets acquired in acquisitions, net of cash | $ | $ | ||||||
|
Less Liabilities assumed |
( |
) | ||||||
| Net liabilities assumed in acquisition | $ | ( |
) | $ | ||||
(The accompanying notes are an integral part of these condensed
consolidated financial statements)
| 7 |
DALRADA FINANCIAL CORPORATION
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
| 1. | Organization and Nature of Operations |
Dalrada Financial Corporation,
(“Dalrada”), was incorporated in September 1982 under the laws of the State of California. It was reincorporated in May 1983
under the laws of the State of Delaware and reincorporated again on May 5, 2020, under the laws of the state of Wyoming. Dalrada Financial
Corporation trades under the symbol, OTCQB: DFCO.
Since Dalrada’s inception,
the Company has grown its footprint to include the unique business divisions: Dalrada Health, Dalrada Energy Services, Dalrada
Precision Manufacturing, and Dalrada Technologies. Dalrada’s global solutions directly address climate change, gaps in
the health care industry, and technology needs that facilitate a new era of human behavior and interaction and ensure a bright future
for the world around us.
Dalrada Health
Dalrada Health delivers advanced
health care solutions with dedicated products, services, and systems. From virus and disease screening capabilities to pharmaceutical
goods and holistic wellness clinics, This specialized division is committed to developing key health products, lifesaving medications
and building comprehensive systems to increase capability, strive to keep people healthy with the goals of improving their quality of
life and increasing their longevity– on a global level.
Empower
Genomics (“Empower”)– Empower is Dalrada’s wholly owned diagnostic laboratory which processes molecular diagnostic
and antibody tests to support the diagnosis of COVID-19 and the detection of immune response to the virus. Empower has built up and maintained
the testing capacity to handle surges in COVID-19 testing demands. Empower also offers genetic testing capabilities including Pharmacogenomics,
Nutraceutical, Nutrition/Diet DNA and Exercise/Fitness DNA tests.
Pala
Diagnostics (“Pala”)– Pala is a joint venture diagnostic laboratory which processes both molecular diagnostic and antibody
tests to support the diagnosis of COVID-19 and the detection of immune response to the virus.
Solas
Corp. (“Solas”)– Solas manages and oversees wellness clinics throughout Southern California including the Sòlas
Rejuvenation + Wellness clinics (“Sòlas”). Through advanced medical techniques and modern technology, Sòlas
delivers a clinical experience that helps men and woman live their best life, whether it’s through simple cosmetic procedures, pain-reducing
practices, or anti-aging therapies. Through its three locations, Sòlas prides itself on its dedicated service-focused, health-first
approach. Its wellness & rejuvenation clinics deliver with a focus on regenerative therapies, IV and injection services, cosmetic
enhancements amongst a myriad of additional health centric services.
International Health Group
(“IHG”)– IHG provides highly trained nursing and medical assistants for hospitals and home health facilities since 2006.
IHG Medical Assistant programs include Certified Nursing Assistant (“CNA") and Home Health Aide (“HHA”) training
and the fast-track 22-Day CNA Certification Program at its state-approved testing facility.
Pacific
Stem Cells (“PSC”)– PSC markets and sells traditional biologics and human cells, tissues, and cellular and tissue-based
products (HCT/Ps).
Watson
Rx Solutions (“Watson”)– In June 2022, Dalrada Health acquired Watson, an Alabama-based pharmacy with more than 30 years
of experience in the retail medical and pharmaceutical industries. Watson helps manage disease states through education and prescription
management while offering generic as well as specialty medications. Watson maintains pharmacy licenses in all 50 States including Washington
D.C.
| 8 |
GlanHealth
(“GlanHealth”)– Dalrada Health Products launched GlanHealth in 2020 to distribute alcohol-free hand sanitizers, surface
cleaners, laundry aides, antimicrobial solutions, electrostatic sprayers, face masks, gloves, kits, and delivery equipment such as dispensers,
stands, and ease of use packaging for the end consumer. GlanHealth leverages an extensive supply chain of producers, resellers, distributors,
vendors, and formulators for the development, sale, and marketing of its products and services.
Dalrada Energy Services
Dalrada Energy Services (‘DES’)
employs next-generation technology that enhances clean energy efforts while reducing the world’s carbon footprint. Through innovative
products and commercial services, DES facilitates energy transition for universities, businesses, government buildings, and more.
Dalrada
Energy Services (“DES”)– DES provides end-to-end comprehensive energy service solutions in a robust commercial capacity,
DES helps organizations meet environmental, social, and governance (“ESG”) goals and standards while mitigating negative environmental
impacts.
Bothof
Brothers Construction (“Bothof”)– Bothof is a licensed general contractor which provides a wide range of development,
construction and design capabilities and expertise throughout the United States. Through Bothof’s extensive experience in construction
and contracting, the DES division is able to provide a myriad of additional services to its private and public works customers.
Dalrada Precision Manufacturing
Dalrada Precision Manufacturing
creates total manufacturing solutions that start with the design and development of high-quality machine parts and components, and end
with an efficient global supply chain. This specialized business division can meet today’s high demands and solves industry challenges.
Dalrada Precision Manufacturing is confident that it redefines the critical quality of the world’s top components and responds with
in-house research, design, engineering, and distribution through a highly reliable global supply chain and improved time-to-market capabilities.
Dalrada
Precision Parts (“Precision”)– Precision extends the client its engineering and operations team by helping devise unique
manufacturing solutions tailored to their products. Dalrada Precision can enter at any stage of the product lifecycle from concept and
design to mass production and logistics.
Likido
Ltd. (“Likido”)– Likido is an international engineering company developing advanced solutions for the harvesting and recycling
of energy. Using its novel, heat pump systems (patent pending), Likido is working to revolutionize the renewable energy sector with the
provision of innovative modular process technologies to maximize the capture and reuse of thermal energy for integrated heating and cooling
applications. With uses across industrial, commercial and residential sectors, Likido provides cost savings and the minimized carbon emissions
across global supply chains. Likido’s technologies enable the effective recovery and recycling of process energy, mitigating against climate
change and expected enhancement of quality of life through the provision of low-carbon heating and cooling systems.
Ignite
I.T. (“Ignite”)– Ignite is a manufacturer and seller of eco-friendly deep cleaners, parts washers and degreasers that
are specially formulated to lift hydrocarbon-based dirt and grease from virtually all surfaces with minimal effort. Ignite products are
non-flammable, non-corrosive, non-toxic, butyl-free, water-based, and leave a light citrus scent. Ignite is developed for all surfaces
suitable for water and meet or exceed the most stringent industry-testing specifications. Ignites products are effective and available
solutions to the increased demand for protecting employees from hazardous chemicals currently used and highlighted in recent federal and
state regulations.
Deposition
Technologies (“DepTec”)– Dalrada Precision Manufacturing acquired DepTec in April 2022. DepTec designs, develops, manufactures,
and services chemical vapor and physical vapor deposition systems for the microchip and semiconductor industries.
| 9 |
DepTec
has built a multitude of precision OEM parts for PVD (Physical vapor deposition) and refurbished
systems which allow clients the option of purchasing the same model of system they’ve been using for decades – but with upgrades
and improved efficiencies. DepTec also has its own PVD and CVD (Chemical Vapor Deposition) systems, EVOS-PVD and EVOS -CVD, which deposits
metals and non-metals for microchips used in almost every standard and specialized microdevices made today and in the future. These systems
can produce a superior film layer utilized in rugged high-stress environment designs and expect to meet the increased US market demand
driven by the CHIPS and Science Act of 2022.
Dalrada Technologies
Dalrada Technologies has
worked with some of the world’s most recognizable companies, providing digital engineering for cutting-edge software systems and
offering a host of robust digital services. This business division connects the world with integrated technology and innovative solutions,
delivering advanced capabilities and error-free results. Dalrada Technologies creates digital products with expert computer information
technology and software engineering services for a variety of technical industries and clients in both B2B and B2C environments.
Prakat (“Prakat”)–
Prakat is an ISO 9001-certified company that provides end-to-end technology services across various industries, improving the value chain.
The Company specializes in test engineering, accessibility engineering, product engineering, application modernization, billing and revenue
management, CRM, and block chain. Prakat provides global customers with software and technology solutions specializing in Test Engineering,
Accessibility Engineering, Product Engineering and Application Modernization.
Liquidity and Going Concern
These condensed consolidated
financial statements have been prepared on a going concern basis, which implies that the Company will continue to realize its assets and
discharge its liabilities in the normal course of business. As of December 31, 2022, the Company has an accumulated deficit of $
The Company closed a convertible debenture funding on February 4, 2022 for a total principal amount of $
the Company as a going concern is dependent upon the continued financial support from related parties, and its ability to identify future
investment opportunities and obtain the necessary debt or equity financing and generating profitable operations from the Company’s
future operations. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. These condensed
consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and
classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
| 2. | Summary of Significant Accounting Policies |
| (a) | Basis of Presentation |
These consolidated financial statements
of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”)
and are expressed in U.S. dollars. The Company’s fiscal year end is June 30.
We have prepared the accompanying condensed
consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”)
for interim financial reporting, and the instructions to Form 10-Q and Article 10 of Regulation S-X. These condensed consolidated financial
statements are unaudited and, in our opinion, include all adjustments, consisting of normal recurring adjustments and accruals necessary
for a fair presentation of our balance sheets, operating results, and cash flows for the periods presented. Operating results for the
periods presented are not necessarily indicative of the results that may be expected for fiscal year 2023. Certain information and footnote
disclosures normally included in condensed consolidated financial statements prepared in accordance with accounting principles generally
accepted in the United States (“GAAP”) have been omitted in accordance with the rules and regulations of the SEC. These condensed
consolidated financial statements should be read in conjunction with the audited financial statements and accompanying notes in our Annual
Report on Form 10-K for the year ended June 30, 2022, as filed with the United States Securities and Exchange Commission (“SEC”).
| 10 |
| (b) | Principles of Consolidation |
These consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries: Dalrada Precision Corp., a company incorporated in the State of
California, since June 25, 2018 (date of incorporation), Dalrada Health Products, a company incorporated in the State of California, since
October 2, 2018 (date of incorporation), Dalrada Technologies, LLC, a company incorporated in the State of Wyoming, since January 1, 2020
(date of incorporation), Dalrada Energy Services, Inc., a company incorporated in the State of Wyoming, since March 17, 2022 (date of
incorporation), since their respective acquisition dates. All inter-company transactions and balances have been eliminated in consolidation.
