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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 QUARTERLY REPORT UNDER SECTION 13
OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31,
2023

 

 TRANSITION REPORT UNDER SECTION 13
OR 15 (d) OF THE EXCHANGE ACT

 

For the transition period from _________ to _________

 

Commission File Number: 000-12641

 

DALRADA FINANCIAL CORPORATION

(Name of Small Business Issuer in its charter)

 

Wyoming 38-3713274
(state or other jurisdiction of incorporation or organization) (I.R.S. Employer ID. No.)

 

600 La Terraza Blvd., Escondido, California
92025

(Address of principal executive offices)

 

858283-1253

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
Common Stock, $0.005 par value per share DFCO 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. Yes ☒   No ☐  

 

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). Yes ☒   No ☐

 

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 ☐
Non-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 ☐    No ☒

 

As of May 15, 2023, the registrant’s outstanding stock consisted
of 88,699,139 common shares.

 

 

 

     

 

 

DALRADA FINANCIAL CORPORATION.

 

Table of Contents

 

 

PART I – FINANCIAL INFORMATION 3
   
Item 1. Financial Statements (unaudited) 3
   
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Stockholders’ Deficit 5
Condensed Consolidated Statements of Cash Flows 7
Notes to the Condensed Consolidated Financial Statements 8
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 35
Item 3. Quantitative and Qualitative Disclosures About Market Risk 43
Item 4. Controls and Procedures 43
   
PART II – OTHER INFORMATION 45
   
Item 1. Legal Proceedings 45
Item 1A. Risk Factors 45
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Securities 45
Item 3. Defaults Upon Senior Securities 45
Item 4. Mine Safety Disclosures 45
Item 5. Other Information 45
Item 6. Exhibits 46
   
SIGNATURES 47

 

 

 

 

 

  2  

 

 

PART I – FINANCIAL INFORMATION

 

Item 1 – Financial Statements

DALRADA FINANCIAL CORPORATION

Condensed Consolidated Balance Sheets

(unaudited)

             
    March 31,     June 30,  
    2023     2022  
Assets                
Current assets:                
Cash and cash equivalents   $ 1,288,916     $ 772,062  
Restricted cash            
Accounts receivable, net     8,218,196       6,406,555  
Accounts receivable, net – related parties     127,951       41,603  
Other receivables     534,761       288,655  
Inventories     2,321,316       1,624,621  
Prepaid expenses and other current assets     337,828       430,070  
Total current assets     12,828,968       9,563,566  
Long-term receivables     41,716       42,395  
Long-term receivables – related parties     1,182,893       1,209,103  
Property and equipment, net     1,403,890       1,076,412  
Goodwill     4,253,424       4,253,424  
Intangible assets, net     3,920,496       3,524,888  
Right-of-use asset, net     2,713,785       1,665,436  
Right-of-use asset, net – related party     2,385,014       1,087,256  
Total assets   $ 28,730,186     $ 22,422,480  
                 
Liabilities and Stockholders’ Deficit                
Current liabilities:                
Accounts payable   $ 4,597,505     $ 2,331,919  
Accrued liabilities     1,717,484       1,799,404  
Accrued payroll taxes, penalties and interest           2,055,736  
Accounts payable and accrued liabilities – related parties     1,792,753       1,270,133  
Deferred revenue     1,972,516       720,923  
Notes payable, current portion     1,035,189       669,028  
Notes payable – related parties     16,726,676       9,269,377  
Convertible notes payable, net of debt discount           1,495,528  
Right-of-use liability     587,527       435,647  
Right-of-use liability – related party     511,772       369,050  
Total current liabilities     28,941,422       20,416,745  
Long-term payables     73,205       120,534  
Notes payable     479,001       479,001  
Notes payable – related parties     13,174,894       9,538,685  
Contingent consideration     4,767,333       4,870,800  
Right-of-use liability     2,126,258       1,231,691  
Right-of-use liability – related party     1,873,242       718,206  
Total liabilities     51,435,355       37,375,662  
                 
