Dalrada Technology Group, Inc 10-Q for FY2022 Q1
Dalrada Technology Group, Inc. (DHTI)
About this 10-Q
Dalrada Technology Group, Inc filed this 10-Q on November 19, 2021, covering the quarter ended September 30, 2021 (FY2022 Q1).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $4.6M
- up 506.1% from $759.39K a year earlier
- Net loss
- $2.27M
- compared with a net loss of $914.36K a year earlier
- Diluted EPS
- -$0.03
- compared with -$0.01 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For the quarterly period ended
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(b) 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
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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
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As of November 18, 2021, the registrant’s outstanding stock consisted of common shares.
DALRADA FINANCIAL CORPORATION.
Table of Contents
| PART I – FINANCIAL INFORMATION | 3 |
| Item 1. Financial Statements (unaudited) | 3 |
| Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 23 |
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | 26 |
| Item 4. Controls and Procedures | 26 |
| PART II – OTHER INFORMATION | 28 |
| Item 1. Legal Proceedings | 28 |
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Securities | 28 |
| Item 3. Defaults Upon Senior Securities | 28 |
| Item 4. Mine Safety Disclosures | 28 |
| Item 5. Other Information | 28 |
| Item 6. Exhibits | 28 |
| SIGNATURES | 29 |
| 2 |
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
DALRADA FINANCIAL CORPORATION
Condensed Consolidated Balance Sheets
(unaudited)
| September 30, | June 30, | |||||||
| 2021 | 2021 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Accounts receivable, net - related parties | ||||||||
| Other receivables | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| 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 – related party | ||||||||
| Right of use liability | ||||||||
| Right of use liability - related party | ||||||||
| Total current liabilities | ||||||||
| Notes payable – related parties | ||||||||
| Right of use liability | ||||||||
| Right of use liability - related party | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 12) | ||||||||
| Stockholders' deficit: | ||||||||
| Preferred stock, $ par value, shares authorized | – | – | ||||||
| Series F preferred stock, $ par value, and shares authorized, issued and outstanding as of September 30, 2021 and June 30, 2021, respectively | ||||||||
| Common stock, $ par value, shares authorized, and shares issued and outstanding at September 30, 2021 and 2020, respectively | ||||||||
| Preferred stock to be issued | ||||||||
| Common stock to be issued | ||||||||
| Additional paid-in capital | ||||||||
| Noncontrolling interests | ( | ) | ||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income (loss) | ||||||||
| 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 | ||||||||
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| Revenues | $ | |||||||
| Revenues - related party | ||||||||
| Total revenues | ||||||||
| Cost of revenue | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| Selling, general and administrative (includes stock-based compensation of $ and $ for 2021 and 2020, respectively) | ||||||||
| Research and development | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other income (expense): | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Interest income | ||||||||
| Other income | ||||||||
| Gain (loss) on foreign exchange | ( | ) | ||||||
| Total other income (expenses) | ( | ) | ( | ) | ||||
| Net loss before taxes | ( | ) | ( | ) | ||||
| Income taxes | ||||||||
| Net loss | ( | ) | ( | ) | ||||
| Net income attributable to noncontrolling interests | ||||||||
| Net loss attributable to Dalrada Financial Corporation stockholders | $ | ( | ) | $ | ( | ) | ||
| Foreign currency translation | ||||||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | ||
| 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 | Total | |||||||||||||||||||||||||||||||||||||||
| Series F | Common Stock | to be | to be | Paid-in | Noncontrolling | Accumulated | Comprehensive | Stockholders' | ||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Issued | Issued | Capital | Interests | Deficit | Income (Loss) | Deficit | ||||||||||||||||||||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||
| Net loss | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | – | – | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||||||||
