DALRADA FINANCIAL CORP - Annual Report: 2022 (Form 10-K)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

☒ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended June 30, 2022

☐ TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT

For the transition period from _________ to _________

Commission File Number: 000-12641

DALRADA FINANCIAL CORPORATION

(Name of Small Business Issuer in its charter)

600 La Terraza Blvd., Escondido, California 92025

(Address of principal executive offices)

858-283-1253

Issuer’s telephone number

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐   No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes ☐     No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐     No ☒

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes  ☐     No ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☐ No ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes ☐    No ☒

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter: $46,878,846

As of September 30, 2022, the registrant’s outstanding stock consisted of 79,987,641 common shares.

DALRADA FINANCIAL CORPORATION.

Table of Contents

PART I

Item 1. Description of Business

Company Overview

Moving the world forward takes bold resolve that turns ideas into actions and builds real-time solutions that positively impact people and the planet. Dalrada accelerates positive change for current and future generations by harnessing true potential and developing products and services that become transformative innovations.

Dalrada Financial Corporation, (“Dalrada”), was incorporated in September 1982 under the laws of the State of California. It was reincorporated in May 1983 under the laws of the State of Delaware and reincorporated again on May 5, 2020, under the laws of the state of Wyoming. Dalrada Financial Corporation trades under the symbol, OTCQB: DFCO.

Since Dalrada’s inception, the Company has grown its footprint to include the unique business divisions: Dalrada Health, Dalrada Energy Services, Dalrada Precision Manufacturing, and Dalrada Technologies. Within each of these divisions, the Company drives transformative innovation while creating solutions that are sustainable, accessible, and affordable. Dalrada’s global solutions directly address climate change, gaps in the health care industry, and technology needs that facilitate a new era of human behavior and interaction and ensure a bright future for the world around us.

Dalrada Health

Dalrada Health delivers advanced health care solutions with dedicated products, services, and systems. From virus and disease screening capabilities to pharmaceutical goods and holistic wellness clinics, When the world needs advanced health care, Dalrada Health delivers with ingenuity, accessibility, and affordability. This specialized division is committed to developing key health products, lifesaving medications and building comprehensive systems to increase capability, strive to keep people healthy with the goals of improving their quality of life and increasing their longevity– on a global level.

Empower Genomics (“Empower”)- Empower is Dalrada’s wholly owned diagnostic laboratory which processes molecular diagnostic and antibody tests to support the diagnosis of COVID-19 and the detection of immune response to the virus. Empower has built up and maintained the testing capacity to handle surges in COVID-19 testing demands. Empower also offers genetic testing capabilities including Pharmacogenomics, Nutraceutical, Nutrition/Diet DNA and Exercise/Fitness DNA tests.

Pala Diagnostics (“Pala”)- Pala is a joint venture diagnostic laboratory which processes both molecular diagnostic and antibody tests to support the diagnosis of COVID-19 and the detection of immune response to the virus.

Solas Corp. (“Solas”)- Solas manages and oversees wellness clinics throughout Southern California including the Sòlas Rejuvenation + Wellness clinics (“Sòlas”). Through advanced medical techniques and modern technology, Sòlas delivers a clinical experience that helps men and woman live their best life, whether it’s through simple cosmetic procedures, pain-reducing practices, or anti-aging therapies. Through its three locations, Sòlas prides itself on its dedicated service-focused, health-first approach. Its wellness & rejuvenation clinics deliver with a focus on regenerative therapies, IV and injection services, cosmetic enhancements amongst a myriad of additional health centric services.

International Health Group (“IHG”)- IHG provides highly trained nursing and medical assistants for hospitals and home health facilities since 2006. IHG Medical Assistant programs include Certified Nursing Assistant (“CNA") and Home Health Aide (“HHA”) training and the fast-track 22-Day CNA Certification Program at its state-approved testing facility.

Pacific Stem Cells (“PSC”)- PSC markets and sells traditional biologics and human cells, tissues, and cellular and tissue-based products (HCT/Ps).

