(The accompanying notes are an integral
part of these condensed consolidated financial statements)
(The accompanying notes are an integral
part of these condensed consolidated financial statements)
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.
In June 2018, the Company created
a new subsidiary, Dalrada Precision Corp. (“Dalrada Precision”), a mechanical contract provider. It extends the client’s
engineering and operations team by helping devise bespoke manufacturing solutions tailored to its 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 will partner with client
companies for the distribution of medical disposables, hospital equipment and furniture, medical devices, laboratory and dental
products. 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the acquisition was rescinded, as the Company never gained control over C2C. Such costs incurred in connection with this rescinded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 consolidated financial statements as expenses incurred on terminated acquisition.
The Company's principal executive
offices are located at 600 La Terraza Blvd., Escondido, California 92025.
Going Concern
These 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, 2019, the Company has a working capital deficit
of $14,264,153 and an accumulated deficit of $105,583,960. The continuation of the Company as a going concern is dependent upon
the continued financial support from its management, 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 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.
We have prepared the accompanying
consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”)
for interim financial reporting. These 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 2020. Certain information and footnote disclosures normally included in 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 consolidated financial statements should be read in
conjunction with the audited financial statements and accompanying notes.
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.
|
(b)
|
Principles of Consolidation
|
These 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), and Dalrada Health, a company incorporated in the State of
California, since October 2, 2018 (date of incorporation). All inter-company transactions and balances have been eliminated on
consolidation.
The preparation of these 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 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, 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.
The Company recognizes and accounts
for revenue in accordance with ASC 606 as a principal on the sale of goods. Pursuant to ASC
606, revenue is measured based on a consideration specified in a contract with a customer, and excludes
any sales incentives and amounts collected on behalf of third parties. The Company recognizes revenue when it satisfies a performance
obligation by transferring control over a product or service to a customer.
The Company’s revenue
is derived from the sales of its products, which represents net sales recorded in the Company’s consolidated statements of
operations. Product sales are recognized when performance obligations under the terms of the contract with the customer are satisfied.
Typically, this would occur upon transfer of control, including passage of title to the customer and transfer of risk of loss related
to those goods. The Company measures revenue as the amount of consideration to which it expects to be entitled in exchange for
transferring goods (transaction price). The Company records reductions to revenue for estimated customer returns, allowances, markdowns
and discounts. The Company bases its estimates on historical rates of customer returns and allowances as well as the specific identification
of outstanding returns, markdowns and allowances that have not yet been received by the Company. The actual amount of customer
returns and allowances is inherently uncertain and may differ from the Company’s estimates. If the Company determines that
actual or expected returns or allowances are significantly higher or lower than the reserves it established, it 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 consolidated balance sheets.
|
(e)
|
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.
ASC 220, Comprehensive Income,
establishes standards for the reporting and display of comprehensive loss and its components in the consolidated financial statements.
As of September 30, 2019, and 2018, the Company has no items representing comprehensive income or loss.
|
(g)
|
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 period using the treasury stock method
and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period
is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants.
There were no outstanding dilutive
securities during the quarter ended September 30, 2018. The weighted average number of common stock equivalents related to convertible
notes payable was not included in diluted loss per share, because the effects are antidilutive, for the quarter ended September
30, 2019. There were no adjustments to the numerator during the quarters ended September 30, 2019 and 2018.
|
(h)
|
Recent Accounting Pronouncements
|
In August 2018, the FASB issued
guidance to improve the effectiveness of fair value measurement disclosures by removing or modifying certain disclosure requirements
and adding other requirements. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning
after December 15, 2019, with early adoption permitted. Certain amendments should be applied prospectively, while all other amendments
should be applied retrospectively to all periods presented. The Company is currently evaluating the impact of the new guidance.
In February 2018, the FASB issued
guidance that permits the Company to reclassify disproportionate tax effects in accumulated other comprehensive income caused by
the Tax Cuts and Jobs Act of 2017 to retained earnings. The guidance is effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2018, with early adoption permitted. The adoption of this standard is not expected
to have a material impact on the Company’s consolidated financial statements.