| Conversion of related party notes into preferred stock | – | – | ||||||||||||||||||||||||||||||||||||||||||
| Common stock issued pursuant to acquisitions | – | ( | ) | |||||||||||||||||||||||||||||||||||||||||
| Joint venture | – | – | ||||||||||||||||||||||||||||||||||||||||||
| Repurchase of common shares from subsidiary | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | – | |||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||
| Foreign currency translation | – | – | ||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||||||||||||||||||
(The accompanying notes are an integral part of these condensed consolidated financial statements)
| 5 |
DALRADA FINANCIAL CORPORATION
Condensed Consolidated Statements of Cash Flows
(unaudited)
| Three Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Stock compensation | ||||||||
| Non-cash research and development expenses | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Other receivables | ( | ) | ||||||
| Inventories | ( | ) | ( | ) | ||||
| Prepaid expenses and other current assets | ( | ) | ( | ) | ||||
| Accounts payable | ( | ) | ( | ) | ||||
| Accounts payable and accrued liabilities - related parties | ||||||||
| Accrued liabilities | ||||||||
| Accrued payroll taxes, penalties and interest | ||||||||
| Right of use assets and liabilities, net | ( | ) | ||||||
| Deferred revenue | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of property and equipment | ( | ) | ( | ) | ||||
| Purchase of intangibles | ( | ) | ||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from related party notes payable | ||||||||
| 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 cash flow information: | ||||||||
| Cash paid for income taxes | $ | $ | ||||||
| Cash paid for interest | $ | $ | ||||||
| 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 | $ | $ | ||||||
| Common stock to be issued pursuant to business combination | $ | $ | ||||||
(The accompanying notes are an integral part of these condensed consolidated financial statements)
| 6 |
DALRADA FINANCIAL CORPORATION
Notes to the Condensed Consolidated Financial Statements
(unaudited)
| 1. | Organization and Nature of Operations |
Dalrada Financial Corporation, (“Dalrada”), a Wyoming Corporation, and its wholly owned subsidiaries (collectively, the “Company”, “we”, “us” or “our”) is a global solutions provider of clean energy, healthcare, technology, and precision engineering solutions. The company has locations in Malaysia, India, UK, and the USA.
Our operating subsidiaries are Dalrada Precision, Dalrada Health Products, and Dalrada Technologies. The subsidiaries are positioned to service the top three growing industries over the next 3-decades; clean energy, healthcare, and technology. We market ten products and services which continuously build upon our core by bringing innovation to a complex new world. As consumers, businesses, and governments seek alternative solutions, Dalrada’s subsidiaries respond with affordable, accessible, and impactful innovations.
The changes COVID-19 brought to the world have been profound to say the least. Consumer habits have transcended to an age of online shopping and remote work. Businesses have shifted to invest in digital technologies, cleanliness, and sustainability. Industries such as healthcare systems experienced overwhelming strains and people skipped regular healthcare routines such as annual check-ups, while supply chains and manufacturing came to a halt. The only positive coming out of the pandemic lockdowns is the break Earth received from pollution, which inadvertently created more awareness in everyone’s mind regarding the importance of climate change.
Dalrada understands these profound changes brought on by the pandemic to people’s behavior, what businesses prioritize, and doing more to protect our planet. This is why we accelerated the expansion of our healthcare division to ensure we provide on-site COVID-19 testing (Pala Diagnostics) and sanitization products (GlanHealth) to help businesses get back to normal and venues to bring back events. We acquired a certified nursing school (IHG) to support a growing and overwhelmed healthcare system, and we launched Empower Genomics and Solas Rejuvenation clinic to provide people with personal advanced health data while offering rejuvenation therapies for uplifting experiences. We also continue to build clinical data for our cerVIA kits to screen females in low to mid-income countries, and fight the 4th most common cancer amongst females, Cervical Cancer.
