DALRADA FINANCIAL CORP - FORM 10-Q

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EX-32.1 - CERTIFICATION - DALRADA FINANCIAL CORP	dalrada_ex3201.htm
EX-31.1 - CERTIFICATION - DALRADA FINANCIAL CORP	dalrada_ex3101.htm

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, 2021

☐ 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)

858-283-1253

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
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 [X] 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 [X] 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 þ

As of May 13, 2021, the registrant’s outstanding stock consisted of 72,264,742 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	28
Item 4. Controls and Procedures	28

PART II – OTHER INFORMATION	31
Item 1. Legal Proceedings	31
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Securities	31
Item 3. Defaults Upon Senior Securities	31
Item 4. Mine Safety Disclosures	31
Item 5. Other Information	31
Item 6. Exhibits	31
SIGNATURES	32

PART I - FINANCIAL INFORMATION

Item 1 - Financial Statements

DALRADA FINANCIAL CORPORATION

Condensed Consolidated Balance Sheets

(unaudited)

	March 31,			June 30,
	2021			2020
Assets
Current assets:
Cash and cash equivalents	$	265,212		$	75,165
Accounts receivable, net		1,169,861			229,167
Accounts receivable, net - related parties		83,758			99,357
Other receivables		30,822			76,013
Inventories		591,756			650,422
Prepaid expenses and other current assets		230,681			121,413
Total current assets		2,372,090			1,251,537
Property and equipment, net		346,201			240,508
Other assets		30,000			30,000
Goodwill		1,429,841			143,152
Right of use asset, net		957,372			1,118,474
Total assets	$	5,135,504		$	2,783,671

Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable	$	394,515		$	297,720
Accrued liabilities		400,618			231,865
Accrued payroll taxes, penalties and interest		10,884,158			10,519,440
Accounts payable and accrued liabilities – related parties		568,805			556,317
Deferred revenue		20,000			176,291
Due to seller		98,000			–
Notes payable, current portion		127,352			93,217
Notes payable – related parties		6,937,324			3,053,782
Convertible notes payable – related party		2,656,580			1,875,000
Right of use liability		233,912			225,611
Total current liabilities		22,321,264			17,029,243
Notes payable		299,900			–
Right of use liability		723,460			892,863
Total liabilities		23,344,624			17,922,106

Commitments and contingencies (Note 12)

Stockholders' deficit:
Preferred stock, $0.01 par value, 100,000 shares authorized, 5,000 shares issued and outstanding at March 31, 2021 and June 30, 2020, respectively		50			50
Common stock, $0.005 par value, 1,000,000,000 shares authorized, 73,264,742 and 68,464,742 shares issued and outstanding at March 31, 2021 and June 30, 2020, respectively		366,324			342,324
Common stock to be issued		687,800			–
Additional paid-in capital		92,717,074			91,904,874
Noncontrolling interests		27,493			51,821
Accumulated deficit		(112,008,589	)		(107,429,607	)
Accumulated other comprehensive income (loss)		728			(7,897	)
Total stockholders' deficit		(18,209,120	)		(15,138,435	)
Total liabilities and stockholders' deficit	$	5,135,504		$	2,783,671

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

DALRADA FINANCIAL CORPORATION

Condensed Consolidated Statements of Operations

(unaudited)

	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2021			2020			2021			2020
Revenues	$	1,303,022		$	292,418		$	2,962,784		$	341,901
Revenues - related party		285,307			58,906			440,455			58,906
Total revenues		1,588,329			351,324			3,403,239			400,807
Cost of revenue		854,791			185,902			1,547,052			200,006
Gross profit		733,538			165,422			1,856,187			200,801

Operating expenses:
Selling, general and administrative		2,917,707			824,506			5,644,157			1,688,792
Research and development		125,752			177,874			404,253			449,809
Expenses incurred on terminated acquisition		–			(355	)		–			169,904
Total operating expenses		3,043,459			1,002,025			6,048,410			2,308,505
Loss from operations		(2,309,921	)		(836,603	)		(4,192,223	)		(2,107,704	)

Other income (expense):
Interest expense		(184,370	)		(219,483	)		(468,181	)		(653,078	)
Interest income		2,991			–			3,893			–
Other income		458			–			37,256			–
Gain on expiration of accrued tax liability		–			–			–			1,276,837
Gain (loss) on foreign exchange		21,393			16,583			15,945			12,171
Total other income (expenses)		(159,528	)		(202,900	)		(411,087	)		635,930
Net loss before taxes		(2,469,449	)		(1,039,503	)		(4,603,310	)		(1,471,774	)
Income taxes		–			–			–			–
Net loss		(2,469,449	)		(1,039,503	)		(4,603,310	)		(1,471,774	)
Net loss attributable to noncontrolling interests		(4,724	)		(11,064	)		(24,328	)		(11,064	)
Net loss attributable to Dalrada Financial Corporation stockholders	$	(2,464,725	)	$	(1,028,439	)	$	(4,578,982	)	$	(1,460,710	)