Watson Rx Solutions (“Watson”)- In June 2022, Dalrada Health acquired Watson, an Alabama-based pharmacy with more than 30 years of experience in the retail medical and pharmaceutical industries. Watson specializes in providing expert care and managing disease states through comprehensive prescription management, education, nursing, and total health solutions. Watson maintains pharmacy licenses in all 50 States including Washington D.C.

GlanHealth (“GlanHealth”)- Dalrada Health Products launched GlanHealth in 2020 to distribute alcohol-free hand sanitizers, surface cleaners, laundry aides, antimicrobial solutions, electrostatic sprayers, face masks, gloves, kits, and delivery equipment such as dispensers, stands, and ease of use packaging for the end consumer. GlanHealth leverages an extensive supply chain of producers, resellers, distributors, vendors, and formulators for the development, sale, and marketing of its products and services

Dalrada Energy Services

Dalrada Energy Services (‘DES’) employs next-generation technology that enhances clean energy efforts while reducing the world’s carbon footprint. Through innovative products and commercial services, DES facilitates energy transition for universities, businesses, government buildings, and more. Reducing the world’s carbon footprint and achieving international Net Zero goals are no easy task. Fortunately, Dalrada Energy Services knows how and where to start. By providing robust commercial services that help organizations meet or exceed environmental standards, DES helps mitigate negative impacts for real-world energy transition while removing cost barriers for clients through innovative financing and savings share models.

Dalrada Energy Services (“DES”)- DES currently operates as a single subsidiary which provides end-to-end comprehensive energy service solutions in a robust commercial capacity, DES helps organizations meet environmental, social, and governance (“ESG”) goals and standards while mitigating negative environmental impacts.

Dalrada Precision Manufacturing

Dalrada Precision Manufacturing creates total manufacturing solutions that start with the design and development of high-quality machine parts and components, and end with an efficient global supply chain. This specialized business division can meet today’s high demands and solves industry challenges. Dalrada Precision Manufacturing is confident that it redefines the critical quality of the world’s top components and responds with in-house research, design, engineering, and distribution through a highly reliable global supply chain and improved time-to-market capabilities.

Dalrada Precision Parts (“Precision”)- Precision extends the client its engineering and operations team by helping devise unique manufacturing solutions tailored to their products. Dalrada Precision can enter at any stage of the product lifecycle from concept and design to mass production and logistics.

Likido Ltd. (“Likido”)- Likido is an international engineering company developing advanced solutions for the harvesting and recycling of energy. Using its novel, heat pump systems (patent pending), Likido is working to revolutionize the renewable energy sector with the provision of innovative modular process technologies to maximize the capture and reuse of thermal energy for integrated heating and cooling applications. With uses across industrial, commercial and residential sectors, Likido provides cost savings and the minimized carbon emissions across global supply chains. Likido's technologies enable the effective recovery and recycling of process energy, mitigating against climate change and expected enhancement of quality of life through the provision of low-carbon heating and cooling systems. 

During the year, the U.S. Government selected Dalrada’s Likido®ONE high-performance, low-carbon heat pump for real-world testing in a prestigious clean energy program. The expected positive results should not only increase market acceleration and adoption within the federal government acceptance of groundbreaking eco-friendly technology but should also accelerate adoption within the commercial building industry.

Ignite I.T. (“Ignite”)- Ignite is a manufacturer and seller of eco-friendly deep cleaners, parts washers and degreasers that are specially formulated to lift hydrocarbon-based dirt and grease from virtually all surfaces with minimal effort. Ignite products are non-flammable, non-corrosive, non-toxic, butyl-free, water-based, and leave a light citrus scent. Ignite is developed for all surfaces suitable for water and meet or exceed the most stringent industry-testing specifications.

Deposition Technologies (“DepTec”)- Dalrada Precision Manufacturing acquired DepTec in April 2022. DepTec designs, develops, manufactures, and services chemical vapor and physical vapor deposition systems for the microchip and semiconductor industries.