Furthermore, we accelerated the development, testing, and production of our flagship product, LikidoONE, to help achieve the world’s net-zero goals by 2050. This high-temperature CO2 based heat pump provides heating and cooling without the need for combustion or the burning of fossil fuels, while reducing energy consumption by up to 75% and emissions by 93%. We also began the development of LikidoHOME to replace residential gas burners and tankless heaters. Despite the supply chain challenges, we developed a stronger relationship with our partner in Malaysia, CHP, through our Dalrada Precision division, to increase our capacity for precision parts and steel fabrication capabilities in order to support the manufacturing of the Likido machines.
To bring it full circle, communication has changed for good. Every generation is now relying on technology to serve their basic needs such as online grocery shopping or rapid pick-up, and businesses cannot thrive without technology. Our technology division, Prakat, continues to advance in the areas of software development, blockchain technologies, mobile application development, remote monitoring systems, online security, digital accessibility for the disabled, and supply chain technologies.
As the world changes, Dalrada’s mission of bringing forth clean energy, healthcare, and technology solutions to people, businesses, and the planet will continue to meet its demands and to do our part.
The Company's principal executive offices are located at 600 La Terraza Blvd., Escondido, California 92025. For more information about the Company’s products visit www.dalrada.com
| 7 |
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 September 30, 2021, the Company has an accumulated deficit of $
| 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. 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 2022. 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.
| (b) | Principles of Consolidation |
These condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries: Dalrada Precision, a company incorporated in the State of California, since June 25, 2018 (date of incorporation), Dalrada Health, a company incorporated in the State of California, since October 2, 2018 (date of incorporation), as well as its subsidiaries (Likido, Prakat, Shark, IHG, Pacific Stem, Ignite, Empower, Solas) since their respective acquisition dates (see Note 3) and Controlling Interest in Pala (see Note 4) . All inter-company transactions and balances have been eliminated on consolidation.
The condensed consolidated financial statements include the accounts of all entities controlled by the Company through its direct or indirect ownership of a majority voting interest. Additionally, the condensed 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 consolidated stockholders' equity in the consolidated balance sheet.
| (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.
| 8 |
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 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.
During the three months ended September
30, 2021, healthcare insurers and government payers accounted for over
| (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 cash, 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.
| (g) | 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 September 30, 2021 and June 30, 2021, the Company had an
allowance of doubtful accounts of $
Pala has 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. As a result of Pala’s limited transaction history, 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. Although we have limited track record, further adjustments to the allowances, based on actual receipts, may be recorded upon settlement.
| 9 |
| (h) | Inventory |
Inventory is recorded at the lower of cost or net realizable value on a first-in first-out basis. As of September 30, 2021 and June 30, 2021, 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 realizable value based upon assumptions about future market conditions.
| (i) | 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:
| Schedule of property and equipment, estimated useful life | ||
| 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.
| (j) | 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 or a gain from a bargain purchase.
| (k) | 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 test. 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 September 31, 2021 and June 30, 2021, there were no qualitative factors that indicated goodwill was impaired.
| 10 |
| (l) | 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 using the modified retrospective transition approach applied to all contracts. Therefore, the reported results for the years ended June 30, 2020 and 2019 reflect the application of ASC 606. Management determined that there were no retroactive adjustments necessary to revenue recognition upon the adoption of the ASU 2014-09. 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 condensed 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 would 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 condensed 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 September 30, 2021.
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 stem cell therapy procedures from Pacific Stems. For Prakat and Pacific Stems, 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.
| 11 |
Net revenues from Pala accounted for over 75% of the Company’s total net revenues for the three ended September 30, 2021 and primarily comprised of a high volume of relatively low-dollar transactions. Pala, 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 does 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. As a result of Pala’s limited transaction history, 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. Although we have limited track record, further adjustments to the allowances, based on actual receipts, may be recorded upon settlement.