Foreign currency translation		(15,634	)		59			8,625			2,159
Comprehensive (loss)	$	(2,485,083	)	$	(1,039,444	)	$	(4,594,685	)	$	(1,469,615	)

Net loss per common share to Dalrada stockholders - basic	$	(0.04	)	$	(0.02	)	$	(0.07	)	$	(0.03	)
Net loss per common share to Dalrada stockholders - diluted	$	(0.04	)	$	(0.02	)	$	(0.07	)	$	(0.03	)

Weighted average common shares outstanding — basic		70,278,075			60,737,965			69,060,362			55,897,598
Weighted average common shares outstanding — diluted		70,278,075			60,737,965			69,060,362			55,897,598

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

DALRADA FINANCIAL CORPORATION

Condensed Consolidated Statements of Stockholders’ Deficit

(unaudited)

	Preferred Stock				Common Stock				Common Stock to be		Additional Paid-in		Non- controlling			Accumulated			Accumulated Other Comprehensive Income			Total Stockholders'
	Shares		Amount		Shares		Amount		Issued		Capital		Interests			Deficit			(Loss)			Deficit

Balance at June 30, 2019		–	$	–		48,281,128	$	241,406	$	–	$	91,086,179	$	–		$	(104,963,229	)	$	–		$	(13,635,644	)
Net loss		–		–		–		–		–		–		–			(620,731	)		–			(620,731	)
Balance at September 30, 2019		–		–		48,281,128		241,406		–		91,086,179		–			(105,583,960	)		–			(14,256,375	)
Conversion of related party payable to preferred stock		5,000		50		–		–		–		120		–			–			–			170
Common stock issued pursuant to business combination		–		–		6,118,000		30,590		–		243,496		–			–			–			274,086
Net income		–		–		–		–		–		–		–			188,460			–			188,460
Foreign currency translation		–		–		–		–		–		–		–			–			2,100			2,100
Balance at December 31, 2019		5,000		50		54,399,128		271,996		–		91,329,795		–			(105,395,500	)		2,100			(13,791,559	)
Common stock issued pursuant to acquisitions		–		–		6,600,000		33,000		–		222,000		63,000			–			–			318,000
Common stock issued for services		–		–		3,000,000		15,000		–		157,800		–			–			–			172,800
Net loss		–		–		–		–		–		–		(11,064	)		(1,028,439	)		–			(1,039,503	)
Foreign currency translation		–		–		–		–		–		–		–			–			59			59
Balance at March 31, 2020		5,000	$	50		63,999,128	$	319,996	$	–	$	91,709,595	$	51,936		$	(106,423,939	)	$	2,159		$	(14,340,203	)


Balance at June 30, 2020		5,000	$	50		68,464,742	$	342,324	$	–	$	91,904,874	$	51,821		$	(107,429,607	)	$	(7,897	)	$	(15,138,435	)
Net loss		–		–		–		–		–		–		5,015			(914,356	)		–			(909,341	)
Foreign currency translation		–		–		–		–		–		–		–			–			14,209			14,209
Balance at September 30, 2020		5,000		50		68,464,742		342,324		–		91,904,874		56,836			(108,343,963	)		6,312			(16,033,567	)
Net loss		–		–		–		–		–		–		(24,619	)		(1,199,901	)		–			(1,224,520	)
Foreign currency translation		–		–		–		–		–		–		–			–			10,050			10,050
Balance at December 31, 2020		5,000		50		68,464,742		342,324		–		91,904,874		32,217			(109,543,864	)		16,362			(17,248,037	)
Common stock issued to board members		–		–		4,500,000		22,500		–		707,500		–			–			–			730,000
Common stock issued pursuant to business combinations		–		–		300,000		1,500		687,800		104,700		–			–			–			794,000
Net loss		–		–		–		–		–		–		(4,724	)		(2,464,725	)		–			(2,469,449	)
Foreign currency translation		–		–		–		–		–		–		–			–			(15,634	)		(15,634	)
Balance at March 31, 2021		5,000	$	50		73,264,742	$	366,324	$	687,800	$	92,717,074	$	27,493		$	(112,008,589	)	$	728		$	(18,209,120	)

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

DALRADA FINANCIAL CORPORATION

Condensed Consolidated Statements of Cash Flows

(unaudited)

	Nine Months Ended
	March 31,
	2021			2020
Cash flows from operating activities:
Net loss	$	(4,603,310	)	$	(1,471,774	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		37,318			–
Stock compensation		730,000			172,800
Research and development expenses associated with asset acquisition		–			92,083
Changes in operating assets and liabilities:
Accounts receivable		(925,095	)		(25,394	)
Other receivables		48,191			(108,779	)
Inventories		58,666			(110,443	)
Prepaid expenses and other current assets		(109,268	)		(54,905	)
Accounts payable		47,350			107,015
Accounts payable and accrued liabilities related party advances		675,016			87,134
Accrued liabilities		130,027			38,918
Accrued payroll taxes, penalties and interest		364,718			(712,258	)
Deferred revenue		(156,291	)		–
Other current liabilities		–			42,765
Net cash used in operating activities		(3,702,678	)		(1,942,838	)