Commitments and contingencies (Note 14)            
                 
Stockholders’ deficit:                
Series G preferred stock, $0.01 par value, 100,000 shares authorized, 10,002 shares issued and outstanding as of both March 31, 2023 and June 30, 2022     100       100  
Series F preferred stock, $0.01 par value, 5,000 and 5,000 shares authorized, issued and outstanding as of both March 31, 2023 and June 30, 2022     50       50  
Common stock, $0.005 par value, 1,000,000,000 shares authorized, 86,240,807 and 72,174,620 shares issued and outstanding at March 31, 2023 and June 30, 2022, respectively     431,187       360,855  
Common stock to be issued     317,925       1,066,925  
Additional paid-in capital     109,222,356       104,627,032  
Accumulated deficit     (133,492,861 )     (121,436,490 )
Accumulated other comprehensive income (loss)     (21,177 )     (50,673 )
Total Dalrada Financial Corp’s stockholders’ deficit     (23,542,420 )     (15,432,201 )
Noncontrolling interests     837,251       479,019  
Total stockholders’ deficit     (22,705,169 )     (14,953,182 )
Total liabilities and stockholders’ deficit   $ 28,730,186     $ 22,422,480  

 

(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     Nine Months Ended  
    March 31,     March 31,  
    2023     2022     2023     2022  
Revenues   $ 9,290,805     $ 5,572,826     $ 18,066,932     $ 15,530,319  
Revenues – related party     183,888       19,324       918,648       111,448  
Total revenues     9,474,693       5,592,150       18,985,580       15,641,767  
Cost of revenue     6,612,680       1,773,630       11,924,140       5,034,308  
Gross profit     2,862,013       3,818,520       7,061,440       10,607,459  
                                 
Operating expenses:                                
Selling, general and administrative (includes stock-based compensation of $815,454 and $362,532 for the three months and $2,184,692 and $2,145,626 for the nine months ended 2023 and 2022 respectively)     6,501,233       6,458,163       18,438,927       16,000,902  
Research and development                       1,596  
Total operating expenses     6,501,233       6,458,163       18,438,927       16,002,498  
Loss from operations     (3,639,220 )     (2,639,643 )     (11,377,487 )     (5,395,039 )
                                 
Other income (expense):                                
Interest expense     (314,319 )     (338,677 )     (2,207,049 )     (597,551 )
Interest income     18,830       4,232       60,725       5,280  
Other income (expense)     (72,933 )     (3,974 )     (179,555 )     9,270  
Gain on expiration of accrued tax liability                 2,090,978        
Gain (loss) on foreign exchange     (38,156 )     (15,018 )     (85,751 )     (59,351 )
Total other income (expenses)     (406,578 )     (353,437 )     (320,652 )     (642,352 )
Net loss     (4,045,798 )     (2,993,080 )     (11,698,139 )     (6,037,391 )
                                 
Other comprehensive (loss) income                                
Foreign currency translation     (137 )     (4,990 )     29,496       34,679  
Comprehensive (loss) income   $ (4,045,935 )   $ (2,998,070 )   $ (11,668,643 )   $ (6,002,712 )
                                 
Net income (loss) attributable to noncontrolling interests     (20,234 )     430,147       358,232       3,036,854  
Net loss attributable to Dalrada Financial Corporation stockholders   $ (4,025,564 )   $ (3,423,227 )   $ (12,056,371 )   $ (9,074,245 )
                                 
Net loss per common share to Dalrada stockholders – basic   $ (0.05 )   $ (0.05 )   $ (0.15 )   $ (0.12 )
Net loss per common share to Dalrada stockholders – diluted   $ (0.05 )   $ (0.05 )   $ (0.15 )   $ (0.12 )
                                 