Disaggregation of Revenue
The following table presents the Company's revenue disaggregated by revenue source:
| Schedule of disaggregated revenue | ||||||||
| Three Months Ended | ||||||||
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| Product sales - third parties | $ | $ | ||||||
| Product sales - related party | ||||||||
| Service revenue - third parties | ||||||||
| Service revenue - related party | ||||||||
| Total revenue | $ | $ | ||||||
Contract Balances
The following table provides information about receivables and contract liabilities from contracts with customers:
| Schedule of receivables and contract liabilities | ||||||||
| September 30, | June 30, | |||||||
| 2021 | 2021 | |||||||
| Accounts receivable, net | $ | $ | ||||||
| Accounts receivable, net - 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.
| (m) | 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:
| Schedule of cost of revenue | ||||||||
| Three Months Ended | ||||||||
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| Product sales | $ | $ | ||||||
| Service revenue | ||||||||
| Total cost of revenue | $ | $ | ||||||
| 12 |
| (n) | Advertising |
Advertising costs are expensed as incurred.
During the three months ended September 30, 2021 and 2020, advertising expenses were approximately $
| (o) | 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 September 30, 2021 and 2020, stock-based compensation expense was $ and $, respectively.
| (p) | 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.
| (q) | 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 months ended September 30 2021, the Company’s only component of comprehensive income was foreign currency translation adjustments.
| (r) | 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 September 30, 2021, non-controlling interests pertained to the Company’s Prakat and Pala subsidiaries.
| (s) | 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.
| 13 |
The weighted average number of common stock equivalents related to convertible notes payable of and shares and stock options of and was not included in diluted loss per share, because the effects are antidilutive, for the three months ended September 30, 2021 and 2020, respectively.
There were no adjustments to the numerator during the three months ended September 30, 2021 and 2020.
| (t) | 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.
| (u) |
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. |
| 3. |
Business Combinations and Acquisition |
Fiscal 2021 Transactions
International Health Group, Inc. (“IHG”)
Effective January 29, 2021, the Company
acquired 100% of the common stock of IHG. In consideration for the acquisition, the Company issued shares of its common stock
at $0.44 per share, or a total fair value of $
The International Health Group 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.
The Company has made a preliminary allocation of the purchase price in regard to the acquisition related to the assets acquired, liabilities assumed and noncontrolling interests as of the purchase date. The following table summarizes the purchase price allocation:
| Purchase price allocation | ||||
| Preliminary | ||||
| Purchase Price | ||||
| Allocation | ||||
| Cash and cash equivalents | $ | |||
| Accounts receivable | ||||
| Other receivables | ||||
| Property and equipment, net | ||||
| Intangible assets | ||||
| Accounts payable | ( | ) | ||
| Accrued liabilities | ( | ) | ||
| Deferred revenue | ( | ) | ||
| Notes payable | ( | ) | ||
| Purchase price consideration | $ | |||
| 14 |
The intangible assets for IHG are in the form of its curriculum development and will be amortized on a straight-line basis over its determined useful life of ten years for the following reasons:
| 1) | The International Health Group transaction was accounted for as a business combination in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”). | |
| 2) | IHG’s founder initially started the program approximately ten years ago offering a Certified Nurse’s Assistant Program (CNA), thus giving the intangible asset a minimum of a 10-year useful. | |
| 3) | Under US GAAP, the cost of intangible assets is either amortized over their respective useful/legal lives, or are tested for impairment on an annual basis. Pursuant to the costs incurred over a ten-year period to develop the CNA and other curriculums, the Company has determined a minimum of a 10-year useful life is appropriate. |
Pacific Stem Cells, LLC (“Pacific Stem”)
Effective February 3, 2021, the Company
acquired 100% of the membership units of Pacific Stem. In consideration for the acquisition, the Company issued $
The Pacific Stem Cells 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. Goodwill is primarily attributable to the go-to-market synergies that are expected to arise as a result of the acquisition. The goodwill is not deductible for tax purposes.