Cash flows from investing activities:
Net cash acquired pursuant to business combination		70,131			234,261
Purchase of property and equipment		(139,081	)		(160,515	)
Net cash provided by (used in) investing activities		(68,950	)		73,745

Cash flows from financing activities:
Proceeds from related party notes payable		4,002,594			1,975,200
Repayment of notes payable		(49,544	)		–
Net cash provided by financing activities		3,953,050			1,975,200

Net increase in cash and cash equivalents		181,422			106,106
Effect of exchange rate changes on cash		8,625			(2,976	)
Cash and cash equivalents at beginning of period		75,165			963
Cash and cash equivalents at end of period	$	265,212		$	104,093

Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	–		$	–
Cash paid for interest	$	–		$	–

Supplemental disclosure of non-cash investing and financing activities:
Common stock issued pursuant to business combination	$	794,000		$	436,086
Fair value of assets acquired and liabilities assumed in acquisition	$	492,689		$	355,934
Fair value of noncontrolling interest acquired in acquisition	$	–		$	63,000
Conversion of accounts payable - related parties to related party convertible note	$	781,580		$	–
Conversion of accounts payable - related parties to preferred stock	$	–		$	170
Outstanding balance of note payable issued for due to seller payment	$	98,000		$	–
Transfer of related party advances to related party notes payable	$	–		$	37,469

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

DALRADA FINANCIAL CORPORATION

Notes to the Condensed Consolidated Financial Statements

(unaudited)

1.	Organization and Nature of Operations

Dalrada Financial Corporation (the “Company”) was incorporated in September 1982 under the laws of the State of California, and reincorporated in May 1983 under the laws of the State of Delaware. Dalrada Financial Corporation reincorporated in May 2020 in the state of Wyoming.

The Company’s operating subsidiaries Dalrada Precision, Dalrada Health Products, and Dalrada Technologies offer high-value innovative alternative solutions to businesses and consumers worldwide. With a global footprint in Malaysia, UK, India, and United States, the Company is well-positioned to supply products and services with the ability to make a meaningful impact in environmental sustainability, healthcare, and business growth leveraging technology. Driven by passionate and dedicated people, Dalrada’s mission is to introduce disruptive solutions by offering a different approach to solving global problems.

In June 2018, the Company created a new subsidiary, Dalrada Precision Corp. (“Dalrada Precision”), a mechanical contract provider. Dalrada Precision extends the client its engineering and operations team by helping devise bespoke 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. In October 2018, the Company created a new subsidiary, Dalrada Health Products Corp (“Dalrada Health”). Dalrada Health partners with client companies for the manufacturing & distribution of medical disposables, hospital equipment and furniture, medical devices, laboratory and dental products, and sanitizing, disinfectant and PPE products & services. In May 2019, Dalrada Health acquired a new subsidiary, C2C Life Sciences, Inc. (“C2C”). On November 1, 2019, the acquisition was rescinded, as the Company never gained control over C2C. Such costs incurred in connection with this rescinded acquisition, have been reflected in these condensed consolidated financial statements as expenses incurred on terminated acquisition.

On December 6, 2019, Dalrada, via its wholly owned subsidiary, Dalrada Precision, acquired, by stock exchange agreement, 100% of Likido Ltd. (HQ) (“Likido”) in exchange of 6,118,000 shares of the Company’s common stock. Likido, a United Kingdom engineering-design company, is based in Edinburgh, Scotland. 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 enhancing quality of life through the provision of low-carbon heating and cooling systems. In connection with the purchase of Likido, the Company is obligated to fund operations for a total up to $600,000 (see Note 3).

On January 9, 2020, Dalrada purchased seventy two percent (72%) of the issued and outstanding common equity shares of Prakat Solutions Inc. a Texas corporation, (“Prakat”). The purchase was made by means of a Stock Purchase Agreement (“SPA”). The consideration for the share purchase was three million six hundred thousand, (3,600,000) common shares of DFCO. Prakat has a wholly owned subsidiary based in India, Prakat Solutions Private Limited, which provides global customers with software and technology solutions specializing in Test Engineering, Accessibility Engineering, Product Engineering and Application Modernization. The Prakat India team provides end to end Product Engineering services across various domains, including – Banking & Financial Services, Telecom, Retail, Healthcare, Manufacturing, Legal and IT Infrastructure. Prakat India is an ISO 9001 Certified Company.

On or about March 23, 2020, Dalrada Health Products Corporation acquired one hundred percent (100%) of the ownership of Shark. Shark is a cleaning solutions provider using electrostatic machines to spray and deodorize residential spaces, healthcare facilities, hospitality, transportation, manufacturing, automotive, schools/education systems, and other facilities requiring cleaning services. Through the acquisition of Shark, Dalrada Health Products developed the GlanHealth Brand (dba of Dalrada Health Products Corporation) 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.

