(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the acquisition was rescinded, as the Company never gained control over C2C. Such costs incurred in connection with this rescinded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).
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 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 (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 March 31, 2020, the Company has a working capital deficit
of $14,746,043 and an accumulated deficit of $106,423,939. 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.
The Company also earns revenue
from engineering and consulting services from its Prakat subsidiary. These services 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.
The following table presents
revenue by type:
|
|
Nine Months Ended
|
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Product sales
|
|
$
|
155,054
|
|
|
$
|
34,407
|
|
Engineering and consulting services - third parties
|
|
|
186,847
|
|
|
|
–
|
|
Engineering and consulting services - related party
|
|
|
58,906
|
|
|
|
–
|
|
Total revenue
|
|
$
|
400,807
|
|
|
$
|
34,407
|
|
|
(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 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.
|
(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.
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 three and nine months ended March 31, 2020. In accordance with ASC 260, “Earnings Per Share”,
the following table reconciles basic shares outstanding to fully diluted shares outstanding for the three and nine months ended
March 31, 2019:
|
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
|
|
March 31, 2019
|
|
|
|
March 31, 2019
|
|
Weighted average number of common shares outstanding - Basic
|
|
|
47,281,128
|
|
|
|
47,281,128
|
|
Potentially
dilutive common stock equivalents (convertible note payable - related party and accrued interest)
|
|
|
51,323,529
|
|
|
|
49,397,810
|
|
Weighted average number of common shares outstanding - Diluted
|
|
|
98,604,657
|
|
|
|
96,678,938
|
|
There were no adjustments to
the numerator during the quarters ended March 31, 2020 and 2019.
|
(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 Company is currently evaluating the impact
of the new guidance.
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 Company is currently evaluating
the impact of the new guidance.
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.
3.
|
Business Combinations and Acquisition
Likido
|
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
|
)
|
Purchase price consideration
|
|
$
|
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.
Prakat
Effective January 9, 2020, the
Company acquired 72% of the common equity shares of Prakat. In consideration for the acquisition, the Company issued 3,600,000
shares of its common stock at $0.0450 per share, or a total fair value of $162,000.
The Prakat 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, liabilities assumed and
the fair value of the noncontrolling interests. 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, liabilities assumed and noncontrolling
interests as of the purchase date. The following table summarizes the preliminary purchase price allocation:
|
|
Preliminary
Purchase Price
Allocation
|
|
Cash and cash equivalents
|
|
$
|
61,899
|
|
Accounts receivable, net
|
|
|
157,544
|
|
Other receivables
|
|
|
122,190
|
|
Prepaid expenses and other current assets
|
|
|
44,573
|
|
Property and equipment, net
|
|
|
7,189
|
|
Accounts payable
|
|
|
(33,614)
|
|
Accrued liabilities
|
|
|
(114,212)
|
|
Other current liabilities
|
|
|
(20,569)
|
|
Noncontrolling interests
|
|
|
(63,000)
|
|
Purchase price consideration
|
|
$
|
162,000
|
|
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 Prakat 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.
Shark
On March 23, 2020, the Company
entered into a Stock Purchase Agreement to acquire Shark Innovative Technologies Corp. (“Shark”). The Company acquired
all of the issued and outstanding common shares, including business plans and access to contacts of Shark. In consideration for
the acquisition, the Company issued 3,000,000 shares of its common stock at $0.0310 per share, or a total fair value of $93,000.
The Company evaluated the acquisition
of the purchased assets under ASC 805 and concluded that as substantially all of the fair value of the gross assets acquired is
concentrated in an identifiable group of similar assets, the transaction did not meet the requirements to be accounted for as a
business combination and therefore was accounted for as an asset acquisition. The purchase price of the Shark assets are as follows:
Cash and cash equivalents
|
|
$
|
917
|
|
Research and development
|
|
|
92,083
|
|
Purchase price consideration
|
|
$
|
93,000
|
|
The
acquired research and development was recorded as an expense in the consolidated statements of operations.
