(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)
(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the acquisition was rescinded, as the Company never gained control over C2C. Such costs incurred in connection with this rescinded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 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 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 (see Note 3).
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 December 31, 2019, the Company has a working capital deficit
of $14,057,020 and an accumulated deficit of $105,395,500. 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 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 condensed 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 2020. 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) and Likido. All inter-company transactions and balances have been eliminated
on consolidation.
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.
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 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.
|
(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.
|
(f)
|
Business Combinations
|
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. Upon the conclusion of the measurement
period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments
are recognized in the condensed consolidated statements of operations.
|
(g)
|
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 December 31,
2019, there were no qualitative factors that indicated goodwill was impaired.
|
(h)
|
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 financial statements of the Company’s subsidiary 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.
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 period ended December 31, 2019, the Company’s only component of comprehensive
income was foreign currency translation adjustments.
|
(j)
|
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.
There were no outstanding dilutive
securities during the three and six months ended December 31, 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 six months
ended December 31, 2019. In accordance with ASC 260, “Earnings Per Share”, the following table reconciles basic shares
outstanding to fully diluted shares outstanding for the three months ended December 31, 2019:
|
|
Three Months Ended
|
|
|
December 31, 2019
|
Weighted average number of common shares outstanding - Basic
|
|
|
49,943,628
|
|
Potentially dilutive common stock equivalents (convertible note payable - related party and accrued interest)
|
|
|
55,767,463
|
|
Weighted average number of common shares outstanding - Diluted
|
|
|
105,711,091
|
|
There were no adjustments to
the numerator during the quarters ended December 31, 2019 and 2018.
|
(k)
|
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 condensed 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 condensed 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 it had a material impact on the Company’s condensed consolidated financial statements due to lease agreement
discussed in Note 7. The lease commenced October 1, 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.
Effective December 6, 2019, the Company acquired 100% of the interests of Likido. In consideration for the acquisition, the Company issued 6,118,000 shares of its common stock at $0.0448 per share, or a total fair value of $274,086.
The Likido 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 provisional allocation of the
purchase price in regard to the acquisition related to the assets acquired and the liabilities assumed as of the purchase
date. The following table summarizes the preliminary purchase price allocation:
|
|
Preliminary
|
|
|
Purchase Price
|
|
|
Allocation
|
Cash and cash equivalents
|
|
$
|
172,362
|
|
Other receivables
|
|
|
36,196
|
|
Prepaid expenses and deposits
|
|
|
10,000
|
|
Inventories
|
|
|
110,062
|
|
Due from related party
|
|
|
131
|
|
Property and equipment, net
|
|
|
80,348
|
|
Goodwill
|
|
|
143,152
|
|
Accounts payable
|
|
|
(92,799
|
)
|
Accrued liabilities
|
|
|
(7,651
|
)
|
Deferred revenue
|
|
|
(177,715
|
)
|
Net assets acquired
|
|
$
|
274,086
|
|
The
Company has not completed the valuations necessary to finalize the acquisition fair values of the assets acquired and liabilities
assumed and related allocation of purchase price of the Likido acquisition. Once the valuation process is finalized, there could
be changes to the reported values of the assets acquired and liabilities assumed, including goodwill and identifiable intangible
assets and those changes could differ materially from what is presented above.
Unaudited
Pro Forma Financial Information
The
following unaudited pro forma financial information presents the Company’s financial results as if the Likido acquisition
had occurred as of July 1, 2018. 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:
|
|
Six Months Ended
|
|
|
December 31,
|
|
|
2019
|
|
2018
|
Revenues
|
|
$
|
311,790
|
|
|
$
|
71,017
|
|
Net loss
|
|
$
|
(414,013
|
)
|
|
$
|
(662,226
|
)
|
Net loss per common share
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
As of December 31, 2019, and
June 30, 2019, the Company had $10,095,766 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 $10,095,766 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 six months ended December 31,
2019 and 2018, the Company recognized $392,325 and $424,368, respectively, of penalties and interest within interest expense on
the condensed consolidated statements of operations. For the six months ended December 31, 2019 and 2018, the Company recognized
$1,276,837 and $0, 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.