Weighted average common shares outstanding  — basic     85,728,770       70,235,384       82,356,784       72,718,261  
Weighted average common shares outstanding  — diluted     85,728,770       70,235,384       82,356,784       72,718,261  

 

(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  
    Series G     Series F     Common Stock     Stock to  
    Shares     Amount     Shares     Amount     Shares     Amount     be Issued  
                                           
Balance at June 30, 2021         $       5,000     $ 50       73,838,662     $ 369,194     $ 601,825  
Conversion of related party notes into preferred stock                                          
Common stock issued pursuant to acquisitions                             212,500       1,063       (85,975 )
Joint ventures                                         58,560  
Repurchase of common shares from subsidiary                             (329,478 )     (1,647 )      
Stock-based compensation                             2,000,000       10,000        
Net income (loss)                                          
Foreign currency translation                                          
Balance at September 30, 2021                 5,000       50       75,721,684       378,610       574,410  
Issuance of preferred stock     10,002       100                                
Common stock issued pursuant to acquisitions                             212,500       1,063       (85,975 )
Joint venture                             250,000       1,250       (58,560 )
Reversal of shares previously issued to directors                             (6,500,000 )     (32,500 )      
Stock-based compensation                             500,000       2,500        
Net income (loss)                                          
Foreign currency translation                                          
Balance at December 31, 2021     10,002       100       5,000       50       70,184,184       350,923       429,875  
Common stock issued pursuant to acquisitions                             212,500       1,063       (85,975 )
Common stock issued in connection with convertible note                             192,000       930        
Joint ventures                                          
Stock-based compensation                                          
Net income (loss)                                          
Foreign currency translation                                          
Balance at March 31, 2022     10,002     $ 100       5,000     $ 50     $ 70,588,684     $ 352,916     $ 343,900  
                                                         
                                                         
Balance at June 30, 2022     10,002     $ 100       5,000     $ 50       72,174,620     $ 360,855     $ 1,066,925  
Common stock issued for conversion of convertibles notes, accrued interest and premium                             6,813,021       34,065        
Common stock issued pursuant to acquisitions                             833,333       4,167       (175,000 )
Stock-based compensation                             500,000       2,500       (175,000 )
Net income (loss)                                          
Foreign currency translation                                          
Balance at September 30, 2022     10,002       100       5,000       50       80,320,974       401,587       716,925  
Common stock issued for conversion of convertibles notes, accrued interest and premium                             4,161,500       20,808        
Common stock issued pursuant to acquisitions                             1,175,000       5,875       (286,650 )
Stock-based compensation                                          
Net income (loss)                                          
Foreign currency translation                                          
Balance at December 31, 2022     10,002       100       5,000       50       85,657,474       428,270       430,275  
Common stock issued for conversion of convertibles notes, accrued interest and premium                                          
Common stock issued pursuant to acquisitions                             583,333       2,917       (112,350 )
Stock-based compensation                                          
Net income (loss)                                          
Foreign currency translation                                          
Balance at March 31, 2023     10,002     $ 100       5,000     $ 50       86,240,807     $ 431,187     $ 317,925  

(continued)

(The accompanying notes are an integral part of
these condensed consolidated financial statements)

 

 

  5  

 

 

DALRADA FINANCIAL CORPORATION

Condensed Consolidated Statements of Stockholders’
Deficit

(unaudited) (continued)

                                                         
    Preferred     Additional           Accumulated Other     Total Dalrada Financial Corp’s           Total  
    Stock     Paid-in     Accumulated     Comprehensive     Stockholders’     Noncontrolling     Stockholders’  
    to be Issued     Capital     Deficit     Income (Loss)     Deficit     Interests     Deficit  
                                           