The consolidated financial statements include
the accounts of Dalrada Financial Corp., Dalrada Health Products Inc., Solas Corp., Empower Genomics, Inc., International Health Group,
Inc., Pala Diagnostics, LLC, Pacific Stem Cells, LLC, Watson Rx Solutions, Inc., Dalrada Precision Corp., Dalrada Energy Services, Inc.,
Likido Corp., Ignite I.T., Bothof Brothers Inc., Prakat Solutions, Inc., Prakat Solutions Private Limited, Likido Ltd., and Deposition
Technologies Ltd., controlled by the Company through its direct or indirect ownership of a majority voting interest. Additionally, the
consolidated financial statements include the accounts of variable interest entities (“VIEs”) in which the Company has a variable
interest and for which the Company is the “primary beneficiary” as it has both: (1) the power to direct the activities of
the VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses of the VIE that potentially
could be significant to the VIE or the right to receive benefits from the VIE that potentially could be significant to the VIE. All significant
intercompany accounts and transactions are eliminated in consolidation.
Income attributable to the minority interest
in the Company’s majority owned and controlled consolidated subsidiaries is recorded as net income attributable to noncontrolling interests
in the consolidated statements of operations and the noncontrolling interest is reflected as a separate component of the statement of
stockholders’ equity, consolidated balance sheet, and statement of cash flows.
| (c) | Use of Estimates |
The preparation of these condensed consolidated
financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements
and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions
related to the valuation of inventory, valuation of accrued payroll tax liabilities, valuation of acquired assets and liabilities, variables
used in the computation of share-based compensation, and deferred income tax asset valuation allowances.
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 and the accrual of costs and expenses
that are not readily apparent from other sources. 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.
| (d) | Cash and Cash Equivalents |
The Company considers all highly liquid
instruments with a maturity of six months or less at the time of issuance to be cash equivalents. Restricted cash includes the cash restricted
to withdrawal or usage.
| 11 |
| (e) | Concentrations of Credit Risk |
Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. The Company generally maintains
balances in various operating accounts at financial institutions that management believes to be of high credit quality, in amounts that
may exceed federally insured limits. The Company has not experienced any losses related to its cash and cash equivalents and does not
believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
When estimating its allowance for credit
losses related to revenues from Covid Testing, the Company differentiates its receivables based on the following customer types: healthcare
insurers, government payers, and cash payers. Additionally, the Company applies assumptions and judgments for assessing collectability
and determining net revenues and accounts receivable from its customers. Historical collection factors we considered for assessing collectability
and determining net revenues and accounts receivable from our customers include the period of time that the receivables have been outstanding,
history of payment amounts, status of collections due, and applicable statutes of limitations.
During the six months ended December 31,
2022, healthcare insurers accounted for over
revenue of $
payers is $
| (f) | Fair Value Measurements |
Pursuant to ASC 820, Fair Value Measurements
and Disclosures, an entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring
fair value. ASC 820 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used
to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of
input that is significant to the fair value measurement. ASC 820 prioritizes the inputs into three levels that may be used to measure
fair value:
Level 1 – applies to assets or liabilities
for which there are quoted prices in active markets for identical assets or liabilities.
Level 2 – applies to assets or liabilities
for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets
or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent
transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally
from, or corroborated by, observable market data.
Level 3 – applies to assets or liabilities
for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the
assets or liabilities.
The Company’s financial instruments
consist principally of accounts receivable, accounts payable and accrued liabilities, notes payable, and amounts due to related parties.
Pursuant to ASC 820, the fair value of cash is determined based on “Level 1” inputs, which consist of quoted prices in active
markets for identical assets. The recorded values of all other financial instruments approximate their current fair values because of
their nature and respective maturity dates or durations.
The Company records a contingent consideration
liability relating to stock price guarantees included in its acquisition and consulting agreements. The estimated fair value of the contingent
consideration is recorded using a significant observable measure and is therefore classified as a Level 2 financial instrument.
| 12 |
The fair value of the contingent consideration
liability related to the Company’s business combinations is valued based on a forward contract and the guaranteed equity value at
settlement as defined in the acquisition agreement. The fair value of the contingent consideration is then calculated based on the guaranteed
equity value at settlement as defined in the acquisition agreement. (See “Note 14. Commitments and Contingencies”).
| (g) | Convertible Instruments |
The Company evaluates and accounts for
conversion options embedded in convertible instruments in accordance with ASC Topic 815, Derivatives and Hedging Activities (“ASC
815”).
Applicable U.S. GAAP requires companies
to bifurcate conversion options from their host instruments and account for them as free-standing derivative financial instruments according
to certain criteria. The criteria includes circumstances in which (a) the economic characteristics and risks of the embedded derivative
instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument
that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable
generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with
the same terms as the embedded derivative instrument would be considered a derivative instrument.
The Company accounts for convertible instruments
(when the Company has determined that the embedded conversion options should not be bifurcated from their host instruments) as follows.
The Company records, when necessary, deemed dividends for the intrinsic value of conversion options embedded in shares based upon the
differences between the fair value of the underlying common stock at the commitment date of the transaction and the effective conversion
price embedded in the shares.
| (h) | Accounts Receivable |
Accounts receivables are derived from products
and services delivered to customers and are stated at their net realizable value. Each month, the Company reviews its receivables on a
customer-by-customer basis and evaluates whether an allowance for doubtful accounts is necessary based on any known or perceived collection
issues. Any balances that are eventually deemed uncollectible are written off against the allowance after all means of collection have
been exhausted and the potential for recovery is considered remote. As of December 31, 2022, and June 30, 2022, the Company had an allowance
of doubtful accounts of $
Pala and Empower have a standardized approach
to estimate the amount of consideration that we expect to be entitled to for its COVID-19 testing revenue, including the impact of contractual
allowances (including payer denials), and patient price concessions. The Company principally estimates the allowance for credit losses
by pool based on historical collection experience, the current credit worthiness of the customers, current economic conditions, expectations
of future economic conditions and the period of time that the receivables have been outstanding. Although we believe that our estimates
for contractual allowances and patient price concessions are appropriate, actual results could differ from those estimates.
| (i) | Inventory |
Inventory is recorded at the lower of cost
or net realizable value on a first-in first-out basis. As of December 31, 2022 and June 30, 2022, inventory is comprised of raw materials
purchased from suppliers, work-in-progress, and finished goods produced or purchased for resale. The Company establishes inventory reserves
for estimated obsolete or unsaleable inventory equal to the difference between the cost of inventory and the estimated selling price in
the ordinary course of business, less estimated costs to sell.
| 13 |
| (j) | Property and Equipment |
Property and equipment are stated at cost
less accumulated depreciation and amortization. Depreciation and amortization expense is recognized using the straight-line method over
the estimated useful life of each asset, as follows:
| Estimated Useful Life | |
| Computer and office equipment | |
| Machinery and equipment | |
| Leasehold improvements |
Estimated useful lives are periodically
assessed to determine if changes are appropriate. Maintenance and repairs are charged to expense as incurred. When assets are retired
or otherwise disposed of, the cost of these assets and related accumulated depreciation or amortization are eliminated from the balance
sheet and any resulting gains or losses are included in the statement of operations loss in the period of disposal.
| (k) | Business Combinations and Acquisitions |
The Company accounts for acquisitions in
which it obtains control of one or more businesses as a business combination. The purchase price of the acquired businesses is allocated
to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The
excess of the purchase price over those fair values is recognized as goodwill. During the measurement period, which may be up to one year
from the acquisition date, the Company may record adjustments, in the period in which they are determined, to the assets acquired and
liabilities assumed with the corresponding offset to goodwill. If the assets acquired are not a business, the Company accounts for the
transaction or other event as an asset acquisition. Under both methods, the Company recognizes the identifiable assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquired entity. In addition, for transactions that are business combinations, the Company
evaluates the existence of goodwill, indefinite life intangible assets, or a gain from a bargain purchase.
| (l) | Impairment of Long-Lived Assets |
The Company reviews its long-lived assets
(property and equipment) for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable.
If the sum of the expected cash flows, undiscounted, is less than the carrying amount of the asset, an impairment loss is recognized as
the amount by which the carrying amount of the asset exceeds its fair value.
Goodwill is tested annually at June 30
for impairment and upon the occurrence of certain events or substantive changes in circumstances.
The annual goodwill impairment test allows
for the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting
unit is less than its carrying amount. An entity may choose to perform the qualitative assessment on none, some or all of its reporting
units or an entity may bypass the qualitative assessment for any reporting unit and proceed directly to step one of the quantitative impairment
tests. If it is determined, on the basis of qualitative factors, that the fair value of a reporting unit is, more likely than not, less
than its carrying value, the quantitative impairment test is required. The quantitative impairment test calculates any goodwill impairment
as the difference between the carrying amount of a reporting unit and its fair value, but not to exceed the carrying amount of goodwill.
As of June 30, 2022, there were quantitative factors that indicated goodwill was impaired in the amount of $
quarter ended December 31, 2022, the Company performed a qualitative assessment of its reporting units to evaluate whether it is
more likely than not that the fair value of a reporting unit is less than its carrying amount. As part of that evaluation, the Company
considered the relevant events and circumstances including macroeconomic conditions, industry and market consideration, cost factors and
relevant entity specific conditions. As a result of the qualitative goodwill impairment assessment performed, the Company did
recognize any goodwill impairment charges.
| 14 |
An intangible asset is an identifiable
non-monetary asset without physical substance. Such an asset is identifiable when it is separable, or when it arises from contractual
or other legal rights. Separable assets can be sold, transferred, licensed, etc. Examples of intangible assets include computer software,
licenses, trademarks, patents, films, and copyrights. The Company’s intangible assets are finite lived assets and are amortized
on a straight-line basis over the estimated useful lives of the assets.
| (m) | Revenue Recognition |
The Company adopted ASU 2014-09, Revenue
from Contracts with Customers, and its related amendments (collectively known as “ASC 606”), effective January 1, 2019.
The Company determines revenue recognition through the following steps:
| – | Identification of a contract with a customer; | |
| – | Identification of the performance obligations in the contract; | |
| – | Determination of the transaction price; | |
| – | Allocation of the transaction price to the performance obligations in the contract; and | |
| – | Recognition of revenue when or as the performance obligations are satisfied. |
Revenue is recognized when control of the
promised goods or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled
to in exchange for those goods or services. As a practical expedient, the Company does not adjust the transaction price for the effects
of a significant financing component if, at contract inception, the period between customer payment and the transfer of goods or services
is expected to be one year or less.
The Company’s revenue is derived
from the sales of its products, which represents net sales recorded in the Company’s consolidated statements of operations. Product
sales are recognized when performance obligations under the terms of the contract with the customer are satisfied. Typically, this would
occur upon transfer of control, including passage of title to the customer and transfer of risk of loss related to those goods. The Company
measures revenue as the amount of consideration to which it expects to be entitled in exchange for transferring goods (transaction price).