The Company has made a preliminary allocation of the purchase price in regard to the acquisition related to the assets acquired, liabilities assumed and noncontrolling interests as of the purchase date. The following table summarizes the purchase price allocation:
| Purchase price allocation | ||||
| Preliminary | ||||
| Purchase Price | ||||
| Allocation | ||||
| Cash and cash equivalents | $ | |||
| Goodwill | ||||
| Accounts payable | ( | ) | ||
| Notes payable | ( | ) | ||
| Purchase price consideration | $ | |||
Ignite
On April 21, 2021, the Company closed
the transaction by moving into a Membership Interest Purchase Agreement to acquire Ignite IT LLC (“Ignite”). The Company acquired
all of the issued and outstanding membership interests, including business plans and access to contacts of Ignite. In consideration for
the acquisition, the Company issued a promissory note for $
The Company evaluated the acquisition
of the purchased assets under ASC 805 and concluded that as substantially all of the fair value of the gross assets acquired is concentrated
in an identifiable group of similar assets, the transaction did not meet the requirements to be accounted for as a business combination
and therefore was accounted for as an asset acquisition. Accordingly, the Company recorded the
acquired research and development at a fair value of $
| 15 |
| 4. | 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
The Company determined that Pala is a VIE, and the Company does have the power to direct the activities that most significantly impact the economic performance of Pala. Dalrada is therefore considered the primary beneficiary and as such, the Company has consolidated the activities of the JV.
Pursuant to the partnership
agreement, Dalrada had an equity commitment of $
Pursuant to the JV agreement,
Dalrada issued
shares of common stock to Vivera after the period ended September 30, 2021. The fair value of $
| 5. | Selected Balance Sheet Elements |
Inventories
Inventories consisted of the following as of September 30, 2021 and June 30, 2021:
| Schedule of inventory | ||||||||
| September 30, | June 30, | |||||||
| 2021 | 2021 | |||||||
| Raw materials | $ | $ | ||||||
| Finished goods | ||||||||
| Inventories | $ | $ | ||||||
Property and Equipment, Net
Property and equipment, net consisted of the following as of September 30, 2021 and June 30, 2021:
| Schedule of property and equipment | ||||||||
| September 30, | June 30, | |||||||
| 2021 | 2021 | |||||||
| Machinery and equipment | $ | $ | ||||||
| Leasehold improvements | ||||||||
| Computer and office equipment | ||||||||
| Property and equipment, gross | ||||||||
| Less: Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
| 16 |
Depreciation and amortization expense
of $
Intangible Assets, Net
Intangible assets, net consisted of the following as of September 30, 2021 and June 30, 2021:
| Schedule of Intangible assets, net | ||||||||||||
| Gross | Accumulated | Carrying | ||||||||||
| Amount | Amortization | Value | ||||||||||
| Amortized Assets: | ||||||||||||
| Curriculum development | $ | $ | $ | |||||||||
| Licenses | ||||||||||||
| $ | $ | $ | ||||||||||
| June 30, 2021 | Gross | Accumulated | Carrying | |||||||||
| Amount | Amortization | Value | ||||||||||
| Amortized: | ||||||||||||
| Curriculum development | $ | $ | $ | |||||||||
| Licenses | ||||||||||||
| $ | $ | $ | ||||||||||
Amortization expense of $
| 6. | Accrued Payroll Taxes |
As of September 30, 2021, and June 30,
2021, the Company had $
| 7. |
Notes Payable |
Notes Payable - Related Parties
The following is a summary of notes payable – related parties at September 30, 2021 and June 30, 2021.