Balance at June 30, 2021   $     $ 92,965,821     $ (107,338,174 )   $ 32,287     $ (13,368,996 )   $ (38,391 )   $ (13,407,388 )
Conversion of related party notes into preferred stock     6,532,206                         6,532,206             6,532,206  
Common stock issued pursuant to acquisitions           84,913                                
Joint ventures                             58,560       111,185       169,745  
Repurchase of common shares from subsidiary           (13,179 )                 (14,826 )           (14,826 )
Stock-based compensation           667,507                   677,507             677,507  
Net income (loss)                 (2,265,842 )           (2,265,842 )     1,289,169       (976,673 )
Foreign currency translation                       39,344       39,344             39,344  
Balance at September 30, 2021     6,532,206       93,705,062       (109,604,016 )     71,631       (8,342,047 )     1,361,963       (6,980,085 )
Issuance of preferred stock     (6,532,206 )     6,532,106                                
Common stock issued pursuant to acquisitions           84,913                                
Joint venture           57,310                         (1,874,244 )     (1,874,244 )
Reversal of shares previously issued to directors           32,500                                
Stock-based compensation           1,103,087                   1,105,587             1,105,587  
Net income (loss)                 (3,385,175 )           (3,385,175 )     1,317,537       (2,067,638 )
Foreign currency translation                       325       325             325  
Balance at December 31, 2021           101,514,978       (112,989,191 )     71,956       (10,621,311 )     805,256       (9,816,053 )
Common stock issued pursuant to acquisitions           84,913                                
Common stock issued in connection with convertible note           1,541,765                   1,542,695             1,542,695  
Joint ventures                                   (7,900 )     (7,900 )
Stock-based compensation           362,532                   362,532             362,532  
Net income (loss)                 (3,423,227 )           (3,423,227 )     430,147       (2,993,080 )
Foreign currency translation                       (4,990 )     (4,990 )           (4,990 )
Balance at March 31, 2022   $     $ 103,504,188     $ (116,412,418 )   $ 66,966     $ (12,144,301 )   $ 1,227,503     $ (10,916,796 )
                                                         
                                                         
Balance at June 30, 2022   $     $ 104,627,032     $ (121,436,490 )   $ (50,673 )   $ (15,432,201 )   $ 479,019     $ (14,953,182 )
Common stock issued for conversion of convertibles notes, accrued interest and premium           1,077,332                   1,111,397             1,111,397  
Common stock issued pursuant to acquisitions           343,183                   172,350             172,350  
Stock-based compensation           640,017                   467,517             467,517  
Net income (loss)                 (3,617,789 )           (3,617,789 )     447,613       (3,170,176 )
Foreign currency translation                       63,762       63,762             63,762  
Balance at September 30, 2022           106,687,564       (125,054,279 )     13,089       (17,234,964 )     926,632       (16,308,332 )
Common stock issued for conversion of convertibles notes, accrued interest and premium           315,283                   336,091             336,091  
Common stock issued pursuant to acquisitions           356,234                   75,459             75,459  
Stock-based compensation           901,721                   901,721             901,721  
Net income (loss)                 (4,413,018 )           (4,413,018 )     (69,147 )     (4,482,165 )
Foreign currency translation                       (34,129 )     (34,129 )           (34,129 )
Balance at December 31, 2022           108,260,802       (129,467,297 )     (21,040 )     (20,368,840 )     857,485       (19,511,355 )
Common stock issued for conversion of convertibles notes, accrued interest and premium                                          
Common stock issued pursuant to acquisitions           146,100                   36,667             36,667  
Stock-based compensation           815,454                   815,454             815,454  
Net income (loss)                 (4,025,564 )           (4,025,564 )     (20,234 )     (4,045,798 )
Foreign currency translation                       (137 )     (137 )           (137 )
Balance at March 31, 2023   $     $ 109,222,356     $ (133,492,861 )   $ (21,177 )   $ (23,542,420 )   $ 837,251     $ (22,705,169 )

 

(The accompanying notes are an integral part of
these condensed consolidated financial statements)

 

  6  

 

 

DALRADA FINANCIAL CORPORATION

Condensed Consolidated Statements of Cash Flows

(unaudited)