The Company records reductions to revenue for estimated customer returns, allowances, markdowns, and discounts. The Company bases its
estimates on historical rates of customer returns and allowances as well as the specific identification of outstanding returns, markdowns
and allowances that have not yet been received by the Company. The actual amount of customer returns and allowances is inherently uncertain
and may differ from the Company’s estimates. If the Company determines that actual or expected returns or allowances are significantly
higher or lower than the reserves it established, it will record a reduction or increase, as appropriate, to net sales in the period in
which it makes such a determination. Reserves for returns, and markdowns are included within accrued expenses and other liabilities. Allowance
and discounts are recorded in accounts receivable, net and the value of inventory associated with reserves for sales returns are included
within prepaid expenses and other current assets on the consolidated balance sheets.
The Company estimates warranty claims reserves
based on historical results and research and determined that a warranty reserve was not necessary as of December 31, 2022, or 2021.
| 15 |
Net revenues from COVID-19 testing accounted
for over 25% of the Company’s total net revenues for the six months ended December 31, 2022, and primarily comprised of a high volume
of relatively low-dollar transactions. Pala and Empower, which provides clinical testing services and other services, satisfies its performance
obligations and recognizes revenues primarily upon completion of the testing process (when results are reported) or when services have
been rendered. Pala and Empower do not invoice the patients themselves for testing but relies on healthcare insurers and government payers
for reimbursement for COVID-19 testing. Pala has a standardized approach to estimate the amount of consideration that we expect to be
entitled to, including the impact of contractual allowances (including payer denials), and patient price concessions. We regularly assess
the state of our billing operations in order to identify issues which may impact the collectability of receivables or revenue estimates.
We believe that the collectability of our receivables is directly linked to the quality of our billing processes, most notably those related
to obtaining the correct information in order to bill effectively for the services we provide. As such, we strive to implement “best
practices” and work with our third-party billing company to reduce the number of requisitions that we receive from healthcare providers
with missing or incorrect billing information. We believe that our collection and revenue estimation processes, along with our close monitoring
of our billing operations, help to reduce the risk associated with material adjustments to reserve estimates. However, changes to our
estimate of the impact of contractual allowances (including payer denials) and patient price concessions could have a material impact
on our results of operations and financial condition in the period that the estimates are adjusted. Adjustments to our estimated contractual
allowances and implicit patient price concessions are recorded in the current period as changes in estimates. Although we have limited
track record, further adjustments to the allowances, based on actual receipts, may be recorded upon settlement.
DES recognizes revenue on energy savings
contracts where it provides design, engineering and equipment upgrades to obtain energy savings through Environmental, Social, and Governance
(“ESG”) targets. Up to and upon completion of an energy savings project, DES calculates the monthly energy savings based on
prior and current energy consumption totals. The monthly energy savings total is split between the customer and DES where DES recognizes
revenue on a certain negotiated percentage of the total savings. Upon completion of an energy savings contract, the customer will then
retain 100% of such energy savings. DES records revenue as it provides additional management, consulting and other services as they are
incurred.
DES records a sales-type lease where the
Company is the lessor. The Company records its investment in the plant and equipment, used to upgrade a customer’s real property,
leased to franchisees on a net basis, which is comprised of the present value of fixed lease payments not yet received over the course
of the energy savings agreements. The current and long-term portions of our net investment in sales-type leases are included in “Accounts
Receivable, net – related parties” and “Long-term receivables – related parties” respectively. Unearned
income is recognized as interest income over the lease term. Sales-type leases result in the recognition of gain or loss at the commencement
of the lease, which is recorded to “Revenues – related party.”
DepTec and Bothof recognize revenues using
a cost-based input method, by which we use actual costs incurred relative to the total estimated contract costs to determine, as a percentage,
progress toward contract completion. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses
are determined.
The Company also earns service revenue
from its other subsidiaries, including information technology and consulting services via Prakat, educational programs, and courses via
IHG, and management services for Solas. For Prakat and Solas, revenues are recognized when performance obligations have been satisfied
and the services are complete. This is generally at a point of time upon written completion and client acceptance of the project, which
represents transfer of control to the customer. For IHG, revenues are recognized over the course of a semester while services are performed.
| 16 |
Disaggregation of Revenue
The following table presents the Company’s
revenue disaggregated by revenue source:
| Three Months Ended | Six Months Ended | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Product sales – third parties | $ | $ | $ | $ | ||||||||||||
| Product sales – related party | ||||||||||||||||
| Service revenue – third parties | ||||||||||||||||
| Service revenue – related party | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
Accounts Receivable and Deferred Revenue
The following table provides information
about receivables and liabilities from contracts with customers:
| December 31, | June 30, | |||||||
| 2022 | 2022 | |||||||
| Accounts receivable, net | $ | $ | ||||||
| Accounts receivable, net – related parties | ||||||||
| Long-term receivables | ||||||||
| Long-term receivables – related parties | ||||||||
| Deferred revenue | ||||||||
The Company invoices customers based upon
contractual billing schedules, and accounts receivable are recorded when the right to consideration becomes unconditional. Contract liabilities
represent a set-up fee prepayment received from a customer in advance of performance obligations met.
| (n) | Cost of Revenue |
Cost of revenue consists primarily
of inventory sold for product sales and direct labor for information technology and consulting services. The following table is a breakdown
of cost of revenue:
| Three Months Ended | Six Months Ended | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Product sales | $ | $ | $ | $ | ||||||||||||
| Service revenue | ||||||||||||||||
| Total cost of revenue | $ | $ | $ | $ | ||||||||||||
| 17 |
| (o) | Advertising |
Advertising costs are expensed as incurred.
During the three months ended December 31, 2022 and 2021, advertising expenses were approximately $
During the six months ended December 31, 2022 and 2021, advertising expenses were approximately $
| (p) | Stock-based Compensation |
The Company records stock-based compensation
in accordance with ASC 718, Compensation – Stock Compensation using the fair value method. All transactions in which goods
or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration
received or the fair value of the equity instrument issued, whichever is more reliably measurable. Equity instruments issued to employees
and the cost of the services received as consideration are measured and recognized based on the fair value of the equity instruments issued.
During the three months ended December 31, 2022 and 2021, stock-based compensation was $ and $, respectively. During the
six months ended December 31, 2022 and 2021, stock-based compensation expense was $ and $, respectively.
| (q) | Foreign Currency Translation |
The functional currency of the Company
is the United States dollar. The functional currency of the Likido subsidiary is the British pound. The functional currency of Prakat
is the Indian rupee. The financial statements of the Company’s subsidiaries were translated to United States dollars in accordance
with ASC 830, Foreign Currency Translation Matters, using period-end rates of exchange for assets and liabilities, and average
rates of exchange for the year for revenues and expenses. Gains and losses arising on foreign currency denominated transactions are included
in condensed consolidated statements of operations.
| (r) | Comprehensive Loss |
ASC 220, Comprehensive Income, establishes
standards for the reporting and display of comprehensive loss and its components in the condensed consolidated financial statements. During
the three and six months ended December 31, 2022, the Company’s only component of comprehensive income was foreign currency translation
adjustments.
| (s) | Non-controlling Interests |
Non-controlling interests are classified
as a separate component of equity in the Company’s consolidated balance sheets and statements of changes in stockholders’ equity.
Net loss attributable to non-controlling interests are reflected separately from consolidated net loss in the consolidated statements
of comprehensive loss and statements of changes in stockholders’ equity. Any change in ownership of a subsidiary while the controlling
financial interest is retained is accounted for as an equity transaction between the controlling and non-controlling interests. In addition,
when a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary will be initially measured
at fair value and the difference between the carrying value and fair value of the retained interest will be recorded as a gain or loss.
As of December 31, 2022, non-controlling
interests pertained to the Company’s Prakat and Pala subsidiaries.
| (t) | Basic and Diluted Net Loss per Share |
The Company computes net income (loss)
per share in accordance with ASC 260, Earnings per Share. ASC 260 requires presentation of both basic and diluted earnings per
share (“EPS”) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common
shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect
to all dilutive potential common shares outstanding during the periods using the treasury stock method and convertible preferred stock
using the if-converted method. In computing diluted EPS, the average stock price for the periods is used in determining the number of
shares assumed to be purchased from the exercise of stock options or warrants.
| 18 |
The weighted average number of common stock
equivalents related to convertible notes payable of shares and shares, and cashless warrants of and , was
not included in diluted loss per share, because the effects are antidilutive, for the six months ended December 31, 2022 and 2021, respectively.
There were no adjustments to the numerator
during the three and six months ended December 31, 2022 and 2021, respectively.
| (u) | Income Taxes |
The Company accounts for income taxes using
the asset and liability method in accordance with ASC 740, Accounting for Income Taxes. The asset and liability method provides
that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the
financial reporting and tax bases of assets and liabilities, and for operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using the currently enacted tax rates and laws that will be in effect when the differences are expected to
reverse. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to
be realized.
| (v) | Recent Accounting Pronouncements |
The Company has implemented all new accounting
pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting
pronouncements that have been issued that might have a material impact on its financial position or results of operations.
| (w) | Contingent Consideration |
The Company estimates and records the acquisition
date fair value of contingent consideration as part of purchase price consideration for acquisitions. Additionally, each reporting period,
the Company estimates changes in the fair value of contingent consideration and recognizes any change in fair in the consolidated statement
of operations. The estimate of the fair value of contingent consideration requires very subjective assumptions to be made of future operating
results, discount rates and probabilities assigned to various potential operating result scenarios. Future revisions to these assumptions
could materially change the estimate of the fair value of contingent consideration and therefore, materially affect the Company’s
future financial results. The contingent consideration liability is to be settled with the issuance of shares of common stock once contingent
provisions set forth in respective acquisition agreements have been achieved. Upon achievement of contingent provisions, respective liabilities
are relieved and offset by increases to common stock and additional paid in capital in the stockholders’ deficit section of the
Company’s consolidated balance sheets. The contingent consideration decreased by $
six months ended December 31, 2022.
| 3. | Investment in Pala Diagnostics |
In August 2021, Dalrada, through its subsidiary
Dalrada Health, entered into a joint venture (“JV”) with Vivera Pharmaceuticals, Inc (“Vivera”) for a
and controlling interest. The JV, Pala Diagnostics, LLC (“Pala”) is a CLIA-certified diagnostics lab focused on SARS-CoV-2
testing for now with additional testing capabilities to be introduced. The JV has been treated as a business combination.
We determined that Pala is a Variable Interest
Entity (VIE), We believe that the Company has the power to direct the activities that most significantly impact the economic performance
of Pala, and accordingly, Dalrada is considered the primary beneficiary of the VIE. The Company has consolidated the activities of the
VIE.