In July 2017, the FASB issued
ASU 2017-11 which simplifies the accounting for certain financial instruments with down round features. The new standard will reduce
income statement volatility for companies that issue warrants and convertible instruments containing such features. The guidance
is effective for fiscal years beginning after December 15, 2018 with early adoption permitted. The adoption of this standard is
not expected to have a material impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued
a new credit loss standard that replaces the incurred loss impairment methodology in current GAAP. The new impairment model requires
immediate recognition of estimated credit losses expected to occur for most financial assets and certain other instruments. It
is effective for annual reporting periods beginning after December 15, 2019 and interim periods within those annual periods, with
early adoption permitted. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings
as of the beginning of the first effective reporting period. The Company is currently evaluating the impact of the new guidance.
In February 2016, the FASB issued
new lease accounting guidance in ASU No. 2016-02, “Leases”. This new guidance was initiated as a joint project
with the International Accounting Standards Board to simplify lease accounting and improve the quality of and comparability of
financial information for users. This new guidance would eliminate the concept of off-balance sheet treatment for “operating
leases” for lessees for the vast majority of lease contracts. Under ASU No. 2016-02, at inception, a lessee must classify
all leases with a term of over one year as either finance or operating, with both classifications resulting in the recognition
of a defined “right-of-use” asset and a lease liability on the balance sheet. Lessor accounting under ASU No. 2016-02
would be substantially unchanged from the previous lease requirements under GAAP. ASU No. 2016-02 will take effect for public companies
in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted
and for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial
statements, lessees and lessors must apply a modified retrospective transition approach. The company adopted this standard in fiscal
year 2020 and expects it to have a material impact on the Company’s consolidated financial statements due to lease agreement
discussed in footnote 7. The lease commences October 1st 2019.
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.
As of September 30, 2019, and
June 30, 2019, the Company had $11,174,724 and $10,980,278, 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 $11,174,724 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 consolidated balance sheets, and an equivalent amount is recognized as “Gain on expiration of accrued payroll taxes”
within other income on the consolidated statements of operations. For quarters ended September 30, 2019 and 2018, the Company recognized
$194,446 and $208,057, respectively, of penalties and interest within interest expense on the consolidated statements of operations.
For the quarters ended September 30, 2019 and 2018, the Company recognized $0 and $0, respectively, within “Gain on expiration
of accrued payroll taxes” as a result of quarterly tax liabilities that expired during the fiscal years. The amount owing
may be subject to additional late filing fees and penalties that are not quantifiable as of the date of these 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.
4.
|
Notes Payable – Related Parties
|
a) During
the year ended June 30, 2019, the Company issued a $38,615 promissory note to a related party for compensation paid by the related
party on behalf of the Company. Under the terms of the note, the amount due is unsecured, bears interest at 3% per annum, and is
due 360 days from the date of issuance. As of September 30, 2019, the outstanding principal balance of the promissory note was
$38,615 and the accrued interest is $290.
b) During
the year ended June 30, 2019, the Company issued a $37,469 promissory note to a related party for legal services and other expenses
incurred to reinstate the Company to a current status with the state of Delaware. Under the terms of the note, the amount due is
unsecured, bears interest at 3% per annum, and is due 360 days from the date of issuance. As of September 30, 2019, the outstanding
principal balance of the promissory note was $37,469 and the accrued interest is $281.
c) As
of June 30, 2019, the Company owed $2,250 to a related party company controlled by the Chief Executive Officer of the Company for
management fees, which consists of accounting and administrative services. The Company is charged $4,500 on a monthly basis, $1,125
of which is allocated each month to Dalrada Health Products. Under the terms of the note, the amount due is unsecured, bears interest
at 3% per annum, and is due 360 days from the date of issuance. As of September 30, 2019, the outstanding principal balance of
the promissory note was $2,250 and the accrued interest is $17.
d) As
of June 30, 2019, the Company owed $1,630 to a related party for reimbursement of expenses paid by the related party on behalf
of the Company related to the proposed C2C acquisition which did not occur. Under the terms of the note, the amount due is unsecured,
bears interest at 3% per annum, and is due 360 days from the date of issuance. As of September 30, 2019, the outstanding principal
balance of the promissory note was $1,630 and the accrued interest is $12.
e) As
of June 30, 2019, the Company owed $262,197 to a related party for reimbursement of compensation to employees and payroll services
paid by the related party on behalf of the Company. Under the terms of the note, the amount due is unsecured, bears interest at
3% per annum, and is due 360 days from the date of issuance. As of September 30, 2019, the outstanding principal balance of the
promissory note was $262,197 and the accrued interest is $1,966.