                 
    Nine Months Ended  
    March 31,  
    2023     2022  
Cash flows from operating activities:                
Net loss   $ (11,698,139 )   $ (6,037,391 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     530,177       156,897  
Stock compensation     2,184,692       2,145,626  
Amortization of debt discount           146,475  
Change in fair value of contingent consideration     181,009        
Bad debt expense     640,484        
Gain on expiration of accrued tax liability     (2,090,978 )      
Changes in operating assets and liabilities, net of amounts acquired or assumed in connection with acquisition:                
Accounts receivable     (2,787,677 )     (7,388,104 )
Other receivables     (218,817 )     (103,932 )
Inventories     (696,695 )     (314,573 )
Prepaid expenses and other current assets     128,542       123,392  
Long-term receivables     26,889        
Accounts payable     2,241,421       123,063  
Long-term payables     (47,329 )      
Accounts payable and accrued liabilities – related parties     522,620       1,967,786  
Accrued liabilities     (217,742 )     1,100,808  
Accrued payroll taxes, penalties and interest     35,242       72,558  
Deferred revenue     1,191,593       441,075  
Net cash used in operating activities     (10,074,709 )     (7,566,320 )
Cash flows from investing activities:                
Purchase of property and equipment     (511,515 )     (441,521 )
Purchase of intangibles     (446,923 )     (206,068 )
Acquisition of business, net of cash     80,087        
Net cash used in investing activities     (878,351 )     (647,589 )
Cash flows from financing activities:                
Proceeds from related party notes payable     11,845,764       7,602,059  
Proceeds from convertible notes payable           2,932,857  
Repayments of related party notes payable     (752,256 )      
Distributions to noncontrolling interest           (1,882,144 )
Net proceeds (repayments) from notes payable     346,910       (21,717 )
Repurchase of common shares from subsidiary           (14,826 )
Net cash provided by financing activities     11,440,418       8,616,229  
Net change in cash and cash equivalents     487,358       402,320  
Effect of exchange rate changes on cash     29,496       34,679  
Cash and cash equivalents at beginning of period     772,062       110,285  
Cash and cash equivalents at end of period   $ 1,288,916     $ 547,284  
                 
Supplemental disclosure of cash flow information:                
Cash paid for interest   $     $  
                 
Supplemental disclosure of non-cash investing and financing activities:                
Conversion of related party notes and interest into preferred stock   $     $ 6,532,206  
Contribution of property and equipment into joint venture   $     $ 111,185  
Issuance of shares to joint venture partner   $     $ 58,560  
Conversion of accounts payable-related parties to note payable-related parties   $     $ 181,744  
Common stock and warrants issued in connection with convertible note   $     $ 1,542,695  
Conversion of convertible note payable, accrued interest and premium into common stock   $ 2,327,489     $  
Increase in right-of-use asset and liability   $ 1,447,488     $  

 

(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: Genefic, 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.

 

Genefic

 

Genefic, formerly named 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).

 

 

  8  

 

 

Watson Rx Solutions (“Watson”)
In June 2022, Dalrada Life Sciences 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.

 

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.

 

 

  9  

 

 

 

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.

 

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 Technology Limited (“DTL”)- Dalrada Precision
Manufacturing Inc. entered into an Ownership Purchase Agreement to purchase all of the membership interests in Dalrada Technology Limited
on March 1, 2023. DTL is a holding company for all European based Dalrada Precision entities.

 

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 March 31, 2023, the Company has an accumulated deficit of $133,492,861. The Company closed a convertible
debenture funding on February 4, 2022 for a total principal amount of $3,000,000. The continuation 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.

 

 

 

 

  10  

 

 

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”).

 

  (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.

 

 

 

  11  

 

 

 

  (d) Cash and Cash Equivalents

 

The Company considers all highly liquid instruments
with a maturity of three months or less at the time of issuance to be cash equivalents.