| Schedule of notes payable | ||||||||
| September 30, 2021 | ||||||||
| Outstanding | Accrued | |||||||
| Principal | Interest | |||||||
| Related entity 1 | $ | $ | ||||||
| Related entity 2 | ||||||||
| Related entity 3 | ||||||||
| $ | $ | |||||||
| 17 |
| June 30, 2021 | ||||||||
| Outstanding | Accrued | |||||||
| Principal | Interest | |||||||
| Related entity 1 | $ | $ | ||||||
| Related entity 2 | ||||||||
| Related entity 3 | ||||||||
| Related entity 4 | ||||||||
| Related entity 5 | ||||||||
| $ | $ | |||||||
In September 2021, the Company converted
$
All
notes are unsecured, bear interest at
As of September 30, 2021 and June 30, 2021 total accrued interest for Notes Payable-Related Parties was $
| 8. | Convertible Note Payable – Related Parties |
As of June 30, 2019, the Company issued
a convertible note for $
In September 2021, the Company converted,
along with the related party notes above, principal of $
| 9. | Related Party Transactions |
As of September 30, 2021 and June
30, 2021, the Company owed $
As of September 30, 2021 and June 30,
2021, the amount above includes $
In September 2021, the Company converted
related party notes and convertible notes of principal totaling $
On July 1, 2019, the Company formalized
an employment agreement with its Chief Executive Officer, which entitles him to compensation of three hundred and ninety-three thousand
dollars ($393,000) per year. Annual increases will be up to 10% based performance criteria to be determined at a later date. He will be
issued common stock of the Company sufficient to provide a 10% ownership position post reverse split which shares be maintained for a
period of two years. In addition to all other benefits and compensation, he shall be eligible for a quarterly bonus of $47,000 based on
if the Company achieves a net profit for that quarter. In the three months ended September 30, 2021, the Chief Executive Officer converted
$
| 18 |
The following is a summary of revenues recorded by the Company’s to related parties with common ownership:
| Summary of revenues | ||||||||
| Three Months Ended | ||||||||
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| Dalrada Health | $ | $ | ||||||
| Prakat | ||||||||
| Total | $ | $ | ||||||
See Notes 6, 7, and 8 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 subsequent to September 30, 2021 pursuant to the conversion of $
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 a majority 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.
| 11. | Stockholders’ Equity |
Common Stock
In August 2021, the Company issued shares of common stock related to the acquisition of Pacific Stem.
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 of common stock to board members for a total fair value of $
In October 2021, the Company issued shares of common stock related to the acquisition of IHG.
Dalrada Financial Corp 2020 Stock Compensation Plan
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 $
| 19 |
| 12. | Segment Reporting |
Upon the Company’s
acquisitions in the year ended June 30, 2020 and 2021, the Company manages its business and makes its decisions based on segments.
The Company classifies its operations into 5
Segment information for the three months ended September 30, 2021 and 2020 is as follows:
| Schedule of segment information | ||||||||||||||||||||||||||||
| Three Months Ended September 30, 2021 | ||||||||||||||||||||||||||||
| Engineering | Health | Information Technology | Education | Corporate | Inter-Segment Eliminations | Consolidated | ||||||||||||||||||||||
| Revenues | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||
| Income (loss) from operations | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
| Net income (loss) | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||
| Three Months Ended September 30, 2020 | ||||||||||||||||||||||||||||
| Engineering | Health | Information Technology | Education | Corporate | Inter-Segment Eliminations | Consolidated | ||||||||||||||||||||||
| Revenues | $ | $ | $ | $ | $ | $ | ( | ) | $ | |||||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||
| Net loss | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||||||||||
Geographic Information
The following table presents revenue by country:
| Schedule of revenue by country | ||||||||
| Three Months Ended | ||||||||
| September 30. | ||||||||
| 2021 | 2020 | |||||||
| United States | $ | $ | ||||||
| Europe | ||||||||
| India | ||||||||
| $ | $ | |||||||
The following table presents inventories by country:
| Schedule of inventories by country | ||||||||
| September 30, | June 30, | |||||||
| 2021 | 2021 | |||||||
| United States | $ | $ | ||||||
| Europe | ||||||||
| $ | $ | |||||||
| 20 |
The following table presents property and equipment, net, by country:
| Schedule of property and equipment by country | ||||||||
| September 30, | June 30, | |||||||
| 2021 | 2021 | |||||||
| United States | $ | $ | ||||||
| Europe | ||||||||
| India | ||||||||
| $ | $ | |||||||
| 13. | 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 of 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 of 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 three months ended September 3, 2021, management determined that there were no variable lease costs.