DepTec has built an impressive catalogue of precision OEM parts for PVD (Physical vapor deposition) systems and the Company’s refurbished systems which allows clients the option of purchasing the same model of system they’ve been using for decades –but with significant upgrades and improved efficiencies. Older systems can now operate more reliably with additional control and monitoring plus longer lifespans. DepTec also has its own PVD and CVD (Chemical Vapor Deposition) systems, EVOS-PVD and EVOS -CVD, which deposits metals and non-metals for microchips used in almost every standard and specialized microdevices made today and in the future. These systems can produce a superior film layer utilized in rugged high-stress environment designs.

Dalrada Technologies

Dalrada Technologies has worked with some of the world’s most recognizable companies, providing digital engineering for cutting-edge software systems and offering a host of robust digital services. This business division connects the world with integrated technology and innovative solutions, delivering advanced capabilities and error-free results. Dalrada Technologies creates digital products with expert computer information technology and software engineering services for a variety of technical industries and clients in both B2B and B2C environments.

Prakat (“Prakat”)- Prakat is an ISO 9001-certified company that provides end-to-end technology services across various industries, improving the value chain. The Company specializes in test engineering, accessibility engineering, product engineering, application modernization, billing and revenue management, CRM, and block chain. Prakat provides global customers with software and technology solutions specializing in Test Engineering, Accessibility Engineering, Product Engineering and Application Modernization.

Research and Development

We spent $656,997 and $520,510 on research and development activities during the years ended June 30, 2022 and 2021, respectively. We anticipate that we will incur additional expenses on research and development over the next 12 months. Our planned expenditures on our operations or a business combination are summarized under the section of this annual report entitled “Management’s Discussion and Analysis of Financial Position and Results of Operations”.

Item 1A. Risk Factors

Not applicable to smaller reporting companies.

Item 1B. Unresolved Staff Comments

Not applicable to smaller reporting companies.

Item 2. Description of Property

We currently lease 153,541 square feet of office, medical, pharmacy and warehouse space in California, Alabama, Texas, Scotland and India, with leases that expire through 2028.

The following table sets forth information with respect to our facilities:

Item 3. Legal Proceedings

Dalrada Health Products (“Dalarada Health”), a subsidiary of Dalrada Financial Corporation, formed a joint venture with Vivera Pharmaceuticals, Inc. (“Vivera”), whereby Vivera is the minority member. As the managing member of the joint venture, Dalrada Health Products, in December 2021, filed suit against Vivera and Paul Edalat, Vivera’s Chairman and CEO, for misappropriation of funds on behalf of the joint venture in the amount of $2,104,509. In addition to filing a cross-complaint against Dalrada Health Products, Vivera filed a separate complaint against Dalrada Financial Corporation, Empower Genomics (a subsidiary of Dalrada Financial Corporation), Dalrada Financial Corporation’s officers, and other unrelated parties. The proceedings are being held at the Superior Court of the State of California, for the County of Orange – Central Justice Center.

A dispute is currently ongoing between the Likido Ltd. and one of its customers, MAPtech Packaging Inc, a US company (“MAPtech”). Arbitration proceedings were raised in June 2021, which have now concluded and currently Likido Ltd. is awaiting the arbitrator's decision (which is expected in a time period of approximately two to three months). The dispute concerns deposit moneys paid to the Company from MAPtech ($429,987.98; approximately £400,000 subject to conversion rates) for the production of a number of chiller units for use in the food packaging industry. The project was delayed largely as a result of Covid-19. The units were required to be redesigned and there were other delays without the Company's control. MAPtech are seeking the return of their deposit together with their costs of the arbitration process. The action has been defended by the Company on the basis that the deposit was non-refundable, that the Company was required to carry out further work on the units, including their partial re-design, on MAPtech's continuing instructions and in response to regulatory changes and that the costs of these works was in excess of the balance of the non-refundable deposit sum. The Company has included a contingency liability in the amount of $271,999 related to the suit.