On January 29, 2021, Dalrada Health entered into a stock purchase agreement and acquired one hundred percent (100%) of the issued and outstanding shares of International Health Group, Inc., a California corporation (“IHG”). The purchase price consideration is 1,000,000 common shares of DFCO, with no shares to be released upon closing and 1,000,000 shares released quarterly over the course of twenty-four months beginning on April 1, 2021. IHG provides highly trained nursing and medical assistants for hospitals and home health facilities since 2006. IHG Medical Assistant programs include CNA and HHA training and the fast-track 22-Day CNA Certification Program at its state-approved testing facility.

On February 3, 2021, Dalrada Health entered into a unit purchase agreement and acquired one hundred percent (100%) of the issued and outstanding membership units of Pacific Stem Cells, LLC, a California limited liability company (“Pacific Stem”). The purchase price consideration is $352,000 in cash and 1,000,000 common shares of DFCO, with 300,000 shares to be released upon closing and the remaining 700,000 shares released quarterly over the course of twenty-four months. Pacific Stem provides regenerative therapy as a potential solution for the prevention, detection, and treatment of cellular breakdown associated with aging and a variety of other conditions. Refer to the Subsequent Events section for an event related to Pacific Stem.

Dalrada Health continues to explore additional products and services within the immunization and personal protective equipment industry.

The Company's principal executive offices are located at 600 La Terraza Blvd., Escondido, California 92025.

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, 2021, the Company has a working capital deficit of $19,949,174 and an accumulated deficit of $112,008,589. 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.

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 2021. 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, IHG and Pacific Stem) since their respective acquisition dates (see Note 3). All inter-company transactions and balances have been eliminated on consolidation.

(c)

Use of Estimates

The preparation of these condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and assumptions related to the valuation of inventory, valuation of accrued payroll tax liabilities, valuation of acquired assets and liabilities, variables used in the computation of share-based compensation, and deferred income tax asset valuation allowances.

The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.

(d)

Cash and Cash Equivalents

The Company considers all highly liquid instruments with a maturity of 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.

(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 March 31, 2021, and June 30, 2020, the Company had an allowance of doubtful accounts of $28,478 and $0, respectively.

As of March 31, 2021, accounts receivable from one customer represented 68% of total accounts receivable. For the three and nine months ended March 31, 2021 and 2020, revenues from the same customer represented 16% and 25% of total revenues, respectively.

This customer is Tongrun for which has sales/receivable in DPC and Likido.

(h)

Inventory

Inventory is recorded at the lower of cost or net realizable value on a first-in first-out basis. As of March 31, 2021 and June 30, 2020, 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:

		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.

(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 March 31, 2021 and June 30, 2020, there were no qualitative factors that indicated goodwill was impaired.

(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 March 31, 2020.

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.

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,
	2021		2020		2021		2020
Product sales - third parties	$	586,522	$	46,665	$	1,715,478	$	96,148
Product sales - related party		23,429		58,906		81,077		58,906
Service revenue - third parties		716,500		245,753		1,247,306		245,753
Service revenue - related party		261,878		–		359,378		–
Total revenue	$	1,588,329	$	351,324	$	3,403,239	$	400,807

Contract Balances

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

	March 31,		June 30,
	2021		2020
Accounts receivable, net	$	1,169,861	$	229,167
Accounts receivable, net - related parties		83,758		99,357
Deferred revenue		20,000		176,291

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:

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2021		2020		2021		2020
Product sales	$	401,790	$	–	$	798,934	$	7,254
Service revenue		453,001		185,902		748,118		192,752
Total cost of revenue	$	854,791	$	185,902	$	1,547,052	$	200,006

(n)

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.

(o)

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.

(p)

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, 2021, the Company’s only component of comprehensive income was foreign currency translation adjustments.

(q)

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 58,042,294 and 57,188,206 shares, respectively, was not included in diluted loss per share, because the effects are antidilutive, for the three and nine months ended March 31, 2021 and 2020.

(r)

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.

(s)

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

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 1,000,000 shares of its common stock at $0.44 per share, or a total fair value of $440,000. The Company acquired IHG to expand into the educational sector of the Health and Human Services Industry.

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. 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:

	Preliminary
	Purchase Price
	Allocation
Cash and cash equivalents	$	43,617
Other receivables		3,000
Property and equipment, net		3,930
Goodwill		693,385
Accounts payable		(31,527	)
Accrued liabilities		(38,726	)
Notes payable		(233,679	)
Purchase price consideration	$	440,000

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 $352,650 in cash consideration and issued 1,000,000 shares of its common stock at $0.354 per share for a total fair value of $706,650. The Company acquired Pacific Stem as an opportunity to enter the growing alternative Health and Human Services Industry.

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.