Right of Use Asset
In May 2020, the Company entered into
a
| 21 |
In May 2020, the Company entered into
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 $
In August 2020, the Company’s Likido subsidiary entered in a new operating agreement for warehouse space. The lease matures in July 2021.
In June 2017, the Company’s IHG subsidiary entered into a lease for 3 separate office suites in San Diego, California. The lease expires in January 2022.
In May 2021, the Company’s
PSC subsidiary entered into a three 3 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 $
| 14. | Subsequent Events |
On October 28, 2021, 250,000 shares were issued to Vivera pursuant to the Pala agreement.
In November 2021, Pala Diagnostics signed a Factoring Agreement for up to $1,000,000 with a related party which bears an annualized interest rate of 24%.
| 22 |
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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.
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 $603,173 during the three months ended September 30, 2021. We will be required to raise substantial capital to fund our capital expenditures, working capital, and other cash requirements since our current cash assets are exhausted and we have generated no revenues to date to sustain our operations. We will continue to rely on related parties to fund our operations, which may dilute existing share value. We will need to 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 expect to incur additional losses during the foreseeable future. Until we are able to successfully execute our business plan. Consequently, we will require substantial additional capital to continue our development and marketing activities. 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.
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. In addition, these new rules and regulations have made it more difficult and more expensive for us to obtain director and officer liability insurance, which we currently cannot afford to do. 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 September 30, 2021 and 2020
The following table sets forth the results of our operations for the three months ended September 30, 2021 and 2020:
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| Revenues | $ | 4,602,353 | $ | 759,393 | ||||
| Cost of revenues | 1,204,335 | 233,428 | ||||||
| Gross profit | 3,398,018 | 525,965 | ||||||
| Operating expenses | 4,309,873 | 1,330,363 | ||||||
| Loss from operations | (911,855 | ) | (804,398 | ) | ||||
| Other income (expenses) | (64,818 | ) | (104,943 | ) | ||||
| Net loss | $ | (976,673 | ) | $ | (909,341 | ) | ||
| 23 |
Revenues and Cost of Revenues
During the three months ended September 30, 2021, the Company recorded revenues of $4,602,353 as attributable to each entity below:
| Three Months Ended | ||||||||
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| Pala Diagnostics | $ | 3,787,239 | $ | – | ||||
| Prakat | 454,592 | 367,076 | ||||||
| IHG | 279,478 | – | ||||||
| Health | 53,936 | 72,450 | ||||||
| Likido | 11,807 | 242,000 | ||||||
| Precision | 3,610 | 54,172 | ||||||
| Other | 11,690 | 23,694 | ||||||
| $ | 4,602,353 | $ | 759,393 | |||||
Operating Expenses
Operating expenses for the three months ended September 30, 2021 was $4,309,873 compared to operating expenses of $1,330,363 during the three months ended September 30, 2020. The increase in operating expenses was a result of corporate expansion, stock-based compensation, increased operating activity across the various subsidiaries and the Pala joint venture as most of fiscal 2020 was spent on development of the Company’s proposed business operations. During the three months ended September 30, 2021, the Company recorded stock compensation expense of $677,507. The increase was a result of options issued to the CFO and shares issued to the Board of Directors.
Other Income (Expense)
Other income (expense) consists of penalties and interest within interest expense on the consolidated statements of operations.
Net Income (Loss)
Net loss for the three months ended September 30, 2021 was $976,673 compared to net loss of $909,341 for the three months ended September 30, 2020.