Item 4. Mine Safety Disclosures

Not applicable to our Company.

PART II

Item 5. Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities

Market Information

Our shares of common stock are listed on the OTC Markets Pink Sheets under the symbol DFCO. Set forth below are high and low bid prices for our common stock for each quarterly period in the two most recent fiscal years. Such quotations reflect inter-dealer prices, without retail mark-up, markdown or commissions and may not necessarily represent actual transactions in the common stock.

Number of Holders

As of June 30, 2022, there were 72,174,620 issued and outstanding shares of common stock held by a total of 557 shareholders of record.

Dividends

No cash dividends were paid on our shares of common stock during the fiscal years ended June 30, 2022, and 2021. We have not paid any cash dividends since our inception and do not foresee declaring any dividends on our common stock in the foreseeable future.

Recent Sales of Unregistered Securities

Common Stock Transactions - Fiscal 2022

In August 2021, December 2021, March 2022, and May 2022, the Company issued 87,500 shares of common stock related to the acquisition of PSC (see Note 4. Combinations and Acquisition for additional information).

In October 2021, December 2021, March 2022, and May 2022, the Company issued 125,000 shares of common stock related to the acquisition IHG (see Note 4. Combinations for Acquisition for additional information).

In September 2021, the Company repurchased 329,478 shares of common stock from a Company employee.

In September 2021, the Company issued 2,000,000 shares of common stock to board members.

In October 2021, the Company issued 250,000 shares to Vivera pursuant to the Pala agreement (see Note 3. Investment in Pala Diagnostics for additional information).

In December 2021, the Company issued 500,000 shares of common stock pursuant to a consulting agreement.

In December 2021, the Company cancelled 6,500,000 common shares issued to its Directors, and an advisor, and returned them to treasury.

In March 2022, the Company issued 192,000 shares of common stock pursuant to a consulting agreement.

In June of 2022, the Company issued 164,659 shares of common stock pursuant to the conversion of $68,630 of convertible debt and its related premium and interest expense.

In June 2022, the Company issued 208,777 shares of common stock pursuant to the conversion of $65,034 of convertible debt and its related premium and interest expense.

In June 2022, the Company issued 500,000 shares of common stock related to the acquisition of Watson (see “Note 4. Business Combinations and Acquisition”).

Common Stock Transactions - Fiscal 2021

Effective January 19, 2021, the Company issued 361,420 pursuant to a share exchange agreement. The fair value of $93,369 was included in research and development expenses in the consolidated statements of operations.

Effective March 22, 2021, the Company issued 4,500,000 shares to the board of directors pursuant to the 2020 stock compensation plan. 3,500,000 shares of common stock were granted on July 9, 2020, at $0.08 per share and 1,000,000 shares of common stock were granted on February 25, 2021 at $0.45 per share, for a total fair value of $730,000.

Preferred Stock:

The Company has 100,000 shares authorized of Series F Super Preferred Stock (“Series F Stock”), par value, $0.01, of which 5,000 shares of Series F Stock (at a fair value of $170) were issued to the CEO in December 2019.  Each share of Series F Stock entitles the holder to the greater of (i) one hundred thousand votes for each share of Series F 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 Stock shall always constitute most of the voting rights of the Corporation. In any vote or action of the holders of the Series F Stock voting together as a separate class required by law, each share of issued and outstanding Series F Stock shall entitle the holder thereof to one vote per share. The holders of Series F Stock shall vote together with the shares of Common Stock as one class.

On February 1, 2022, the Company converted related party principal and interest into 10,002 shares of Series G Convertible Preferred Stock (“Series G Stock”).  The Series G Stock shall convert at one share of Series G Stock to 2,177 shares of common stock (equivalent to converting the related dollars into common shares at $0.30 per share).  Series G Stock do not have voting rights.

Purchase of our Equity Securities by Officers and Directors

None.