	Preliminary
	Purchase Price
	Allocation
Cash and cash equivalents	$	281,164
Goodwill		593,304
Accounts payable		(17,918	)
Notes payable		(149,900	)
Purchase price consideration	$	706,650

As of March 31, 2021, total payments made to the seller was $254,650, including cash payments made by the Company of $187,650 and a promissory note issued to a related party of $67,000 in exchange for repayment to the seller. The remaining cash consideration owed to the seller was $98,000.

Unaudited Pro Forma Financial Information

The following unaudited pro forma financial information presents the Company’s financial results as if the various acquisitions had occurred as of July 1, 2019. The unaudited pro forma financial information is not necessarily indicative of what the financial results actually would have been had the acquisition been completed on this date. In addition, the unaudited pro forma financial information is not indicative of, nor does it purport to project the Company’s future financial results. The pro forma information does not give effect to any estimated and potential cost savings or other operating efficiencies that could result from the acquisitions:

	Nine Months Ended
	March 31,
	2021			2020
Revenues	$	4,386,349		$	2,634,546
Net income (loss) attributable to Dalrada	$	(4,496,176	)	$	(1,369,012	)
Net income (loss) per common share	$	(0.07	)	$	(0.02	)

4.	Property and Equipment, Net

Property and equipment, net consisted of the following as of March 31, 2021 and June 30, 2020:

	March 31,			June 30,
	2021			2020
Machinery and equipment	$	237,746		$	143,930
Leasehold improvements		149,889			112,366
Computer and office equipment		84,796			52,665
		472,431			308,961
Less: Accumulated depreciation		(126,230	)		(68,453	)
	$	346,201		$	240,508

Depreciation and amortization expense of $37,318 and $0 for the nine months ended March 31, 2021 and 2020, respectively, were included in selling, general and administrative expenses in the statements of operations.

5.	Accrued Payroll Taxes

As of March 31, 2021, and June 30, 2020, the Company had $10,884,158 and $10,519,440, 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 make up the $10,884,158 balance have a calculated expiration date of 10 years according to the Internal Revenue Service statute of limitations. As the tax periods surpass their estimated expiration date, the Company removes 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. For the nine months ended March 31, 2021 and 2020, the Company recognized $364,718 and $564,479, respectively, of penalties and interest within interest expense on the condensed consolidated statements of operations. For the nine months ended March 31, 2021 and 2020, the Company recognized $0 and $1,276,837, respectively, within “Gain on expiration of accrued payroll taxes” as a result of quarterly tax liabilities that expired during the fiscal periods. The amount owing may be subject to additional late filing fees and penalties that are not quantifiable as of the date of these condensed consolidated financial statements. In addition, the Company periodically reviews the historical filings in determining if the statute has been paused or extended by the Internal Revenue Service.

6.	Notes Payable – Related Parties

The following is a summary of notes payable – related parties at March 31, 2021 and June 30, 2020:

	March 31, 2021
	Outstanding		Accrued
	Principal		Interest
Chief Executive Officer	$	781,580	$	–
Related entity 1		2,080,108		21,183
Related entity 2		1,924,408		27,647
Related entity 3		2,653,543		70,048
Related entity 4		279,265		62,161
	$	7,718,904	$	181,039

	June 30, 2020
	Outstanding		Accrued
	Principal		Interest
Related entity 1	$	740,237	$	12,417
Related entity 2		354,875		1,176
Related entity 3		1,887,052		23,192
Related entity 4		71,618		579
	$	3,053,782	$	37,364

All notes are unsecured, bear interest at 3% per annum, and are due 360 days from the date of issuance, ranging from 06/25/2020 to 03/26/2022. Each entity has significant influence or common ownership with the Company’s Chief Executive Officer. Several of these notes are in default. The company has not received any notices of default or demands for payment.

In March 2021, the Company issued a note of $781,580 in exchange for conversion of related party accounts payable to the Chief Executive Officer.

7.	Convertible Note Payable – Related Parties

As of June 30, 2019, the Company issued a convertible note for $1,875,000 to the Chief Executive Officer of the Company for compensation. Under the terms of the note, the amount due is unsecured, bears interest at 3% per annum, and was due 360 days from the date of issuance. On June 30, 2019, the Company issued note agreement which included a conversion feature of the outstanding balance at $0.034 per share. As the conversion price was equal to the fair value of the common shares on the date of the agreement, there was no beneficial conversion feature. A convertible note in the amount of $1,875,000 is past due and no default notices or demands have been received; this convertible note is expected to be renewed.

As of March 31, 2021, the outstanding principal balance of the promissory note was $1,875,000 and the accrued interest is $137,645.

8.	Related Party Transactions

As of March 31, 2021, and June 30, 2020, the Company owed $568,805 and $556,317, respectively, to related parties for reimbursement of various operating expenses, accrued salaries, management fees, etc. which has been recorded in accounts payable and accrued liabilities – related parties. As of March 31, 2021, and June 30, 2020, this amount includes $0 and $7,650 of management fees, which consists of accounting and administrative services to Trucept Inc., a related party company controlled by the Chief Executive Officer of the Company. The management fee agreement calls for monthly payments of $4,500. The agreement is ongoing until terminated by either party. As of March 31, 2021, amounts included within accounts payable and accrued liabilities – related parties for which relate to advances for operating expenses were $119,052.