Pursuant to the partnership agreement, Dalrada
contributed equity in the amount of $
This amount was recorded to non-controlling interest equity balance in the consolidated balance sheets.
| 19 |
Pursuant to the JV agreement, Dalrada issued
shares of common stock to Vivera in October 2021. The fair value of $
In December 2021, Dalrada Health filed suit
against Vivera and Paul Edalat, Vivera’s Chairman and CEO, for misappropriation of funds on behalf of the joint venture in the amount
of $
Vivera filed a separate complaint against Dalrada Financial Corporation, Empower Genomics (a subsidiary of Dalrada Financial Corporation),
Dalrada Financial Corporation’s officers, and other unrelated parties. The proceedings are being held at the Superior Court of the
State of California, for the County of Orange – Central Justice Center.
| 4. | Business Combinations and Acquisition |
Bothof Brothers Construction Inc. (“Bothof”)
On October 17, 2022, the Company acquired
100% of the common stock of Bothof. The Company assumed the net liabilities of the Bothof in exchange for the employment services of the
selling shareholder. All consideration in the transaction requires the continued employment of the selling shareholder and thus is not
consideration transferred under ASC 805.
The Company entered into a 36-month employment
agreement with the selling shareholder for $
per share, to equal $
If at the end of the 24-month warrant distribution period, beginning
on the effective date of October 17, 2022 (the “Distribution Period”), the value of cashless warrants does not equate to $
(the “Target Amount”) in value, then the Company shall issue additional cashless warrants equal to the shortfall between the
value of the Warrants Consideration and the Target Amount (the “Valuation Shortfall”).
The following is a summary of the value of the Warrant Consideration
to the selling shareholder. The Company records the value on a straight line basis over the vesting period of 24-months:
| Warrant Consideration | $ |
The Warrant Consideration is contingent
on the selling shareholder’s continued employment with the Company; therefore, it is treated as stock-based compensation expense
and recognized ratably over a 24-month period.
The Company acquired Bothof to facilitate
the work of and expand the Dalrada Energy Services segment. Bothof’s selling shareholder holds certain licenses, construction/engineering
design expertise and management skills which will leverage synergies with Dalrada Energy Services.
The Bothof transaction was
accounted for as a business combination in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business
Combinations (“ASC 805”). The Company has determined preliminary fair values of the assets acquired and liabilities
assumed. These values are subject to change as we perform additional reviews of our assumptions utilized and expect to finalize any
changes to the purchase price allocation prior to filing the fiscal year 2023 year ending June 30, 2023.
| 20 |
The Company has made a preliminary allocation of the purchase
price regarding the acquisition related to the assets acquired and liabilities assumed as of the purchase date. The following table summarizes
the purchase price allocation:
| Preliminary Purchase Price |
||||
| Allocation | ||||
| Cash and cash equivalents | $ | |||
| Other receivables | ||||
| Right of use asset, net | ||||
| Property and equipment, net | ||||
| Trade name | ||||
| Accounts payable | ( |
) | ||
| Accrued liabilities | ( |
) | ||
| Deferred revenue | ( |
) | ||
| Right of use liability | ( |
) | ||
| Notes payable, current portion | ( |
) | ||
| Purchase price consideration | $ | |||
Trade name is amortized on a straight-line
basis over one month. The fair value estimate of the trade name for the purchase price allocation were based on an analysis of the present
value of future cash flows and relief from royalty method.
| 5. | Selected Balance Sheet Elements |
Inventories
Inventories consisted of the following As
of December 31, 2022 and June 30, 2022:
| September 30, | June 30, | |||||||
| 2022 | 2022 | |||||||
| Raw materials | $ | $ | ||||||
| Finished goods | ||||||||
| Inventory, Net | $ | $ | ||||||
Property and Equipment, Net
Property and equipment, net consisted of the following As of December 31, 2022 and June 30, 2022:
| December 31, | June 30, | |||||||
| 2022 | 2022 | |||||||
| Machinery and equipment | $ | $ | ||||||
| Leasehold improvements | ||||||||
| Computer and office equipment | ||||||||
| Less: Accumulated depreciation | ( |
) | ( |
) | ||||
| $ | $ | |||||||
| 21 |
Depreciation expense of $
for the six months ended, and $
in selling, general and administrative expenses in the statements of operations.
Intangible Assets, Net
Intangible assets, net consisted of the following
As of December 31, 2022 and June 30, 2022
| Developed | ||||||||||||||||||||||||
| technology, | ||||||||||||||||||||||||
| Curriculum | Customer | software, | ||||||||||||||||||||||
| development | Licenses | relationships | Trademarks | and other | Totals | |||||||||||||||||||
| Balance: June 30, 2022 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Additions | ||||||||||||||||||||||||
| Balance: December 31, 2022 | ||||||||||||||||||||||||
| Less: Accumulated amortization | ||||||||||||||||||||||||
| Balance: June 30, 2022 | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||
| Additions | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||
| Balance: December 31, 2022 | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||
| Net book value: December 31, 2022 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Developed | ||||||||||||||||||||||||
| technology, | ||||||||||||||||||||||||
| Curriculum | Customer | software, | ||||||||||||||||||||||
| development | Licenses | relationships | Trademarks | and other | Totals | |||||||||||||||||||
| Balance: June 30, 2021 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Additions | ||||||||||||||||||||||||
| Balance: June 30, 2022 | ||||||||||||||||||||||||
| Less: Accumulated amortization | ||||||||||||||||||||||||
| Balance: June 30, 2021 | ( |
) | ( |
) | ||||||||||||||||||||
| Additions | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||
| Balance: June 30, 2022 | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||
| Net book value: June 30, 2022 | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Amortization expense of $
for the six months ended, and $
in selling, general and administrative expenses in the statements of operations. The Company’s intangible assets are subject to
amortization and are amortized over the straight-line methods over their estimated period of benefit.
| 22 |
| 6. | Accrued Payroll Taxes |
As of December 31, 2022, and June 30, 2022,
the Company had $
The total balance for accrued payroll taxes has accumulated on a quarterly basis beginning on their respective quarterly filing dates.
had a calculated expiration date of 10 years according to the Internal Revenue Service statute of limitations. As the tax periods surpassed
their estimated expiration date, the Company removed the liability from the condensed consolidated balance sheets, and an equivalent amount
is recognized as “Gain on expiration of accrued payroll taxes” within other income on the condensed consolidated statements
of operations.
| 7. | Debt |
Notes Payable – Related Parties
The following is a summary of notes payable –
related parties on December 31, 2022 and June 30, 2022:
| December 31, 2022 | ||||||||
| Outstanding | Accrued | |||||||
| Principal | Interest | |||||||
| Related entity 1 | $ | $ | ||||||
| Related entity 2 | ||||||||
| Related entity 3 | ||||||||
| Related entity 4 | ||||||||
| Related entity 5 | ||||||||
| $ | $ | |||||||
| June 30, 2022 | ||||||||
| Outstanding | Accrued | |||||||
| Principal | Interest | |||||||
| Related entity 1 | $ | $ | ||||||
| Related entity 2 | ||||||||
| Related entity 3 | ||||||||
| Related entity 4 | ||||||||
| Related entity 5 | ||||||||
| $ | $ | |||||||
| 23 |
The following is a summary of current
and long-term notes payable – related parties as of December 31, 2022 and June 30, 2022:
| December 31, 2022 | ||||||||||||
| Current | Long-Term | |||||||||||
| Portion | Portion | Total | ||||||||||
| Related entity 1 | $ | $ | $ | |||||||||
| Related entity 2 | ||||||||||||
| Related entity 3 | ||||||||||||
| Related entity 4 | ||||||||||||
| Related entity 5 | ||||||||||||
| $ | $ | $ | ||||||||||
| June 30, 2022 | ||||||||||||
| Current | Long-Term | |||||||||||
| Portion | Portion | Total | ||||||||||
| Related entity 1 | $ | $ | $ | |||||||||
| Related entity 2 | ||||||||||||
| Related entity 3 | ||||||||||||
| Related entity 4 | ||||||||||||
| Related entity 5 | ||||||||||||
| $ | $ | $ | ||||||||||
All notes are unsecured, bear interest at
due 360 days from the date of issuance, ranging from
ownership with the Company’s Chief Executive Officer. Several of these notes are in default. The Company has not received any notices
of default or demands for payment. All notes are unsecured and those which are past-due are due on demand. As of December 31, 2022, and
June 30, 2022, total accrued interest for Notes Payable-Related Parties was $
interest expense from Notes Payable-Related Party for fiscal quarters ending December 31, 2022, and 2021, of $
In September 2021, the Company converted
$
2022, the remaining outstanding amounts of the related party notes payable were extended through September 30, 2026.
Notes Payable
Pacific Stem and IHG’s EIDL loans,
dated June 7, 2020 and May 10, 2020, respectively, include a
first two years (during which interest will accrue), and payments of principal and interest are made over the remaining 28 years. The
EIDL loan has no penalty for prepayment. The EIDL loans attach collateral which includes the following property that EIDL borrower owns
or shall acquire or create immediately upon the acquisition or creation thereof: all tangible and intangible personal property, including,
but not limited to: (a) inventory, (b) equipment, (c) instruments, including promissory notes (d) chattel paper, including tangible chattel
paper and electronic chattel paper, (e) documents, (f) letter of credit rights, (g) accounts, including health-care insurance receivables
and credit card receivables, (h) deposit accounts, (i) commercial tort claims, (j) general intangibles, including payment intangibles
and software and (k) as-extracted collateral as such terms may from time to time be defined in the Uniform Commercial Code. The security
interest the EIDL borrower grants includes all accessions, attachments, accessories, parts, supplies and replacements for the collateral,
all products, proceeds and collections thereof and all records and data relating thereto. The EIDL loans are technically in default as
a result of a change in ownership without SBA’s prior written consent. The Company has contacted the Small Business Administration
regarding the transfer of ownership and has not yet finalized the transfer of ownership.
| 24 |
Likido’s COVID-19 Government Loan
includes a
Watson’s outstanding loans includes
an interest rate of
monthly payments in the amount of $
of Credit includes an
Convertible Notes
On February 4, 2022, the Company”
entered into a securities purchase agreement (“SPA”) with YA II PN, Ltd. (the “Buyer”) for issuance and sale of
convertible debentures (the “Debentures”) in the aggregate principal amount of $
of $
The Debentures have a fixed conversion price
of $
payable under the Debentures will mature 15 months from the issuance date (the “Maturity Date”), unless earlier converted
or redeemed by the Company. At any time before the Maturity Date, the Buyer may convert the Debentures into the Company’s common
stock at the Fixed Conversion Price. Beginning on May 1, 2022, and continuing on the first day of each calendar month thereafter through
February 1, 2023, the Principal amount plus a 20% redemption premium and plus accrued and unpaid interest will be subject to monthly redemption
(“Monthly Redemption”). Under Monthly Redemption, the Company shall redeem an applicable redemption amount in accordance with
the redemption schedule provided in the Debenture, which is subject to pro rata adjustment to reflect the conversion or redemption otherwise
effected pursuant to the Debenture contemporaneous with or prior to the scheduled redemption date, in cash, in common stock through the
Buyer’s conversion of the Debenture (at any time after the applicable redemption date), or a combination of both at the Company’s
option. With respect to each Monthly Redemption all or partially in common stock, the conversion price shall be the lower of (1) the Fixed
Conversion Price, or (2) 100% of the lowest daily VWAP during the ten consecutive trading days immediately preceding the date of conversion
(the “Variable Conversion Price”). The conversion price shall be adjusted from time to time pursuant to the other terms and
conditions of the Debenture. At no point will the conversion price be less than $0.01.