Other Stockholder Matters

None

Item 6.  Selected Financial Data

Not applicable to smaller reporting companies.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis in conjunction with our financial statements, including the notes thereto, included in this Report. Some of the information contained in this Report may contain forward-looking statements within the meaning of Section 27A of the Securities Exchange Act of 1933, as amended (the “Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This information may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance, or achievements to be materially different from future results, performance or achievements expressed or implied by any forward-looking statements. Forward-looking statements which involve assumptions and describe our future plans, strategies and expectations, are generally identifiable by the use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative of these words or other variations on these words or comparable terminology. These forward-looking statements are based on assumptions that may be incorrect, and there can be no assurance that the projections included in these forward-looking statements will come to pass. Our actual results could differ materially from those expressed or implied by the forward-looking statements as a result of various factors. We undertake no obligation to update publicly any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

Our Independent Registered Public Accounting Firm’s report contains a statement that our net loss and limited working capital raise substantial doubt about our ability to continue as a going concern. Our independent registered public accountants have stated in their report (included in Item 8 of the Financial Statements) that our significant operating losses and working capital deficit raise substantial doubt about our ability to continue as a going concern. We incurred a net loss of $11,571,783 for the year ended June 30, 2022, and net income of $1,221 during the year ended June 30, 2021. Although the Company continues to rely on equity and debt investors to finance its losses, it is implementing plans to achieve cost savings and other strategic objectives to address Company profitability. In addition to raising debt and equity financing, the Company continues to focus on growing the subsidiaries anticipated to be most profitable while reducing investments in areas that are not expected to have long-term benefits. The Company will continue to pursue synergistic opportunities to enhance its business portfolio.

RESULTS OF OPERATIONS

The following table sets forth the results of our operations for the years ended June 30, 2022, and 2021:

Dalrada operates numerous diverse business activities through its Corporate segment as well as its four operating segments: 1) Health; 2) Energy; 3) Manufacturing; and 4) Technology. The business segment data (Note 13 to the accompanying Consolidated Financial Statements) should be read in conjunction with this discussion.

During the year we established products and services through a strategic vertical integration approach. Dalrada leveraged its resources to increase market share across all operating segments as well as acquired companies to enhance and strengthen the existing suite of businesses.

In the first quarter of the year, we entered into a joint venture agreement with a diagnostic laboratory as well as expanded our wholly owned diagnostic laboratory to conduct both molecular diagnostic and antibody tests to support the diagnosis of COVID-19.

In the third quarter of the year, due to strong market demands, we expanded our presence in the green energy industry when launching Dalrada Energy Services (“DES”) to service the Environment, Social and Governance (“ESG”) space. DES provides an end-to-end solution that will simultaneously help achieve ESG responsibilities while producing significant cost savings. DES deploys a proprietary financial model (Patent In process) that helps realize reductions in usage through reliable, efficient, and secure protocols meeting long-term clean energy and net-zero sustainability initiatives with no capital investment requirement.

During the third quarter of the year, Dalrada launched Ignite I.T. (“Ignite”), as a manufacturer and seller of eco-friendly deep cleaners, parts washers and degreasers that are specially formulated to lift hydrocarbon-based dirt and grease from virtually all surfaces. Ignite and its family of products directly address global demand and increased government regulation to reduce employee exposure to harmful chemicals and toxic substances. Ignite is a complementary business to the Manufacturing segment of services and products.

Also, in the third quarter of the year, Solas Corp. (“Solas”) expanded its management services agreements to three health and wellness clinics throughout San Diego, California.