In November 2019, the Chief Executive Officer converted $170 in amounts owed from the Company into 5,000 shares of Series F Super Preferred Stock.

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. As of March 31, 2021, and June 30, 2020, the Company had $0 and $556,317, accrued within accounts payable and accrued liabilities – related parties, respectively. On March 31, 2021, the Chief Executive Officer converted $781,580 of accrued salary into a convertible promissory note.

In February 2021, the Company issued 500,000 common shares to each board member, including the Chief Executive Officer, for an aggregate of 4,500,000 shares. The fair value of $730,000 was recorded in the consolidated statements of operations.

The following is a summary of revenues recorded by the Company’s to related parties with common ownership:

	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2021		2020		2021		2020
Dalrada Health	$	23,429	$	58,906	$	81,077	$	58,906
Prakat		126,748		–		224,248		–
Pacific Stem		135,130		–		135,130		–
	$	285,307	$	58,906	$	440,455	$	58,906

See Notes 5, 6, 7, 9, 10 and 12 for additional related party transactions.

9.	Preferred Stock

The Company has 100,000 shares authorized of Series F Super Preferred Stock, par value, $0.01, of which 5,000 shares (at a fair value of $170) were issued to the CEO as of December 31, 2019. 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.

10.

Common Stock

2021 Transactions

Effective January 29, 2021, the Company acquired 100% of the common stock of IHG. In consideration for the acquisition, the Company will issue a total of 1,000,000 shares of its common stock at $0.44 per share, or a total fair value of $440,000. 125,000 shares of common stock will be issued quarterly over the course of a twenty-four-month period.

Effective February 3, 2021, the Company acquired 100% of the membership units of Pacific Stem. As common stock consideration for the acquisition, the Company will issue a total of 1,000,000 shares of its common stock at $0.354 per share, or a fair value of $354,000. As of March 31, 2021, 300,000 of common stock has been issued and the remaining 700,000 common stock shares will be issued evenly over a twelve-month period.

As of March 31, 2021, the Company had issued 300,000 shares pursuant to the above acquisitions. The remaining shares will be issued on a quarterly basis in accordance with the respective agreements. The fair value of the shares not yet issued is $687,000 and was recorded to common stock to be issued in the consolidated balance sheets.

On July 9, 2020 the Board authorized the Dalrada Financial Corp 2020 stock compensation plan to be used to compensate the company board of directors. The plan allocates the issuance of up to 3,500,000 shares. On February 25, 2021, the Company amended the plan to issue up to 4,500,000 shares and issued an aggregate of 4,500,000 common shares, or 500,000 shares to each board member (9). 3,500,000 shares of common stock were granted on July 9, 2020 at $0.08 per share and 1,000,000 shares of common stock were granted on February 25, 2021 at $0.45 per share, for a total fair value of $730,000, which is included in the consolidated statements of operations.

As of March 31, 2021, and June 30, 2020, the Company had 73,264,742 and 68,464,742 common shares issued and outstanding, respectively.

In January 2021, Dalrada Health amended its Articles of Incorporation to authorize 100,000,000 shares of common stock.

11.

Segment Reporting

Upon the Company’s acquisitions in the year ended June 30, 2020, the Company manages its business and makes its decisions based on segments. The Company classifies its operations into four segments: Engineering, Health, Information Technology, Education and Corporate. The Company evaluates the performance of its segments primarily based on revenues, operating income (loss) and net income (loss). Segment information for the three and nine months ended March 31, 2021 is as follows:

	Three Months Ended March 31, 2021
	Engineering			Health			Information Technology			Education			Corporate			Inter-Segment Eliminations			Consolidated
Revenues	$	316,848		$	689,024		$	536,918		$	202,394		$	–		$	(156,854	)	$	1,588,329
Loss from operations		(193,260	)		(193,236	)		(39,466	)		(42,862	)		(2,077,807	)		236,711			(2,309,921	)
Net loss	$	(184,913	)	$	(178,033	)	$	(39,467	)	$	(42,862	)	$	(1,914,921	)	$	(109,253	)	$	(2,469,449	)

	Nine Months Ended March 31, 2021
	Engineering		Health			Information Technology			Education			Corporate			Inter-Segment Eliminations			Consolidated
Revenues	$	1,777,309	$	877,338		$	1,446,583		$	202,394		$	–		$	(900,384	)	$	3,403,239
Income (loss) from operations		227,557		(513,375	)		(53,892	)		(42,862	)		(3,892,334	)		82,682			(4,192,223	)
Income (loss)	$	229,626	$	(498,172	)	$	(53,643	)	$	(42,862	)	$	(3,476,710	)	$	(761,549	)	$	(4,603,310	)

Geographic Information

The following table presents revenue by country:

	Nine Months Ended
	March 31,
	2021		2020
United States	$	1,916,506	$	138,522
Europe		507,661		16,532
India		979,072		245,753
	$	3,403,239	$	400,807

The following table presents inventories by country:

	March 31,		June 30,
	2021		2020
United States	$	315,059	$	409,044
Europe		276,697		241,378
India		–		–
	$	591,756	$	650,422

The following table presents property and equipment, net, by country:

	March 31,		June 30,
	2021		2020
United States	$	73,833	$	39,507
Europe		272,368		191,508
India		–		9,493
	$	346,201	$	240,508

12.