The Company, in its sole discretion, may
redeem in cash amounts owed under the Debentures prior to the Maturity Date by providing the Buyer with advance written notice at least
10 trading days prior to such redemption, provided that the Shares are trading below the Fixed Conversion Price at the time of the redemption
notice. The Company shall pay a redemption premium equal to 20% (the “Redemption Premium”) of the principal amount being redeemed.
In connection with the Debenture, the Company
issued to the Buyer warrants equal to 30% coverage exercisable at a strike price equal to the Fixed Conversion Price determined at the
date of the initial closing, or a total of warrants to purchase common stock. The Warrants shall be exercisable for four years
and shall be exercised on a cash basis provided the Company is not in default and the shares underlying the Warrant are subject to an
effective registration statement at the time of the Investor’s exercise. There is a cashless provision.
The Company analyzed the conversion feature
of the warrants and determined they did not need to be bifurcated under ASC 815. Based on adoption of ASU-2020-06, the debt will be accounted
for as traditional convertible debt with no portion of the proceeds attributed to the conversion feature. The warrants issued with the
debt will be accounted for as a debt discount and will be amortized as interest expense over the life of the note. The warrants were valued
using the Monte Carlo model and the Company recognized $
| Volatility | Risk Free Rate | Stock Price | Term Remaining (Yrs) |
| % | % | $ |
In connection with the Debenture,
the Company incurred $
at a fair value of $
| 25 |
The total debt discounts related to the
convertible notes were $
December 31, 2022, the Company amortized $
The total redemption premiums related to
the convertible notes were $
quarter ended December 31, 2022, the Company paid redemption premiums related of $
In addition, the Company recorded accretion of $
During the quarter ended December 31, 2022,
the Company redeemed $
common stock were issued through the stock redemption.
The net balance of the convertible note was $
as of December 31 and June 30, 2022, respectively.
| 8. | Convertible Note Payable – Related Parties |
On June 30, 2019, the Company issued a convertible
note for $
bears interest at
included a conversion feature of the outstanding balance at $
common shares on the date of the agreement, there was no beneficial conversion feature. As of December 31, 2021, the principal balance
was $
In September 2021, the Company converted,
along with the related party notes above, principal of $
preferred stock.
| 9. | Related Party Transactions |
During the
three and six months ended December 31, 2022, the Company received cash funding or expenses paid on behalf of the Company from related
parties totaling $
In most cases, promissory notes were created on a quarterly basis totaling the amounts referenced above. The remaining amounts are included
within accounts payable – related parties for which the related parties expect repayment. As of December 31, 2022, amounts included
within accounts payable and accrued liabilities – related parties for expense and payroll advances were $
expenses and payables relate to three corporations that the Company has classified as related parties. These corporations are all owned
and/or operated by an individual who has a familial relationship with the Company’s CEO.
During the three and six months ended December
31, 2022, the Company incurred expenses from services provided by related parties totaling $
provided to the Company include management services, payroll processing services, rent and chartered flight services. As of December 31,
2022, amounts included within accounts payable and accrued liabilities – related parties for expense and payroll related advances
were $
Company’s CEO can exercise control, or is an individual who has a familial relationship with the Company’s CEO.
During the three and six months ended December
31, 2022, the Company incurred $
31, 2022, amounts included within accounts payable and accrued liabilities for services performed by non-employee board members was $
| 26 |
The following is a summary of revenues recorded by the Companies
from related parties with common ownership:
| Three Months Ended | Six Months Ended | |||||||||||||||
| December 31, | December 31, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Dalrada Health | $ | $ | $ | $ | ||||||||||||
| Solas | ||||||||||||||||
| Dalrada Energy Services | ||||||||||||||||
| Prakat | ||||||||||||||||
| Bothof Brothers | ||||||||||||||||
| $ | $ | $ | $ | |||||||||||||
See Notes 6, 7, 8, 9, 10, and 11 for additional related party transactions.
| 10. | Preferred Stock |
The Company has shares authorized
of Series Preferred Stock, par value, $, of which shares of Series F Preferred Stock (at a fair value of $170) were issued to
the CEO in December 2019 and shares of Series G Preferred Stock were issued pursuant to the conversion of $
related party notes and accrued interest into preferred shares in February 2022.
Each share of Series F Super Preferred Stock
entitles the holder to the greater of (i) one hundred thousand votes for each share of Series F Super Preferred Stock, or (ii) the number
of votes equal to the number of all outstanding shares of Common Stock, plus one additional vote such that the holders of Series F Super
Preferred Stock shall always constitute most of the voting rights of the Corporation. In any vote or action of the holders of the Series
F Super Preferred Stock voting together as a separate class required by law, each share of issued and outstanding Series F Super Preferred
Stock shall entitle the holder thereof to one vote per share. The holders of Series F Super Preferred Stock shall vote together with the
shares of Common Stock as one class.
share converts into 2,177 shares of common stock (equivalent to converting the related equity dollars into common shares at $0.30 per
share).
| 11. | Stockholders’ Equity |
Common Stock Transactions – Fiscal
2022
In August 2021, December 2021, March 2022,
and May 2022, the Company issued shares of common stock related to the acquisition of Pacific Stem Business.
In October 2021, December 2021, March 2022,
and May 2022, the Company issued shares of common stock related to the acquisition International Health Group.
In September 2021, the Company repurchased
shares of common stock from a Company employee for a total fair value of $
In September 2021, the Company issued
shares to the board of directors pursuant to the 2020 stock compensation plan. The shares of common stock were granted
on July 19, 2021, at $ per share for a total fair value of $.
| 27 |
In October 2021, the Company issued shares to Vivera
pursuant to the Pala agreement. See “Note 3. Investment in Pala Diagnostics” for additional information related to the issuance
of stock related to the Pala Diagnostics joint venture.
In December 2021, the Company issued
shares of common stock pursuant to a consulting agreement for health care management services. The shares of common stock were
granted on December 20, 2021, at $ per share for a total fair value of $.
In December 2021, the Company cancelled
common shares issues to its Directors and an advisor and returned them to treasury.
to the Directors and the advisor in place of the common shares that were cancelled. See “Note 12. Stock-Based Compensation”
for additional information related to the issuance of the warrants.
In March 2022, the Company issued
shares of common stock pursuant to a consulting agreement for a total fair value of $.
In June 2022, the Company issued
shares of common stock pursuant to the conversion of $
In June 2022, the Company issued
shares of common stock pursuant to the conversion of $
In June 2022, the Company issued shares of
common stock related to the acquisition of Watson.
Common Stock Transactions – Fiscal 2023
In July, November and December, the Company
issued a total of shares of common stock related to the acquisition of DepTec (SSCa).
In July 2022, the Company issued
common stock shares pursuant to a consulting agreement for management services.
In September and December, the Company issued
a total of shares of common stock related to the acquisition of Watson.
In September and December, the Company issued
a total of shares of common stock related to the acquisition of International Health Group.
In September and December, the Company issued
a total of shares of common stock related to the acquisition of Pacific Stem Business.
During the six months ended December 31, 2022, the Company issued
shares of common stock pursuant to the conversion of $ of convertible debt and its related premium and interest expense.
| 12. | Stock-Based Compensation |
Dalrada Financial Corp 2020 Stock Compensation
Plan
On July 9, 2020, the Board authorized the
Dalrada Financial Corp 2020 Stock Compensation Plan to be used to compensate the company board of directors. The plan allocates the issuance
of up to shares. On February 25, 2021, the Company amended the plan to issue up to shares and issued an aggregate
of common shares, or 500,000 shares to each board member (9). shares of common stock were granted on July 9, 2020,
at $0.08 per share and shares of common stock were granted on February 25, 2021, at $0.45 per share, for a total fair value
of $
| 28 |
On May 10, 2021, the Company granted
options to purchase common stock to its Chief Financial Officer with an exercise price of $ per share. The options expire in ten years
after issuance. The fair value of the options granted was $ per share, or $
On November 10, 2021, the Company cancelled
shares issued to the Board of Directors and issued cashless warrants. cashless warrants were to vest immediately,
and 2,000,000 cashless warrants were to vest over a 12-month period. All cashless warrants carry a $0.45 exercise price and a ten-year
term. The Company recorded stock-based compensation related to the 6,500,000 shares in prior periods. The issuance of the warrants was
treated as a modification and, as a result of the value of the stock-based compensation of the shares cancelled being greater than the
stock-based compensation related to the cashless warrants issued, no additional stock-based compensation expense was recorded for the
year ended June 30, 2022.
On November 30, 2021, the Company issued
cashless warrants to employees and consultants for services performed. cashless warrants vested immediately and 1,450,000
cashless warrants vests over a 36-month period. The cashless warrants include an exercise price of $
expire in ten years after issuance. The fair value of the cashless warrants granted was $ per share, or $
using the Black-Scholes model.