f) On
September 30, 2019, the Company issued a $131,265 promissory note to a related party for reimbursement of compensation to employees
and payroll services paid by the related party on behalf of the Company. Under the terms of the note, the amount due is unsecured,
bears interest at 3% per annum, and is due 360 days from the date of issuance.
g) On
September 30, 2019, the Company issued a $2,075 promissory note to a related party for reimbursement of expenses paid by the related
party on behalf of the Company related to the proposed C2C acquisition which did not occur. Under the terms of the note, the amount
due is unsecured, bears interest at 3% per annum, and is due 360 days from the date of issuance.
h) On
September 30, 2019, the Company issued a $3,375 promissory note to a related party company controlled by the Chief Executive Officer
of the Company for management fees, which consists of accounting and administrative services for which the Company is charged $1,125
on a monthly basis. Under the terms of the note, the amount due is unsecured, bears interest at 3% per annum, and is due 360 days
from the date of issuance.
i) On
September 30, 2019, the Company issued a $36,370 promissory note to a related party for reimbursement of operating expenses paid
by the related party on behalf of the Company. Under the terms of the note, the amount due is unsecured, bears interest at 3% per
annum, and is due 360 days from the date of issuance.
j) On
September 30, 2019, the Company issued a $1,865 promissory note to a related party for reimbursement of expenses paid by the related
party on behalf of the Company related to the proposed C2C acquisition which did not occur. Under the terms of the note, the amount
due is unsecured, bears interest at 3% per annum, and is due 360 days from the date of issuance.
k) On
September 30, 2019, the Company issued a $93,137 promissory note to a related party for reimbursement of operating expenses paid
by the related party on behalf of the Company. Under the terms of the note, the amount due is unsecured, bears interest at 3% per
annum, and is due 360 days from the date of issuance.
5.
|
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 is 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.
As of September 30, 2019, the outstanding principal balance of the promissory note was $1,875,000 and the accrued interest is $14,063.
6.
|
Related Party Transactions
|
As of September 30, 2019, and
June 30, 2019, the Company owed $570,488 and $479,512 respectively to related parties for reimbursement of various operating expenses,
which has been recorded in accounts payable and accrued liabilities – related parties. This amount includes $40,500 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.
See Notes 4, 5, 6 and 8 for additional
related party transactions.
7.
|
Commitments and Contingencies
|
|
(a)
|
On September 1, 2019, the Company, entered into a three-year lease agreement to lease a commercial building in Escondido, California. The building is owned by related party. Under the terms of the lease agreement, the Company is committed to the following minimum lease payments:
|
Fiscal year ended
|
|
$
|
|
|
|
|
|
June 30, 2020
|
|
|
12,804
|
|
June 30, 2021
|
|
|
17,457
|
|
June 30, 2022
|
|
|
17,980
|
|
June 30, 2023
|
|
|
18,112
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
66,353
|
|
|
|
On December 6, 2019, Dalrada, via its wholly owned subsidiary, Dalrada Precision, acquired, by stock exchange agreement, one hundred percent of Likido Ltd. (HQ) in exchange of 6,118,000 shares of the Company’s common stock. Likido, a United Kingdom engineering-design company based in Edinburgh, Scotland. Likido is an international technology 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. Subsequent to September 30, 2019, the Company issued Stuart Cox 6,118,000 shares as of February 4, 2020 in exchange for 100% of Likido’s issued and outstanding shares held by Mr. Cox. The Company is still determining the impact of this transaction on the financial statements including the purchase price and the allocation of such.
|
|
|
|
|
(b)
|
Prakat stock issuance.
|
|
|
|
|
|
On January
9, 2020, DFCO purchased seventy four percent (74%) 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 equity 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 . The Company is still determining the impact of this transaction on the financial statements including the purchase
price and the allocation of such.
|
|
|
|
|
(c)
|
COO appointed for Dalrada Financial Corp.
|
|
|
|
|
|
The Directors have affirmed
and ratify the final agreement of the employment terms of Fawad Nisar as the Chief Operating Officer of Dalrada Financial Corp.
The transaction was completed on January 6, 2020. The Company and Mr. Nisar have agreed in the Employment Terms, to, among other
items, the issuance, as consideration for his accepting the position of COO of the Company, of Three Million (3,000,000) common
shares of the Company.
|
|
|
|
|
(d)
|
Issuance of Series F Super Voting Preferred shares.
|
|
|
|
|
|
After September 30, 2019, Dalrada Financial Corporation designated
and issued 5,000 shares of Series F Super Preferred Stock to the CEO. 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.
|