 

  (e) Concentrations of Credit Risk

 

Financial instruments that potentially subject
the Company to concentrations of credit risk consist principally of cash and cash equivalents. 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 that the receivables have been outstanding, history
of payment amounts, status of collections due, and applicable statutes of limitations.

 

During the nine months ended March 31, 2023, healthcare
insurers and government payers accounted for over 29% of total revenues or $5,567,245. The accounts receivable related to both healthcare
insurers and government payers was $3,863,560 as of March 31, 2023.

  

  (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.

 

 

 

  12  

 

 

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.

 

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 Receivable 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 March 31, 2023 and June 30, 2022, the Company recorded a bad
debt allowance of $223,062 and $119,791, respectively.

 

Pala and Empower have a standardized approach
to estimate the amount of consideration that we are entitled to for its COVID-19 testing revenue, including the impact of contractual
allowances (including payer denials), and patient price concessions. Collection and payer reimbursement is based on industry standards
and third-party experts. Adjustments to our estimated contractual allowances and implicit patient price concessions are recorded in the
current period as changes in estimates. Further adjustments to the allowances, based on actual receipts, may be recorded upon settlement.

 

  (i) Inventory

 

Inventory is recorded at the lower of cost or
net realizable value on a first-in first-out basis. As of March 31, 2023 and June 30, 2022, inventory is comprised of raw materials purchased
from suppliers, 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 3 – 5 years
Machinery and equipment 5 years
Leasehold improvements Shorter of lease term or useful life

 

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 for
impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If the sum of the expected
cashflow, 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 on 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 one or all 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 $218,308.
During the third quarter ended March 31, 2023, 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 not
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 represent 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 March 31, 2023, or 2022.

  

 

 

  15  

 

 

Net revenues from COVID-19 testing accounted for
over 29% of the Company’s total net revenues for the nine months ended March 31, 2022, and primarily comprised of a high volume
of relatively low-dollar transactions. Pala and Empower, which provide 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 rely 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 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 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. 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.

 

Disaggregation of Revenue

 

The following table presents the Company’s revenue
disaggregated by revenue source:

                               
    Three Months Ended     Nine Months Ended  
    March 31,     March 31,  
    2023     2022     2023     2022  
Product sales – third parties   $ 2,878,093     $ 1,627,647     $ 5,390,857     $ 1,788,938  
Product sales – related party     1,336       19,324       75,335       49,208  
Service revenue – third parties     6,412,712       3,945,179       12,676,075       13,741,381  
Service revenue – related party     182,552             843,313       62,240  
Total revenue   $ 9,474,693     $ 5,592,150     $ 18,985,580     $ 15,641,767  

 

 

 

  16  

 

 

Accounts Receivable and Deferred Revenue

 

The following table provides information about
receivables and liabilities from contracts with customers:  

           
    March 31,     June 30,  
    2023     2022  
Accounts receivable, net   $ 8,218,196     $ 6,406,555  
Accounts receivable, net – related parties     127,951       41,603  
Long-term receivables     41,716       42,395  
Long-term receivables – related parties     1,182,893       1,209,103  
Deferred revenue     1,972,516       720,923  

 

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     Nine Months Ended  
    March 31,     March 31,  
    2023     2022     2023     2022  
Product sales   $ 1,617,124     $ 796,148     $ 3,320,438     $ 1,386,244  
Service revenue     4,995,556       977,482       8,603,702       3,648,064  
Total cost of revenue   $ 6,612,680     $ 1,773,630     $ 11,924,140     $ 5,034,308  

 

 

  (o) Advertising

 

Advertising costs are expensed as incurred. During
the nine months ended March 31, 2023 and 2022, advertising expenses were approximately $275,846 and $366,551, respectively. During the
three months ended March 31, 2023, and 2022, advertising expenses were approximately $74,846 and $138,551, respectively.