On February 16, 2022, the Company issued
cashless warrants to new members of the Board of Directors. The cashless warrants vest over a 12-month period and hold an exercise
price of $
$ per share, or $
On August 11, 2022, the Company
issued cashless warrants to new members of the Board of Directors and Advisors. cashless warrants vest over a
12-month period and hold an exercise price of $
exercise price of $
exercise price of $0.45 per share. The cashless warrants expire in ten years after issuance. The fair value of the cashless warrants
granted was $ per share, or $
On October 7, 2022, the Company issued
cashless warrants to the selling shareholder of Bothof in connection with acquisition of Bothof. The warrants vest over a 24-month period
and hold an exercise price of $
warrants granted was $ per share, or $
on the selling shareholder’s continued employment with the Company; therefore, it is treated as stock-based compensation expense
and recognized ratably over a 24-month period.
| Common Stock Warrants |
Weighted Average Exercise Price |
|||||||
| Outstanding – June 30, 2021 | $ | |||||||
| Granted | ||||||||
| Exercised | ||||||||
| Forfeited | ||||||||
| Outstanding – June 30, 2022 | $ | |||||||
| Granted | ||||||||
| Exercised | ||||||||
| Forfeited | ||||||||
| Outstanding – December 31, 2022 | $ | |||||||
| Exercisable – December 31, 2022 | $ | |||||||
| 29 |
During the six months ended December 31,
2022 and 2021, stock-based compensation was $ and $, respectively. Total unrecognized compensation cost of non-vested
options was $ on December 31, 2022, which will be recognized through fiscal year ended 2025.
| 13. | Segment Reporting |
Segment information for the six months ended
December 31, 2022, and 2021 is as follows:
| Six Months Ended December 31, 2022 | ||||||||||||||||||||||||
| Dalrada Health | Dalrada Energy | Dalrada Precision Manufacturing | Dalrada Techhnologies | Corporate | Consolidated | |||||||||||||||||||
| Revenues | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Income (Loss) from Operations | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||
| Six Months Ended December 31, 2021 | ||||||||||||||||||||||||
| Dalrada Health | Dalrada Energy | Dalrada Precision Manufacturing | Dalrada Techhnologies | Corporate | Consolidated | |||||||||||||||||||
| Revenues | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Income (Loss) from Operations | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||
Geographic Information
The following table presents revenue
by country:
| Six Months Ended | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| United States | $ | $ | ||||||
| Scotland | ||||||||
| India | ||||||||
| $ | $ | |||||||
The following table presents inventories
by country:
| December 31, | June 30, | |||||||
| 2022 | 2022 | |||||||
| United States | $ | $ | ||||||
| Scotland | ||||||||
| $ | $ | |||||||
| 30 |
The following table presents property
and equipment, net, by country:
| December 31, | June 30, | |||||||
| 2022 | 2022 | |||||||
| United States | $ | $ | ||||||
| Scotland | ||||||||
| India | ||||||||
| $ | $ | |||||||
| 14. | Commitments and Contingencies |
Lease Commitments
The Company determines if an arrangement
is a lease at inception. This determination generally depends on whether the arrangement conveys to the Company the right to control the
use of an explicitly or implicitly identified fixed asset for a period of time in exchange for consideration. Control of an underlying
asset is conveyed to the Company if the Company obtains the rights to direct the use of and to obtain substantially all the economic benefits
from using the underlying asset. The Company has lease agreements which include lease and non-lease components, which the Company has
elected to account for as a single lease component for all classes of underlying assets. Lease expense for variable lease components is
recognized when the obligation is probable.
Operating lease right of use (“ROU”)
assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Operating
lease payments are recognized as lease expense on a straight-line basis over the lease term. The Company primarily leases buildings (real
estate) which are classified as operating leases. ASC 842 requires a lessee to discount its unpaid lease payments using the interest rate
implicit in the lease or, if that rate cannot be readily determined, its incremental borrowing rate. As an implicit interest rate is not
readily determinable in the Company’s leases, the incremental borrowing rate is used based on the information available at commencement
date in determining the present value of lease payments.
The lease term for all the Company’s leases
includes the non-cancellable period of the lease plus any additional periods covered by either a Company option to extend (or not to terminate)
the lease that the Company is reasonably certain to exercise, or an option to extend (or not to terminate) the lease controlled by the
lessor. Options for lease renewals have been excluded from the lease term (and lease liability) for the majority of the Company’s leases
as the reasonably certain threshold is not met.
Lease payments included in the measurement
of the lease liability are comprised of fixed payments, variable payments that depend on index or rate, and amounts probable to be payable
under the exercise of the Company option to purchase the underlying asset if reasonably certain.
Variable lease payments not dependent on
a rate or index associated with the Company’s leases are recognized when the event, activity, or circumstance in the lease agreement on
which those payments are assessed as probable. Variable lease payments are presented as operating expenses in the Company’s income statement
in the same line item as expense arising from fixed lease payments. As of and during the six months ended December 31, 2022, management
determined that there were no variable lease costs.
| 31 |
Right of Use Asset
In May 2020, the Company entered into a
five-year lease agreement to lease a commercial building in Escondido, California. The building is owned by a related party. The Company
recognized a right of use asset and liability of $
interest is $
a new five-year lease agreement to lease a commercial building in Escondido, California beginning July 1, 2022. The Company recognized
a right of use asset and liability of $
Imputed interest is $
In May 2020, the Company entered into three-year
lease agreement to lease a warehouse in Brownsville, Texas. The Company recognized a right of use asset and liability of $
used an effective borrowing rate of
The Company’s Prakat subsidiary entered
into a lease agreement to lease office space through September 2026. The Company recognized a right of use asset and liability of $
and used an effective borrowing rate of
In August 2020, the Company’s Likido
subsidiary entered in a new operating agreement for warehouse space. The lease matured in July 2021. Upon maturity, rent payments are
made on a month-to-month basis.
In June 2017, the Company’s IHG subsidiary
entered a lease for 3 separate office suites in San Diego, California. The lease expired in January 2022.
In May 2021, the Company’s PSC subsidiary
entered into a three-year and 6-month lease agreement to lease a medical office space in Poway, California. The Company recognized a right
of use asset and liability of $
In January 2022, the Company’s IHG
subsidiary entered into a five-year and 5-month lease agreement to lease a medical office space in Chula Vista, California. The Company
recognized a right of use asset and liability of $
In May 2022, the Company’s IHG subsidiary
entered into a six-year and 3-month lease agreement to lease an office space in San Diego, California. The Company recognized a right
of use asset and liability of $
In August 2020, the Company’s
DepTec subsidiary entered into a five-year lease agreement to lease office space. The Company recognized a right of use asset and liability
of $
In May 2021, the Company’s Watson
subsidiary entered into a three-year lease agreement to lease a building in Florence, Alabama. The Company recognized a right of use asset
and liability of $
In July 2022, the Company’s Empower
subsidiary entered into a five-year lease agreement to lease a commercial building in Escondido, California. The building is owned by
a related party. The Company recognized a right of use asset and liability of $
the calculation. Imputed interest is $25,838. The lease agreement matures in June 2027.
| 32 |
In October 2022, the Company acquired Bothof
Brothers which had an existing lease to a commercial building in Escondido, California. The building is owned by a related party. Upon
acquisition, the company recognized a right of use asset and liability of $
the calculation. Imputed interest is $
Legal Proceedings
Dalrada Health Products (“Dalarada
Health”), formed a joint venture with Vivera Pharmaceuticals, Inc. (“Vivera”), whereby Vivera is the minority member.
As the managing member of the joint venture, Dalrada Health Products, in December 2021, filed suit against Vivera and Paul Edalat, Vivera’s
Chairman and CEO, for misappropriation of funds on behalf of the joint venture in the amount of $
against Dalrada Health Products, Vivera filed a separate complaint against Dalrada Financial Corporation, Empower Genomics (a subsidiary
of Dalrada Financial Corporation), Dalrada Financial Corporation’s officers, and other unrelated parties. The proceedings are being
held at the Superior Court of the State of California, for the County of Orange – Central Justice Center.
See Note 15. Subsequent Events regarding
the Likido arbitration resolution.
15. Subsequent Events
On January 10, 2023, a resolution was concluded in the dispute between
Likido Ltd. and MAPtech PACKAGING LIMITED (“MAPtech”) whereby Likido shall pay sum of $429,987 in damages, $42,374 in legal
costs, and £19,754 as reimbursement for arbitration fees and expenses paid on account by MAPtech. Likido Ltd. shall pay interest
at a rate of 8% per annum simple on all sums due pursuant to award, beginning 30 days from the date of the award. The Company has accrued
a total of $496,224 related to the dispute as of December 31, 2022.
| 33 |
Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations of Dalrada Financial Corporation for the Three and Six Months Ended December 31, 2022 and 2021.
The following discussion and analysis of our
financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and related notes
to the Consolidated Financial Statements of this Quarterly Report on Form 10-Q (this “Quarterly Report”) and our Annual Report
on Form 10-K for the year ended June 30 2022. This discussion contains forward-looking statements that involve risks and uncertainties.
Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include,
but are not limited to, those identified below and those discussed in Item 1A “Risk Factors” of our Quarterly Report.
You should read the following discussion and analysis
in conjunction with our financial statements, including the notes thereto, included in this Report. Some of the information contained
in this Report may contain forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1933, as amended
(the “Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This information
may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance, or achievements
to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking
statements which involve assumptions and describe our future plans, strategies, and expectations, are generally identifiable by the use
of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,”
“believe,” “intend” or “project” or the negative of these words or other variations on these words
or comparable terminology. These forward-looking statements are based on assumptions that may be incorrect, and there can be no assurance
that the projections included in these forward-looking statements will come to pass. Our actual results could differ materially from those
expressed or implied by the forward-looking statements as a result of various factors. We undertake no obligation to update publicly any
forward-looking statements for any reason, even if new information becomes available or other events occur in the future.
Overview
Moving the world forward takes bold resolve that turns
ideas into actions and builds real-time solutions that positively impact people and the planet. Dalrada accelerates positive change for
current and future generations by harnessing true potential and developing products and services that become transformative innovations.
Dalrada Financial Corporation, (“Dalrada”),
was incorporated in September 1982 under the laws of the State of California. It was reincorporated in May 1983 under the laws of the
State of Delaware and reincorporated again on May 5, 2020, under the laws of the state of Wyoming. Dalrada Financial Corporation trades
under the symbol, OTCQB: DFCO.
Since Dalrada’s inception, the Company has grown
its footprint to include the unique business divisions: Dalrada Health, Dalrada Energy Services, Dalrada Precision Manufacturing, and
Dalrada Technologies. Within each of these divisions, the Company drives transformative innovation while creating solutions that are sustainable,
accessible, and affordable. Dalrada’s global solutions directly address climate change, gaps in the health care industry, and technology
needs that facilitate a new era of human behavior and interaction and ensure a bright future for the world around us.
Our net loss and limited working capital raise substantial
doubt about our ability to continue as a going concern. We incurred a net loss of $4,482,165 and $7,652,341 during the three and six months
ended December 31, 2022, respectively. We will be required to raise substantial capital to fund our capital expenditures, working capital,
and other cash requirements. We will continue to rely on related parties and seek other financing to complete our business plans. The
successful outcome of future financing activities cannot be determined at this time and there are no assurances that, if achieved, we
will have sufficient funds to execute our intended business plan or generate positive operational results.
In addition to our current deficit, we may incur additional
losses during the foreseeable future, until we are able to successfully execute our business plan. There is no assurance that we will
be able to obtain additional financing through private placements and/or public offerings necessary to support our working capital requirements.
To the extent that funds generated from any private placements and/or public offerings are insufficient, we will have to raise additional
working capital through other sources, such as bank loans and/or financings. No assurance can be given that additional financing will
be available, or if available, will be on acceptable terms.
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Macroeconomic conditions, including inflation, rising
interest rates and currency fluctuations, have direct and indirect impacts on the Company’s business. The Company believes these
factors have impacted, and could in the future materially impact, the Company’s results of operations and financial condition.