Acquisitions

In April 2022, we entered into an agreement to acquire 100% of Silicon Services Consortium (Europe) LTD which is operating as Deposition Technologies (“DepTec”). DepTec was founded in 2004 and has since specialized in delivering precision manufacturing equipment and services for semiconductor, micro-electromechanical systems (MEMS), and medical and optoelectronics device companies. DepTec manufactures chemical vapor and physical vapor deposition systems. DepTec also designs, develops, manufactures, and services advanced vacuum and plasma technology-based systems as well as control systems and software solutions for the semiconductor industry. In 2014, DepTec developed its own unique PVD system, the EVOS, and entered the OEM arena. DepTec currently features multiple systems, including robotics, that assist in producing devices used in the latest medical devices, communications products and virtually all systems utilizing microelctronics. Additionally, DepTec provides refurbished Varian PVD Systems, including the 3180/3190, 3290 and XM-90 systems as well as the Novellus Concept 1 and 2 PECVD Systems.

In June 2022, we entered into an agreement to acquire 100% of RxHealth LLC which is operating as Watson Rx. Watson Rx is a Pharmacy operating in Alabama and focused on managing complex disease states and licensed in all 50 states plus Washington D.C. Its services/products provided include Pharmaceutical, Diabetes Care, Durable Medical Equipment, Health Screenings, and Medication Therapy.

Through the acquisition and integration into Dalrada Life Sciences, Watson Rx further establishes a comprehensive healthcare solution for all Dalrada Health clients with unique offerings that will now include: a pharmacy to facilitate prescription processing, physicians and clinicians at treatment clinics, expanding into telemedicine, engagement of Dalrada-owned testing facilities and laboratories, and utilization of Company-specific technologies to facilitate immediate growth of the business. Watson Rx has a long history of providing excellent pharmacy services and allows Dalrada to expand its healthcare footprint and continue to build a total health management solution on an already successful turnkey operation. Through comprehensive prescription management, education, nursing, and total health management, Watson Rx Solutions” leadership team holds more than six decades of combined experience in various complex pharmacy disease states and retail services, always putting patients first. Dalrada has entered the pharmaceutical space with an accelerated strategic plan to leverage the Company’s existing capabilities.

Revenues and Cost of revenues

Dalrada Health

Total Revenues for Dalrada Health increased $11,878,249 , or 683% from the prior year.

Pala Diagnostics (“Pala”) and Empower Genomics (“Empower”) generated $11,824,717, or 87% of the total revenue for Dalrada Health through its complexity CLIA diagnostic laboratories, focusing primarily on Covid-19 testing services with validated PCR and Rapid antigen testing. Our diagnostic laboratories saw an immediate increase in revenue as a result of the COVID-19 Omicron surge during the summer of 2021 and into Spring of 2022. Our Covid Response Field Tech teams were deployed to senior cares, schools and universities, businesses, and community sites throughout Southern California. During the year, Empower developed proprietary digital registration and reporting software that met all compliance benchmarks required by county, state, and federally funded Covid-19 programs. In March 2022, the HRSA COVID-19 Uninsured Program ceased and stopped accepting claims on March 22, 2022. The cost of revenue was $3,612,891, or 31% of revenue.

IHG’s revenue increased by $334,727 from the prior year and represented 5.78% of the total revenue for Dalrada Health. The increase in revenue was a result of a rising number of students entering and graduating from IHG’s Certified Nursing Assistant (“CNA”), Medical Assistant and Home Health Aid (“HHA”) Certification programs. The cost of revenues increased by 172% from the prior year.

Solas began managing a suite of wellness therapies during fiscal year 2022 and expanded its management services agreements to three locations during fourth quarter of fiscal year 2022. The revenue generated was $723,215, or 5.31% of total revenue for Dalrada Health. The cost of revenue was $750,565.

Watson generated $69,160, or .51% of the total revenue for Dalrada Health between the acquisition date of June 7, 2022 and the fiscal year ended June 30, 2022. The revenue was a driven from subscriptions filled on its existing customer base. The cost of revenue was $12,305.

Dalrada Health and Shark’s sale of alcohol-free natural sanitizers and sanitizing kits decreased by 78% from the prior year. The decrease was a result of a highly competitive sanitization market. Total cost of revenue was $74,420, or 0.55% of total Revenue for Dalrada Health.