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 and nine months ended March 31, 2021, management determined that there were no variable lease costs.

Right of Use Asset

In May 2020, the Company entered into a five-year lease agreement to lease a commercial building in Escondido, California. The building is owned by a related party. The Company recognized a right of use asset and liability of $822,389 and used an effective borrowing rate of 3.0% within the calculation. Imputed interest is $53,399. The lease agreements mature in April 2025. Total amounts expensed under the lease during the three and nine months ended March 31, 2021 were $135,569 and $254,282, respectively, for which is included accounts payable and accrued liabilities – related parties.

In May 2020, the Company entered into three-year lease agreement to lease a warehouse in Brownsville, Texas. The Company recognized a right of use asset and liability of $177,124 and used an effective borrowing rate of 3.0% within the calculation. Imputed interest is $8,399. The lease agreements mature in April 2025. Total amounts expensed under the lease during the three and nine months ended March 31, 2021 were $22,125 and $35,028, respectively.

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 $140,874 and used an effective borrowing rate of 9.2% within the calculation.

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.

13.

Subsequent Events

On April 6, 2021, the Company issued 87,500 shares of common stock as part of the consideration for the acquisition of Pacific Stem.

On April 22, 2021, the Company issued 125,000 shares of common stock as part of the consideration for the acquisition of IHG.

In May 2021, the Company was made aware of an FDA concern with its subsidiary, Pacific Stem. We are in contact with the FDA and shall disclose information as it becomes available.

Management has evaluated all other subsequent events through May 12, 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.

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 $4,603,310 during the nine months ended March 31, 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 March 31, 2021 and 2020

The following table sets forth the results of our operations for the three months ended March 31, 2021 and 2020:

	March 31,
	2021			2020
Revenues	$	1,588,329		$	351,324
Cost of revenues		854,791			185,902
Gross profit		733,538			165,422
Operating expenses		3,043,459			1,002,025
Loss from operations		(2,309,921	)		(836,603	)
Other income (expenses)		(159,528	)		(202,900	)
Net loss	$	(2,469,449	)	$	(1,039,503	)

Revenues and Cost of Revenues

During the three months ended March 31, 2021, the Company recorded revenues of $1,588,329, as attributable to each entity below:

Pacific Stem	$	425,218
Prakat		350,184
Health		263,806
Likido		248,281
IHG		202,394
Precision		62,078
Shark		36,368
	$	1,588,329

Related party revenue was $285,307. Total cost of revenues was $854,791, resulting in a gross profit of $733,538.

Operating Expenses

Operating expenses for the three months ended March 31, 2021 was $3,043,459 compared to operating expenses of $1,002,025 during the three months ended March 31, 2020. The increase in operating expenses was due to an increase in the operating activity as most of fiscal 2020 was spent on development of the Company’s proposed business operations whereas fiscal 2021 focused on the implementation of the business operations. During the three months ended March 31, 2021, the Company recorded stock compensation expense of $730,000. The increase was also partially attributable to the Prakat acquisition in January 2020 and Pacific Stem and IHG acquisitions in January 2021 and February 2021.

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 March 31, 2021 was $2,469,449 compared to net loss of $1,039,503 for the three months ended March 31, 2020.

Nine Months Ended March 31, 2021 and 2020

The following table sets forth the results of our operations for the nine months ended March 31, 2021 and 2020:

	March 31,
	2021			2020
Revenues	$	3,403,239		$	400,807
Cost of revenues		1,547,052			200,006
Gross profit		1,856,187			200,801
Operating expenses		6,048,410			2,308,505
Loss from operations		(4,192,223	)		(2,107,704	)
Other income (expenses)		(411,087	)		635,930
Net loss	$	(4,603,310	)	$	(1,471,774	)

Revenues and Cost of Revenues

During the nine months ended March 31, 2021, the Company recorded revenues of $3,403,239 as attributable to each entity below:

Pacific Stem	$	425,218
Prakat		979,072
Health		452,120
Likido		507,661
IHG		202,394
Precision		744,763
Shark		92,011
	$	3,403,239

During the nine months related party revenue was $440,455. Total cost of revenues was $1,547,052, resulting in a gross profit of $1856,187.

Operating Expenses

Operating expenses for the nine months ended March 31, 2021 was $6,048,410 compared to operating expenses of $2,308,505 during the nine months ended March 31, 2020. The increase in operating expenses was due to an increase in the operating activity as most of fiscal 2020 was spent on development of the Company’s proposed business operations whereas fiscal 2021 focused on the implementation of the business operations. During the nine months ended March 31, 2021, the Company recorded stock compensation expense of $730,000. The increase was also partially attributable to the Prakat acquisition in January 2020, IHG acquisitions in January 2021, Pacific Stem and in February 2021.