We are incurring increased costs as a result of being
a publicly traded company. As a public company, we incur significant legal, accounting and other expenses that we did not incur as a private
company. In addition, the Sarbanes-Oxley Act of 2002, as well as new rules subsequently implemented by the Securities and Exchange Commission,
have required changes in corporate governance practices of public companies. These new rules and regulations have increased our legal
and financial compliance costs and have made some activities more time-consuming and costly. For example, as a result of becoming a public
company, we have created additional board committees and have adopted policies regarding internal controls and disclosure controls and
procedures. In addition, we have incurred additional costs associated with our public company reporting requirements. As a result of the
new rules, it may become more difficult for us to attract and retain qualified persons to serve on our Board of Directors or as executive
officers. We cannot predict or estimate the amount of additional costs we may incur as a result of being a public company or the timing
of such costs.
RESULTS OF OPERATIONS
Three Months Ended December 31, 2022 and 2021
The following table sets forth the results of our
operations for the three months ended December 31, 2022 and 2021:
| Three Months Ended December 31, 2022 | ||||||||||||||||||||||||
| Dalrada Health | Dalrada Energy | Dalrada Precision Manufacturing | Dalrada Techhnologies | Corporate | Consolidated | |||||||||||||||||||
| Revenues | $ | 2,006,894 | $ | 1,731,163 | $ | 1,034,478 | $ | 480,585 | $ | – | $ | 5,253,120 | ||||||||||||
| Income (Loss) from Operations | (905,079 | ) | 626,737 | (973,598 | ) | (94,466 | ) | (3,435,683 | ) | (4,782,089 | ) | |||||||||||||
| Three Months Ended December 31, 2021 | ||||||||||||||||||||||||
| Dalrada Health | Dalrada Energy | Dalrada Precision Manufacturing | Dalrada Techhnologies | Corporate | Consolidated | |||||||||||||||||||
| Revenues | $ | 4,570,080 | $ | – | $ | 241,758 | $ | 635,426 | $ | – | $ | 5,447,264 | ||||||||||||
| Income (Loss) from Operations | 2,005,014 | – | (796,240 | ) | (5,562 | ) | (3,105,331 | ) | (1,902,119 | ) | ||||||||||||||
| Increase (Decrease) for the Three Months Ended December 31, 2022 | ||||||||||||||||||||||||
| Dalrada Health | Dalrada Energy | Dalrada Precision Manufacturing | Dalrada Techhnologies | Corporate | Consolidated | |||||||||||||||||||
| Revenues | $ | (2,563,186 | ) | $ | 1,731,163 | $ | 792,720 | $ | (154,841 | ) | $ | – | $ | (194,144 | ) | |||||||||
| Income (Loss) from Operations | (2,910,093 | ) | 626,737 | (177,358 | ) | (88,904 | ) | (330,352 | ) | (2,879,970 | ) | |||||||||||||
| 35 |
Revenues and Cost of Revenues
Revenues
Dalrada Health:
Revenues for the three months ended December 31, 2022,
was $2,006,894 compared with revenue of $4,570,080 during the three months ended December 31, 2021, a decrease of $2,563,186, or 56%.
The decrease in revenues was primarily attributable to the decrease in demand for Covid diagnostic testing.
Dalrada Energy:
Revenues for the three months ended December 31, 2022,
was $1,731,163 which includes revenues related to Bothof Brothers in the amount of $722,766.
Dalrada Precision Manufacturing:
Revenues for the three months ended December 31, 2022,
was $1,034,478 compared with revenue of $241,758 during the three months ended December 31, 2021, an increase of $792,720, or 328%. The
increase in revenues was primarily attributable to the increased sales of the Dalrada Precision Parts sector.
Dalrada Technologies:
Revenues for the three months ended December 31, 2022,
was $480,585 compared with revenue of $635,426 during the three months ended December 31, 2021, a decrease of $154,841, or 24%. The decrease
in revenue was a result of completing customer contracts while not entering into larger, new contracts.
Costs and Expenses
Cost of Revenues
Dalrada Health:
Cost of Revenues for the three months ended December
31, 2022 was $1,232,690 compared to cost of revenues of $1,080,093 during the three months ended December 31, 2021, an increase of $152,597,
or 14%. The increase in cost of revenues was primarily a result of rising labor costs and a decrease in demand.
Dalrada Energy:
Cost of Revenues for the three months ended December
31, 2022 was $715,180 and consisted primarily of Bothof Brothers construction costs, a newly combined subsidiary, for the three months
ended December 31, 2022.
Dalrada Precision Manufacturing:
Cost of Revenues for the three months ended December
31, 2022 was $624,203 compared to cost of revenues of $438,624 during the three months ended December 31, 2021, an increase of $185,579,
or 42%. The increase in cost of revenues was primarily a result of sales growth in the Precision Parts sector.
Dalrada Technologies:
Cost of Revenues for the three months ended December
31, 2022 was $383,059 compared to cost of revenues of $537,624 during the three months ended December 31, 2021, a decrease of $154,565,
or 29%. The decrease in cost of revenues was primarily a result of the decrease in sales volume for the period.
Operating Expenses
Dalrada Health:
Operating expenses for the three months ended December
31, 2022 was $1,679,283 compared to operating expenses of $1,484,973 during the three months ended December 31, 2021, an increase of $194,310,
or 13%. The increase in operating expenses was a result Dalrada Health’s acquisition of Watson in June 2022.
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Dalrada Energy:
Operating expenses for the three months ended December
31, 2022 was $389,246 and consists of $136,495 of legal and professional fees for ongoing projects.
Dalrada Precision Manufacturing:
Operating expenses for the three months ended December
31, 2022 was $1,383,873 compared to operating expenses of $599,374 during the three months ended December 31, 2021, an increase of $784,499,
or 131%. The increase in operating expenses was a result of segment expansion of Precision Parts and acquisition of DepTec.
Dalrada Technologies:
Operating expenses for the three months ended December
31, 2022 was $191,992 compared to operating expenses of $103,364 during the three months ended December 31, 2021, an increase of $88,628,
or 86%. The increase in operating expenses was a result of rising labor costs.
Corporate:
Operating expenses for the three months ended December
31, 2022 was $3,435,684 compared to operating expenses of $3,046,753 during the three months ended December 31, 2021, an increase of $388,931,
or 13%. During the three months ended December 31, 2022, the Company recorded stock compensation expense of $901,721 to consultants, employees,
executives, and the Board of Directors, which is included in operating expenses.
Other Income (Expense)
Other income (expense) consists of penalties and interest
within interest expense on the consolidated statements of operations. A gain on the expiration of accrued tax liabilities in the amount
of $2,037,712 was recorded for the three months ended December 31, 2022.
Net Income (Loss)
Net loss for the three months ended December 31, 2022
was $4,482,165 compared to net loss of $2,126,216 for the three months ended December 31, 2021.
Six Months Ended December 31, 2022 and 2021
The following table sets forth the results of our
operations for the six months ended December 31, 2022 and 2021:
| Six Months Ended December 31, 2022 | ||||||||||||||||||||||||
| Dalrada Health | Dalrada Energy | Dalrada Precision Manufacturing | Dalrada Techhnologies | Corporate | Consolidated | |||||||||||||||||||
| Revenues | $ | 4,427,618 | $ | 1,752,258 | $ | 2,174,712 | $ | 1,156,299 | $ | – | $ | 9,510,887 | ||||||||||||
| Income (Loss) from Operations | (961,131 | ) | 427,175 | (1,623,362 | ) | (64,362 | ) | (5,516,587 | ) | (7,738,267 | ) | |||||||||||||
| Six Months Ended December 31, 2021 | ||||||||||||||||||||||||
| Dalrada Health | Dalrada Energy | Dalrada Precision Manufacturing | Dalrada Techhnologies | Corporate | Consolidated | |||||||||||||||||||
| Revenues | $ | 8,702,300 | $ | – | $ | 257,299 | $ | 1,090,018 | $ | – | $ | 10,049,617 | ||||||||||||
| Income (Loss) from Operations | 4,218,191 | – | (1,344,454 | ) | (103,357 | ) | (5,525,776 | ) | (2,755,396 | ) | ||||||||||||||
| Increase (Decrease) for the Six Months Ended December 31, 2022 | ||||||||||||||||||||||||
| Dalrada Health | Dalrada Energy | Dalrada Precision Manufacturing | Dalrada Techhnologies | Corporate | Consolidated | |||||||||||||||||||
| Revenues | $ | (4,274,682 | ) | $ | 1,752,258 | $ | 1,917,413 | $ | 66,281 | $ | – | $ | (538,730 | ) | ||||||||||
| Income (Loss) from Operations | (5,179,322 | ) | 427,175 | (278,908 | ) | 38,995 | 9,189 | (4,982,871 | ) | |||||||||||||||
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Revenues and Cost of Revenues
Revenues
Dalrada Health:
Revenues for the six months ended December 31, 2022,
was $4,427,618 compared with revenue of $8,702,300 during the six months ended December 31, 2021, a decrease of $4,274,682, or 49%. The
decrease in revenues was primarily attributable to the decrease in demand for Covid diagnostic testing.
Dalrada Energy:
Revenues for the six months ended December 31, 2022,
was $1,752,258 consisting of $1,029,492 of Dalrada Energy Service revenue generated and $722,766 of Bothof Brothers revenue generated.
Dalrada Precision Manufacturing:
Revenues for the six months ended December 31, 2022,
was $2,174,712 compared with revenue of $257,299 during the six months ended December 31, 2021, an increase of $1,917,413, or 745%. The
increase in revenues was primarily attributable to the expansion of the Precision Parts and DepTec segment expansions.
Dalrada Technologies:
Revenues for the six months ended December 31, 2022,
was $1,156,299 compared with revenue of $1,090,018 during the six months ended December 31, 2021, an increase of $66,281, or 6%. The increase
in revenue was a result of timing differences in project completion between 2022 and 2021.
Backlog
Backlog represents revenue we expect to realize for
work completed by our consolidated subsidiaries. Backlog is expressed in terms of gross revenue and, therefore, may include significant
estimated amounts of third party or pass-through costs to subcontractors and other parties. We record revenue as goods are delivered,
services are performed or when energy savings are obtained on certain DES contracts, as described in Note 2. (m), Revenue Recognition,
in the notes to our consolidated financial statements. We calculate backlog without regard to possible project reductions or expansions
or potential cancellations until such changes or cancellations occur. No assurance can be given that we will ultimately realize our full
backlog. Backlog fluctuates due to the timing of when contracts are awarded and contracted and when contract revenue is recognized. Our
backlog by division is presented in the following table:
| As of December 31, | ||||||||||||||||
| 2022 | 2021 | |||||||||||||||
| Backlog by division: | ||||||||||||||||
| Dalrada Energy Services | 27,164,000 | 52% | – | 0% | ||||||||||||
| Dalrada Precision Manufacturing | 22,500,000 | 43% | – | 0% | ||||||||||||
| Dalrada Health Products | 2,400,000 | 5% | – | 0% | ||||||||||||
| Total backlog | 52,064,000 | 100% | – | 0% | ||||||||||||
Dalrada Energy Services contracts’ backlog is
comprised of management and construction services revenue which occur over a one-year period as well as energy savings revenue which occurs
over a 20-year period. Dalrada Precision Manufacturing and Dalrada Health Products backlog occur over a one-year period.