Dalrada Precision Manufacturing

Total Revenue for Dalrada Precision Manufacturing rose $1,642,124, or 341% from the prior year. The increase in revenue was a direct result of obtaining an increased customer base in the Dalrada Precision Parts market. Furthermore, the launch of Ignite generated revenue to Precision Manufacturing.

Dalrada Precision Parts generated $1,347,816, or 63% of the total revenue for Dalrada Precision Manufacturing. Revenue for Dalrada Precision Parts increased by $1,197,756, or 233% from the prior year. The increase was a result of an expansion of its customer base in the United States. Additionally, Dalrada Precision Parts purchased several Likido units from Likido Ltd (UK) and sold them to a third party. The cost of revenue was $762,873.

Likido Ltd. generated $155,218, or 7% of the total revenue for Dalrada Precision Manufacturing. Revenue for Likido Ltd. decreased by $176,035, or 53% from the prior year. The decrease was a result of additional R&D completed on the Likido®ONE heat pump in anticipation for an increase in manufacturing volumes. Likido Ltd. sold several Likido®ONE and Likido®CRYO units to Dalrada Precision Parts which was eliminated in consolidation. During the year Likido Ltd. began working with Likido Corp. (USA) to ramp up manufacturing in the United States. The cost of revenues was $946,890 and includes a write down of inventory.

DepTec generated $570,225, or 27% of the total revenue for Dalrada Precision Manufacturing between the acquisition date of April 6, 2022, and the fiscal year ended June 30, 2022. DepTec records its revenue on a percentage of completion method. The cost of revenues was $290,368.

Ignite’s cleaners, parts washers and degreasers products generated $50,178, or 2% of total revenue for Dalrada Precision Manufacturing. The cost of revenue was $23,916.

Dalrada Energy Services

Dalrada Energy Services generated $1,261,774 during the year through implementing robust energy savings strategies to several properties of a related party. The Revenue was a result of a sales-type lease arrangement for obtaining energy savings over a 20-year contract. The cost of revenue was $172,231.

DES made significant investments to meet strong market demand from is strategically working global public and private sector organizations to adopt real, measurable, and repeatable Environmental, Social, and Governance (ESG) measures. These measures also allow our clients and DES to benefit from ESG focused laws and mandates that require businesses to create and adhere to their own sustainability plans. This includes the elimination of legacy lighting, oil and natural gas boilers and other high carbon producing infrastructure. DES implements the following upgrades and enhancements as part of its energy savings strategies:

Dalrada Technologies

Total Revenue for Dalrada Technologies” sole subsidiary, Prakat, rose $1,053,781, or 89% from the prior year. The increase in revenue was a direct result of a small number of larger contracts in Asia.

Operating Expenses

Operating expenses for the year ended June 30, 2022, was $20,941,591 compared to operating expenses of $9,504,869 during the year ended June 30, 2021, an increase of $11,436,722.

Corporate

Operating expenses for the corporate segment increased by $6,089,806 from the prior year and represented 52% of the total operating expenses.

The Corporate segment’s Selling, general and administrative (“SG&A”) expenses consist of the following:

Interest Expense increased by $593,938, or 100% from the prior year as a result of related party debt, PPP loans, and convertible debt. See “Note 7. Notes Payable” to our audited consolidated financial statements included in this Annual Report on Form 10-K for more information regarding our outstanding debt.

Stock-based compensation includes expenses related to equity awards issued to employees and non-employee directors. Stock-based compensation increased by $1,971,098, or 246% from the prior year. See “Note 12. Stock-Based Compensation” to our audited consolidated financial statements included in this Annual Report on Form 10-K for more information regarding our stock-based compensation.

Dalrada Health

Operating expenses for the Dalrada Health segment increased by $4,006,142 from the prior year and represented 29% of the total operating expenses.

The Dalrada Health segment’s Selling, general and administrative (“SG&A”) expenses consist of the following:

Dalrada Precision Manufacturing

Operating expenses for the Dalrada Precision Manufacturing segment increased by $2,993,732 from the prior year and represented 14% of the total operating expenses.