  

  (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 March 31, 2023, and 2022, stock-based compensation expense was $815,454 and $362,532, respectively. During
the nine months ended March 31, 2023 and 2022, stock-based compensation expense was $2,184,692 and $2,145,626, respectively.

 

 

 

  17  

 

 

 

  (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 nine months ended March 31, 2023, 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 is 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 is recorded as a gain or loss.

 

As of March 31, 2023, 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.

  

The weighted average number of common stock equivalents
related to convertible notes payable of 0 and 58,042,294 shares, and cashless warrants of 0 and 15,786,829, was not included in diluted
loss per share, because the effects are antidilutive, for the nine months ended March 31, 2023 and 2022, respectively.

 

There were no adjustments to the numerator during
the three and nine months ended March 31, 2023 and 2022, respectively.

 

 

 

  18  

 

 

 

  (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 $103,467 to a balance of $4,767,333 during the nine months ended
March 31, 2023.

 

3. Investment in Pala Diagnostics

 

In August 2021, Dalrada, through its subsidiary
Dalrada Health, entered a joint venture (“JV”) with Vivera Pharmaceuticals, Inc (“Vivera”) for a 51% ownership
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 $500,000 for operating capital and Vivera contributed property and equipment at a fair value of $111,185.
This amount was included in non-controlling interest equity balance in the consolidated balance sheets. 

 

Pursuant to the JV agreement, Dalrada issued 250,000
shares of common stock to Vivera in October 2021. The fair value of $58,560 was recorded to goodwill as of March 31, 2023.

 

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
$2,104,509, accounted for as an unauthorized distribution. 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. See Note 14 for legal proceedings.

 

 

 

  19  

 

 

 

4. Business Combinations
and Asset 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 considerations 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 $30,000 monthly and additionally issued 3,000,000 cashless warrants, at a strike
price of $0.15 per share, to equal $450,000, which shall vest quarterly over a period of 24 months (the “Warrant Consideration”).

 

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 $6,000,000 (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   $ 3,482,550  

 

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.

 

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   $ 70,979  
Other receivables     27,289  
Right of use asset, net     18,618  
Property and equipment, net     17,179  
Trade name     6,776  
Accounts payable     (24,165 )
Accrued liabilities     (18,807 )
Deferred revenue     (60,000 )
Right of use liability     (18,618 )
Notes payable, current portion     (19,251 )
Purchase price consideration   $  

 

 

 

  20  

 

 

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 was based on an analysis of the present
value of future cash flows and relief from royalty method.

 

Dalrada Technology LTD EU (“DTL”)

 

On March 1, 2023 the Company acquired
100% of the common stock of DTL in an asset acquisition. In consideration for the asset acquisition, the Company issued 1,000,000 cashless
warrants, at a strike price of $0.10 per share, which shall vest quarterly over 36 months.

 

The following
is a summary of the value of the Warrant Consideration to the selling shareholder. The value was calculated using the Black-Scholes model.
The Company recorded a liability for the warrants at the acquisition date as the warrants are not contingent on employment of the sellers: 

       
Warrant Consideration   $ 68,975  

 

The Company acquired DTL as a holding
company for its European operations, including Likido Ltd. and DepTec. DTL will also be u tilized to pursue certain European grants
and other governmental funding opportunities. The two sellers of DTL are related parties to the Chairman and CEO of the Company.

 

The DTL transaction was accounted for
as an asset acquisition 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.

 

The Company
has made a preliminary allocation of the purchase price regarding the asset 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   $ 9,108  
Deposits     13,536  
Prepaids     24,666  
Furniture and Fixtures     64,533  
Trade name     206,336  
Loan Payable     (249,204 )
Purchase price consideration   $ 68,975  

 

Trade name is amortized on a straight-line
basis over two years.