Liquidity and Capital Resources
As of September 30, 2021, the Company had an accumulated deficit of $109,604,016. The Company has few revenues and significant losses. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. Cash presently on hand is immaterial. We anticipate needing over $1,000,000 during the next twelve months to fund operations, expand our subsidiaries and continue the commercialization of our Likido heating & cooling units. Management is planning to support operations by raising capital, and by accelerating sales & marketing efforts of high-margin heating & cooling units, precision parts, our Glanhealth products and COVID-19 testing through Pala Diagnostics. 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 audit firm included an explanatory paragraph in their report regarding substantial doubt about our Company’s ability to continue as a going concern.
| 24 |
Working Capital
As of September 30, 2021, the Company had current assets of $5,887,946 and current liabilities of $5,459,903 compared with current assets of $1,640,511 and current liabilities of $17,175,111 at June 30, 2021. The increase in the working capital was primarily a result of Pala Diagnostics commercial insurance and government billing for COVID-19 testing services.
Cash Flows
| Three Months Ended | ||||||||
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| Net cash used in operating activities | $ | (3,212,720 | ) | $ | (393,313 | ) | ||
| Net cash used in investing activities | (217,871 | ) | (68,099 | ) | ||||
| Net cash provided by financing activities | 3,373,297 | 511,532 | ||||||
| Net change in cash during the period, before effects of foreign currency | $ | (57,294 | ) | $ | 50,120 | |||
Cash flow from Operating Activities
During the three months ended September 30, 2021, the Company used $3,212,720 of cash for operating activities compared to $393,313 used during the three months ended September 30, 2020. The increase in the use of cash for operating activities was primarily due to the net loss due to an overall increase in operations as the Company incurred more day-to-day operating costs and stock-based compensation.
Cash flow from Investing Activities
During the three months ended September 30, 2021, the Company used $217,871 of cash for investing activities compared to $68,099 used during the three months ended September 30, 2020. The increase in the use of cash for investing activities was primarily due to the purchase of equipment used in the COVID-19 testing operations.
Cash flow from Financing Activities
During the three months ended September 30, 2021, the Company received $3,373,297 in cash from financing activities compared to $511,532 during the three months ended September 30, 2020. The Company received proceeds of $3,399,035 from the issuance of related party notes payable compared to $511,532 received during the three months ended September 30, 2020. The Company also repaid $10,911 on the notes payable and repurchased $14,827 of common shares during the three months ended September 30, 2021.
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.
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.
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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.
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.
Subsequent Events
Management has evaluated all other subsequent events through November 18, 2021, the date the financial statements were available to be issued. Based on this evaluation, no additional material events were identified which require adjustment or disclosure in these financial statements.
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 three months ended September 30, 2021.
(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.
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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").
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:
Accounting and Financial Reporting Policies and Procedures
The Company does not currently have a comprehensive and formalized accounting and financial reporting policies and procedures manual, nor do they have sufficient informal practices in place to efficiently and effectively complete a majority of the aspects of financial reporting, including performing reconciliations and preparing adequate and complete schedules. Management Plans to establish comprehensive financial reporting policies which include performing reconciliations and preparing adequate and complete schedules during fiscal year 2022.
Tracking of Contracts and Agreements
The Company should keep a master file in a centralized location of all executed contracts and agreements that the Company has entered into. In addition, the Company should document any significant transaction in an agreement. Centralizing master documents and putting them with a responsible party that is authorized to see all master documents should increase management’s ability to quickly track down important documents in the course of business and during financial reporting periods. Management plans to keep a master file in a centralized location of all executed contracts and agreements that the Company has entered into beginning fiscal year 2021.
Evidence and Retention of Financial Data Review
The Company should document and retain all management reviews related to financial data. This includes reviews of reconciliations, accounts receivable, accounts payable, financial reports, budgets, etc. Management review procedures related to financial data should also be included in the accounting policies and procedures manual. Management plans to retain reviews of reconciliations, accounts receivable, accounts payable, financial reports, budgets, etc. during fiscal year 2022.
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PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
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. EXHIBITS
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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: November 18, 2021 | 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 | November 18, 2021 |
| Brian Bonar | and Director |
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