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Costs and Expenses
Cost of Revenues.
Dalrada Health:
Cost of Revenues for the six months ended December
31, 2022 was $2,263,109 compared to cost of revenues of $2,014,034 during the six months ended December 31, 2021, an increase of $249,075,
or 12%. The increase in cost of revenues was primarily a result of a growth in business of Watson, which incurs a higher cost of revenue
than the Covid diagnostic testing that was primarily prevalent for the six months ended December 31, 2021.
Dalrada Energy:
Cost of Revenues for the six months ended December
31, 2022 was $715,180 and consisted primarily of Bothof Brothers construction costs, a newly acquired subsidiary.
Dalrada Precision Manufacturing:
Cost of Revenues for the six months ended December
31, 2022 was $1,505,467 compared to cost of revenues of $478,732 during the six months ended December 31, 2021, an increase of $1,026,735,
or 214%. The increase in cost of revenues was primarily a result of sales growth in the Precision Parts sector.
Dalrada Technologies:
Cost of Revenues for the six months ended December
31, 2022 was $827,704 compared to cost of revenues of $767,910 during the six months ended December 31, 2021, an increase of $59,794,
or 8%. The increase is a result of wage and salary inflation.
Operating Expenses.
Dalrada Health:
Operating expenses for the six months ended December
31, 2022 was $3,125,640 compared to operating expenses of $2,470,075 during the six months ended December 31, 2021, an increase of $655,565,
or 27%. The increase in operating expenses was a result of the acquisition of Watson Rx and reallocating personnel from the Corporate
division to the Dalrada Health division.
Dalrada Energy:
Operating expenses for the six months ended December
31, 2022 was $609,903 and consists of $339,044 of legal and professional fees for ongoing projects.
Dalrada Precision Manufacturing:
Operating expenses for the six months ended December
31, 2022 was $2,292,607 compared to operating expenses of $1,123,021 during the six months ended December 31, 2021, an increase of $1,169,586,
or 104%. The increase in operating expenses was a result of acquiring DepTec as well as reallocating personnel from the Corporate division
to the Dalrada Precision Manufacturing division.
Dalrada Technologies:
Operating expenses for the six months ended December
31, 2022 was $392,957 compared to operating expenses of $425,465 during the six months ended December 31, 2021, a decrease of $32,508,
or 8%.
Corporate:
Operating expenses for the six months ended December
31, 2022 was $5,516,587 compared to operating expenses of $5,525,776 during the six months ended December 31, 2021, a decrease of 9,189.
During the six months ended December 31, 2022, the Company recorded stock compensation expense of $1,369,238 to consultants, employees,
executives and the Board of Directors, which is included in operating expenses.
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Other Income (Expense)
Other income (expense) consists of penalties and interest
within interest expense on the consolidated statements of operations. A gain on the expiration of accrued tax liabilities in the amount
of $2,090,978 was recorded for the six months ended December 31, 2022.
Net Income (Loss)
Net loss for the six months ended December 31, 2022
was $7,652,341 compared to net loss of $3,044,311 for the six months ended December 31, 2021.
Liquidity and Capital Resources
As of December 31, 2022, the Company had an accumulated
deficit of $128,467,297. The Company continues to incur significant losses and raises substantial doubt regarding the Company’s
ability to continue as a going concern. We anticipate needing additional liquidity during the next twelve months to fund operations, expand
our subsidiaries, expand the growth of the COVID-19 testing segment, continue the commercialization of our Likido heating & cooling
units and growing the Dalrada Energy Services subsidiary. Management is planning to support operations by raising capital, and by accelerating
sales & marketing efforts of high-margin heating & cooling units, precision parts, Dalrada Energy Services, DepTec’s deposition
systems and COVID-19 testing. The continuation of the Company as a going concern is dependent upon the continued financial support from
its management, its ability to obtain the necessary debt or equity financing and generate profitable operations from the Company’s
planned future operations. We will continue to rely on equity sales of our common shares in order to continue to fund our business operations.
Issuances of additional shares will result in dilution to existing stockholders. There is no assurance that we will achieve any additional
sales of the equity securities or arrange for debt or other financing to fund planned acquisitions and activities and there are no plans
to induce conversion of existing debt. There are no assurances that our plans will be successful. These financial statements do not include
any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
Our primary sources of liquidity
are cash from operations and cash on hand from related party loans. Our primary requirements for liquidity are to fund our working capital
needs, debt service, operating lease obligations, capital expenditures and general corporate needs.
As of December 31, 2022, we
maintained a cash and cash equivalents balance of $1,110,034 and $426,920 of restricted cash with a working capital deficit of $16,971,401.
The working capital deficit is primarily due to the current portion of the related party notes payable.
Working Capital
As of December 31, 2022, the Company had current assets
of $10,340,331 and current liabilities $27,311,732 compared with current assets of $9,563,566 and current liabilities of $20,416,745 on
June 30, 2022. The decrease in the working capital was primarily a result of increased related party loans.
Cash Flows
| Six Months Ended | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Net cash used in operating activities | $ | (4,911,404 | ) | $ | (4,728,921 | ) | ||
| Net cash used in investing activities | (920,328 | ) | (337,728 | ) | ||||
| Net cash provided by financing activities | 6,566,991 | 5,097,451 | ||||||
| Net change in cash during the period, before effects of foreign currency | $ | 735,259 | $ | 30,802 | ||||
| 40 |
Cash flow from Operating Activities
During the six months ended December 31, 2022, the
Company used $4,911,404 of cash for operating activities compared to $4,728,921 used during the six months ended December 31, 2021. The
primary increase in the use of cash for operating activities was a result of the reduction in accounts receivable related to the COVID-19
business and the purchase of inventory from the Precision Manufacturing division.
Cash flow from Investing Activities
During the six months ended December 31, 2022, the
Company used $920,328 of cash for investing activities compared to $337,728 used during the six months ended December 31, 2021. The increase
in the use of cash for investing activities was primarily due to the purchase of equipment used primarily for the Dalrada Precision Manufacturing
segment.
Cash flow from Financing Activities
During the six months ended December 31, 2022, the
Company received $6,566,991 in cash from financing activities compared to $5,097,451 during the six months ended December 31, 2021. The
increase was primarily due to the increase in proceeds from related party notes payable.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources, and related party transactions.
Critical Accounting Policies
Our financial statements and accompanying notes have
been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis. The preparation
of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting periods.
We regularly evaluate the accounting policies and
estimates that we use to prepare our financial statements. A complete summary of these policies is included in note (1) of the notes to
our financial statements. In general, management’s estimates are based on historical experience, on information from third party professionals,
and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from
those estimates made by management.
Use of Estimates
The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes for the reporting period. Significant areas requiring the
use of management estimates relate to the valuation of its mineral leases and claims and our ability to obtain final government permission
to complete the project. As of December 31, 2022 there have been no material changes to our critical accounting policies and estimates
from those previously disclosed in our Annual Report on Form 10-K for the year ended June 30, 2022.
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Stock-Based Compensation
The Company records stock-based compensation in accordance
with ASC 718, Compensation – Stock Compensation, using the fair value method. All transactions in which goods or services
are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received
or the fair value of the equity instrument issued, whichever is more reliably measurable. Equity instruments issued to employees and the
cost of the services received as consideration are measured and recognized based on the fair value of the equity instruments issued.
Recently Issued Accounting Pronouncements
We have reviewed all the recently issued, but not
yet effective, accounting pronouncements and we do not believe any of these pronouncements will have a material impact on the Company.
Contractual Obligations
We are a smaller reporting company as defined by Rule
12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable to smaller reporting companies.
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures.
Our Chief Executive Officer and Principal Financial Officer, after evaluating the effectiveness of our "disclosure controls and procedures"
(as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly
Report on Form 10-Q (the "Evaluation Date"), concluded that as of the Evaluation Date, our disclosure controls and procedures
were not effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission
rules and forms. The control weaknesses mentioned below were first identified during the six months ended December 31, 2022.
(b) Changes in internal control over financial reporting.
There were no changes in our internal control over financial reporting during our most recent fiscal quarter that materially affected,
or were reasonably likely to materially affect, our internal control over financial reporting.
Limitations on the Effectiveness of Internal Controls
Disclosure controls and procedures, no matter how
well designed and implemented, can provide only reasonable assurance of achieving an entity’s disclosure objectives. The likelihood of
achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These include the fact that human
judgment in decision-making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors
or mistakes or intentional circumvention of the established process.
Management’s Report on Internal Control over Financial
Reporting
Our management is responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is defined in the Securities Exchange Act of 1934 Rule 13a-15(f).
Our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in
Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission ("2013 COSO
Framework").
| 42 |
A material weakness is a deficiency or combination
of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement
of our annual or interim financial statements will not be prevented or detected on a timely basis.
Our management concluded we have a material weakness
due to the following:
| · | Lack of Management oversight and review of the financial reporting process, including presentation of the financial statements and related disclosures; | ||
| · | Lack of procedures related to recognition of revenues; | ||
| · | Lack of procedures related to the calculation and allocation of the purchase price, including acquired intangibles, in connection with business acquisitions. | ||
| 43 |
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
Dalrada Health Products (“Dalarada Health”),
formed a joint venture with Vivera Pharmaceuticals, Inc. (“Vivera”), whereby Vivera is the minority member. As the managing
member of the joint venture, Dalrada Health Products, in December 2021, filed suit against Vivera and Paul Edalat, Vivera’s Chairman
and CEO, for misappropriation of funds on behalf of the joint venture in the amount of $2,104,509. In addition to filing a cross-complaint
against Dalrada Health Products, Vivera filed a separate complaint against Dalrada Financial Corporation, Empower Genomics (a subsidiary
of Dalrada Financial Corporation), Dalrada Financial Corporation’s officers, and other unrelated parties. The proceedings are being
held at the Superior Court of the State of California, for the County of Orange – Central Justice Center.
See Note 12. Subsequent Events on Likido arbitration
resolution.
Item 1A. Risk Factors
Not applicable to smaller reporting entities.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Securities
None.
Item 3. Defaults Upon Senior Securities
None noted.
Item 4. Mine Safety Disclosures
Not applicable to our Company.
Item 5. Other Information
None noted.
Item 6. Exhibit
| 44 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d)
of the Exchange Act, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.
| Dalrada Financial Corporation | |
| By: /s/ Brian Bonar | |
| Date: February 14, 2023 | Brian Bonar |
| Chief Executive Officer |
Pursuant to the requirements of the Exchange Act this
Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date |
| /s/ Brian Bonar | Chief Executive Officer | February 14, 2023 |
| Brian Bonar | and Director |
| 45 |