Other Income (Expense)

During the nine months ended March 31, 2021 and 2020, the Company recorded a gain on expiration of accrued tax liability of $0 and $1,276,837, respectively. The Company also incurred $364,718 and $564,479, respectively, of penalties and interest within interest expense.

Net Income (Loss)

Net loss for the nine months ended March 31, 2021 was $4,603,310 compared to net loss of $1,471,7744 for the nine months ended March 31, 2020.

Liquidity and Capital Resources

As of March 31, 2021, the Company had a working capital deficit of $19,949,174 and an accumulated deficit of $112,008,589. 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 $1,000,000 over the next twelve months to fund operations for the production of our VIA kits, development of our Likido heating & cooling units, and the manufacturing of our extraction machine. Management is planning to support operations by raising capital, and by accelerating sales & marketing efforts to take pre-orders of our extraction machines (resulting in down-payments), the sales of high-margin heating & cooling units, precision parts, and healthcare VIA kits. 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.

Working Capital

As of March 31, 2021, the Company had current assets of $2,372,090 and current liabilities of $22,321,264 compared with current assets of $1,251,537 and current liabilities of $17,029,243 at June 30, 2020. The increase in the working capital deficit was mainly due to the increase in related party notes payable.

Cash Flows

	March 31,
	2021			2020
Net cash used in operating activities	$	(3,702,678	)	$	(1,942,838	)
Net cash provided by (used in) investing activities	$	(68,950	)	$	73,745
Net cash provided by financing activities	$	3,953,050		$	1,975,200
Net increase in cash during the period	$	181,422		$	106,106

Cash flow from Operating Activities

During the nine months ended March 31, 2021, the Company used $3,702,678 of cash for operating activities compared to $1,942,838 used during the nine months ended March 31, 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.

Cash flow from Investing Activities

During the nine months ended March 31, 2021, the Company purchased equipment for $139,081 and received $70,131 in net cash pursuant to its acquisitions. During the nine months ended March 31, 2020, the Company purchased equipment for $160,515 and received $234,621 in cash pursuant to its acquisitions.

Cash flow from Financing Activities

During the nine months ended March 31, 2021, the Company received proceeds of $3,953,050 from the issuance of related party notes payable compared to $1,975,200 received from notes payable during the six nine months ended March 31, 2020.

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.

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

On April 6, 2021, the Company issued 87,500 shares of common stock as part of the consideration for the acquisition of Pacific Stem.

On April 22, 2021, the Company issued 125,000 shares of common stock as part of the consideration for the acquisition of IHG.

In May 2021, the Company was made aware of an FDA concern with its subsidiary, Pacific Stem. We are in contact with the FDA and shall disclose information as it becomes available.

Management has evaluated all other subsequent events through May 14, 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 nine months ended March 31, 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.

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 2021.

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.

Identification and Disclosure of Related Party Transactions

The Company does not have a formal process for identification of related parties. The Company should prepare and maintain a listing of related parties, which should be used a reference when processing transactions. The Company is currently dependent on capital from these related parties for whom make payments directly to company vendors. These procedures have resulted in the Company missing or being unaware of payments. On a go forward basis, the related party should advance the funds to the Company who in turn should make all vendor payments. This would reduce the risk of omitting the accounting for and disclosures of transactions that are paid for by related parties on the Company’s behalf. Management plans to prepare and maintain a listing of related parties, which will be used a reference when processing transactions beginning fiscal year 2021.

Account Reconciliations

All necessary monthly account reconciliations are not prepared and reviewed by management. The Company should make a listing of all reconciliations that need preparing at each period’s end along, with the manager who will review such reconciliations. Management plans to review all monthly account reconciliations during 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 2021.

Accruing Liabilities and Cut-off Procedures for Accounts Payable

The Company currently does not have procedures in place to properly cut-off accounts payable and the accrual of un-invoiced liabilities. When services are performed that relate to a particular reporting period, the expenses related to those services should be properly accrued. Management plans to establishing proper cut-off procedures and will list all monthly accruals to more accurately track such liabilities during fiscal year 2020.

Based on this evaluation and because of the material weaknesses, management has concluded that our internal control over financial reporting was not effective as of March 31, 2021.

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

Exhibit Number	Exhibit Description
31.1	Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14 or 15d-14 of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1	Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation Linkbase
101.LAB	XBRL Taxonomy Extension Label Linkbase
101.PRE	XBRL Taxonomy Extension Presentation Linkbase
101.DEF	XBRL Taxonomy Extension Definition Linkbase

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: May 17, 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	May 17, 2021
Brian Bonar	and Director

DALRADA FINANCIAL CORP - FORM 10-Q - May 17, 2021

Attached files

DALRADA FINANCIAL CORP Reports