Unaudited Pro Forma Financial
Information
The following unaudited pro forma
financial information presents the Company’s financial results as if the Likido and Prakat’s acquisitions 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:
|
|
Nine Months Ended
|
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Revenues
|
|
$
|
1,094,860
|
|
|
$
|
1,147,123
|
|
Net income (loss) attributable to Dalrada
|
|
$
|
(1,363,426
|
)
|
|
$
|
1,493,306
|
|
Net income (loss) per common share
|
|
$
|
(0.02
|
)
|
|
$
|
0.03
|
|
As of March 31, 2020, and June
30, 2019, the Company had $10,268,020 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 $10,268,020 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, 2020
and 2019, the Company recognized $564,479 and $637,749, respectively, of penalties and interest within interest expense on the
condensed consolidated statements of operations. For the nine months ended March 31, 2020 and 2019, the Company recognized $1,276,837
and $2,243,523, 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 March 31, 2020, the outstanding principal balance of the promissory note was $38,615
and the accrued interest is $869.
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 March 31, 2020, the outstanding
principal balance of the promissory note was $37,469 and the accrued interest is $843.
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 March 31, 2020, the outstanding principal balance of the
promissory note was $2,250 and the accrued interest is $51.
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 March 31, 2020, the outstanding principal
balance of the promissory note was $1,630 and the accrued interest is $37.
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 March 31, 2020, the outstanding principal balance of the promissory
note was $262,197 and the accrued interest is $5,899.
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 March 31, 2020, the outstanding principal
balance of the promissory note was $131,265 and the accrued interest is $1,969.
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 March 31, 2020, the outstanding
principal balance of the promissory note was $2,075 and the accrued interest is $31.
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 March 31, 2020, the outstanding principal balance of the promissory note was $3,375 and the accrued
interest is $51.
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 March 31, 2020, the outstanding principal balance of the promissory
note was $36,370 and the accrued interest is $546.
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 March 31, 2020, the outstanding
principal balance of the promissory note was $1,865 and the accrued interest is $42.
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 March 31, 2020, the outstanding principal balance of the promissory
note was $93,137 and the accrued interest is $1,397.
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. As of March 31, 2020, the outstanding principal balance of the promissory
note was $18,669 and the accrued interest is $140.
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. As of March 31, 2020, the outstanding principal balance of the promissory
note was $16,165 and the accrued interest is $121.
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. As of March 31, 2020, the outstanding
principal balance of the promissory note was $1,125 and the accrued interest is $8.
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. As of March 31, 2020, the outstanding principal balance of the promissory note was
$152,282 and the accrued interest is $1,142.
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. As of March 31, 2020, the outstanding principal balance of the promissory
note was $5,270 and the accrued interest is $40.
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. As of March 31, 2020, the outstanding principal balance of the promissory
note was $720,914 and the accrued interest is $5,407.
r) On
March 31, 2020, the Company issued a $233,886 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.
s) On
March 31, 2020, the Company issued a $1,120 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.
t) On
March 31, 2020, the Company issued a $175,742 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.
u) On
March 31, 2020, the Company issued a $14,655 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.
v) On
March 31, 2020, the Company issued a $1,165 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.
w) On
March 31, 2020, the Company issued a $417,996 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.
x) On
March 31, 2020, the Company issued a $79,866 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.
y) On
March 31, 2020, the Company issued a $55,868 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.
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Convertible Note Payable – Related Parties
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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 March 31, 2020, the outstanding principal balance of the promissory note was $1,875,000 and the accrued interest is $42,758.
7.
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Related Party Transactions
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As of March 31, 2020, and June
30, 2019, the Company owed $363,274 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.
During the three months end March
31, 2020, the Company’s Prakat subsidiary recorded revenues of $58,906 for engineering and consulting services provided to
Trucept.
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, 2020, the Company had $294,750
accrued within accounts payable and accrued liabilities – related parties.
On January 6, 2020, the Directors
affirmed and ratified the final agreement of the employment terms of Fawad Nisar as the Chief Operating Officer of Dalrada Financial
Corp. 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 3,000,000 shares of the Company’s common stock. The fair value of $172,800
is included in selling, general and administrative expenses in the consolidated statements of operations.
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 nine months ended March
31, 2020, management determined that there were no variable lease costs.
Right of Use Asset
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. The Company recognized a right of use asset and liability of $132,860 and used an effective borrowing rate of 3%
within the calculation. The lease agreements mature in September 2022. Minimum remaining rental payments in 2020, 2021 and 2022
are $34,109, $46,726 and $35,827, respectively, and the imputed interest is $6,316.
Management has evaluated all activity and
concluded that no subsequent events have occurred that would require recognition in these financial statements or disclosure in
the notes to these financial statements.