5.
|
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 December 31, 2019, the outstanding principal balance of the promissory note was $38,615
and the accrued interest is $579.
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 December 31, 2019, the outstanding
principal balance of the promissory note was $37,469 and the accrued interest is $562.
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 December 31, the outstanding principal balance of the promissory
note was $2,250 and the accrued interest is $34.
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 December 31, 2019, the outstanding principal
balance of the promissory note was $1,630 and the accrued interest is $24.
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 December 31, 2019, the outstanding principal balance of the
promissory note was $262,197 and the accrued interest is $3,933.
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. As of December 31, 2019, the outstanding principal
balance of the promissory note was $131,265 and the accrued interest is $984.
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. As of December 31, 2019, the outstanding
principal balance of the promissory note was $2,075 and the accrued interest is $16.
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. As of December 31, 2019, the outstanding principal balance of the promissory note was $3,375 and the
accrued interest is $25.
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. As of December 31, 2019, the outstanding principal balance of the promissory
note was $36,370 and the accrued interest is $281.
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. As of December 31, 2019, the outstanding
principal balance of the promissory note was $1,865 and the accrued interest is $14.
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. As of December 31, 2019, the outstanding principal balance of the promissory
note was $93,137 and the accrued interest is $699.
l) On
December 31, 2019, the Company issued a $18,669 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.
m) On
December 31, 2019, the Company issued a $16,165 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.
n) On
December 31, 2019, the Company issued a $1,125 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. 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.
o) On
December 31, 2019, the Company issued a $152,282 promissory note to a related party for reimbursement of operating expenses paid
by the related party on behalf of the Company. Funds were used for medical device listing fees, computer software, travel expenses,
and professional consultant services 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.
p) On
December 31, 2019, the Company issued a $5,270 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.
q) On
December 31, 2019, the Company issued a $720,914 promissory note to a related party for reimbursement of operating expenses paid
by the related party on behalf of the Company. Funds were used for travel expenses, professional consultant services, software,
international shipping charges, and office supplies 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.
6.
|
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 December 31, 2019, the outstanding principal balance of the promissory note was $1,875,000 and the accrued interest
is $28,125.
7.
|
Related Party Transactions
|
As of December 31, 2019, and
June 30, 2019, the Company owed $477,313 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 $54,000 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.
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 December 31, 2019, the Company had $196,500
accrued within accounts payable and accrued liabilities – related parties.
See Notes 5 and 6 for additional
related party transactions.
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.
9.
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Commitments and Contingencies
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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 are 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 six months ended December 31, 2019, management determined that there were no variable lease costs.
Operating Leases
In September 2019, the Company entered into a three-year lease agreement to lease a commercial building in Escondido, California. The building is owned by a related party. Likido entered into a lease agreement of office space in Edinburgh, Scotland. The lease matures in February 2020. Future minimum lease payments are as follows:
Fiscal Year Ended June 30,
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2020
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$
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20,088
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2021
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17,457
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2022
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17,980
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2023
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18,112
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Total minimum lease payments
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$
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73,637
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(a)
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Prakat stock issuance
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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.
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(b)
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COO appointed for Dalrada Financial Corp.
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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’s
common stock.
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(c)
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Coronavirus Outbreak
On January 30,
2020, the World Health Organization declared the coronavirus outbreak a "Public Health Emergency of International Concern"
and on March 10, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of the coronavirus
include restrictions on travel, and quarantines in certain areas, and forced closures for certain types of public places and businesses.
The coronavirus and actions taken to mitigate it have had and are expected to continue to have an adverse impact on the economies
and financial markets of many countries, including the geographical area in which the Company operates. While it is unknown how
long these conditions will last and what the complete financial effect will be to the Company, to date, the Company is expecting
to experience declining revenue and labor and supply shortages. Our concentrated area of operations makes it reasonably possible
that we are vulnerable to the risk of a near-term severe impact.
Additionally,
it is reasonably possible that estimates made in the financial statements have been, or will be, materially and adversely impacted
in the near term as a result of these conditions, including impairment losses related to goodwill.
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(d)
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Related Party Advances
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From January 1, 2020 through the date the
financial statements were available to be issued, the Company received advances from related parties totaling approximately $1,060,000.
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