 

 

 

  21  

 

 

 

5. Selected Balance Sheet Elements

 

Inventories

 

Inventories
consisted of the following as of March 31, 2023 and June 30, 2022: 

           
    March 31,     June 30,  
    2023     2022  
Raw materials   $ 1,193,509     $ 399,706  
Finished goods     1,127,807       1,224,915  
Inventory, Net    $ 2,321,316     $ 1,624,621  

 

Property and Equipment, Net

 

Property
and equipment, net consisted of the following as of March 31, 2023 and June 30, 2022:  

           
    March 31,     June 30,  
    2023     2022  
Machinery and equipment   $ 1,474,850     $ 740,147  
Leasehold improvements     303,922       314,642  
Computer and office equipment     429,027       518,017  
      2,207,799       1,572,806  
Less: Accumulated depreciation     (803,909 )     (496,394 )
    $ 1,403,890     $ 1,076,412  

 

Depreciation expense of $265,749 and
$103,566 for the nine months ended, and $94,331 and $9,313 for the three months ended, March 31, 2023, and 2022, respectively, were included
in selling, general and administrative expenses in the statements of operations.

 

Intangible Assets, Net

 

Intangible
assets, net consisted of the following as of March 31, 2023 and June 30, 2022:  

                                   
                            Developed        
                            technology,        
    Curriculum           Customer           software,        
    development     Licenses     relationships     Trademarks     and other     Totals  
Balance: June 30, 2022   $ 693,385     $ 1,064,000     $ 1,230,159     $ 348,100     $ 335,021     $ 3,670,665  
Additions                       206,336       448,218       654,554  
Balance: March 31, 2023     693,385       1,064,000       1,230,159       554,436       783,239       4,325,219  
                                                 
Less: Accumulated amortization                                                
Balance: June 30, 2022     (102,891 )     (4,260 )     (30,754 )     (380 )     (7,492 )     (145,777 )
Additions     (52,004 )     (38,340 )     (92,262 )     (45,375 )     (30,965 )     (258,946 )
Balance: March 31, 2023     (154,895 )     (42,600 )     (123,016 )     (45,755 )     (38,457 )     (404,723 )
                                                 
Net book value: March 31, 2023   $ 538,490     $ 1,021,400     $ 1,107,143     $ 508,681     $ 744,782     $ 3,920,496  

 

 

  22  

 

 

 

                            Developed        
                            technology,        
    Curriculum           Customer           software,        
    development     Licenses     relationships     Trademarks     and other     Totals  
Balance: June 30, 2021   $ 693,385     $     $     $     $     $ 693,385  
Additions           1,064,000       1,230,159       348,100       335,021       2,977,280  
Balance: June 30, 2022     693,385       1,064,000       1,230,159       348,100       335,021       3,670,665  
                                                 
Less: Accumulated amortization                                                
Balance: June 30, 2021     (28,891 )                             (28,891 )
Additions     (74,000 )     (4,260 )     (30,754 )     (380 )     (7,492 )     (116,886 )
Balance: June 30, 2022     (102,891 )     (4,260 )     (30,754 )     (380 )     (7,492 )     (145,777 )
                                                 
Net book value: June 30, 2022   $ 590,494     $ 1,059,740     $ 1,199,405     $ 347,720     $ 327,529     $ 3,524,888  

 

 

Amortization expense of $264,428 and
$155,570 for the nine months ended, and $87,334 and $120,131 for the three months ended, March 31, 2023, and 2022, respectively, were
included 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. 

 

6. Accrued Payroll Taxes

 

As of March 31, 2023, and June 30, 2022,
the Company had $0 and $2,055,736, respectively, of accrued payroll taxes, penalties and interest relating to calendar years 2004 – 2007.
The total balance for accrued payroll taxes has accumulated on a quarterly basis beginning on their respective quarterly filing dates.
Accrued interest is compounded daily at an estimated effective interest rate of 7.33%. The quarterly sub-totals that made up the balance
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 March 31, 2023 and June 30, 2022: 

               
    March 31, 2023  
    Outstanding     Accrued  
    Principal     Interest  
Related entity 1   $