The Dalrada Precision Manufacturing Segment’s Selling, general and administrative (“SG&A”) expenses consist of the following:

Dalrada Energy Services

The Dalrada Energy Services Segment’s Selling, general and administrative (“SG&A”) expenses consist of the following:

Dalrada Technologies

The Dalrada Technologies segment’s Selling, general and administrative (“SG&A”) expenses consist of the following:

Other Income (Expense)

Other Income decreased by $9,575,398, or 112% from the prior year. The change in Other Income (Expense) was a result of additional interest of $1,303,714 related to additional related party debt, EIDL loans, and convertible debt. See “Note 7. Notes Payable” to our audited consolidated financial statements included in this Annual Report on Form 10-K for more information regarding our outstanding debt. The change in Other Income (Expense) was also related to a $9,054,041 “Gain on expiration of accrued payroll taxes” as a result of quarterly tax liabilities that expired during fiscal 2021.

Net Income (Loss)

Net Loss for the year ended June 30, 2022, was $11,571,783 compared to a Net Income of $1,221 during the year ended June 30, 2022

Liquidity and Capital Resources

As of June 30, 2022, the Company had current assets of $9,563,566 and current liabilities of $20,416,745 compared with current assets of $1,640,511 and current liabilities of $17,175,111 at June 30, 2021. The increase in the working capital deficit of was due to the fact that the Company recovered tax liability during the prior year which was used to offset outstanding obligations. The continuation of the Company as a going concern is dependent upon the successful financing through equity and/or debt investors and growing the subsidiaries anticipated to be profitable while reducing investments in areas that are not expected to have long-term benefits.

The Company anticipates an increase in sales of Likido’s Likido®ONE heat pump through DES’ energy savings projects as well as its current and future customer base. Furthermore, the United States General Services Administration (GSA) and the Department of Energy (DOE) have chosen the Company’s Likido®ONE heat pump to help reduce greenhouse emissions from commercial buildings through high performance, low-carbon solutions set forth by the Green Proving Ground (GPG) program.

The company has completed and anticipates obtaining material ESG contracts through its DES subsidiary and expects to sell these contracts to various investment firms and energy brokerages.

The Company is owed a material amount of account receivable from insurance providers related to the COVID-19 testing services. Furthermore, the Company wrote down $1,758,000 of revenue during the year ended June 30, 2022 which it is actively working to recoup through its third-party billing company.

Additional sales are expected through the Company’s increased Precision Parts sales channels, expansion of Prakat’s technology services, IHG’s increased educational footprint through launching the LVN program, opportunities within the pharmaceutical business and other new business opportunities (see “Subsequent Events”). 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.

Cash Flows

Cash flow from Operating Activities

During the year ended June 30, 2022, the Company used $10,349,808 of cash for operating activities compared to $5,583,788 used during the year ended June 30, 2021. The increase in the use of cash for operating activities was primarily due to an overall increase in day-to-day operating costs while the Company continues to grow in addition to its new business units.

Cash flow from Investing Activities

During the year ended June 30, 2022, the Company used $574,040 of cash for investing activities compared to $385,830 used during the year ended June 30, 2021. The increase in the use of cash for investing activities was due to the purchase of equipment and the acquisition of DepTec and Watson.

Cash flow from Financing Activities

During the year ended June 30, 2022, the Company received $11,668,585 of cash for financing activities compared to $5,964,554 used during the year ended June 30, 2021. The increase was due to the issuance of related party and convertible notes payables in the amount of $11,492,218 and $2,880,000, respectively.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, Revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Subsequent Events

In July 2022 through October 31, 2022, the Company issued 8,132,415 shares of common stock for the conversion of $1,231,471 in convertible notes held by YA II PN, LTD at an average conversion price of $0.1514.

On July 1, 2022, the Company issued 500,000 shares of common stock as part of the consideration for the acquisition of Deposition Technologies.

On October 10, 2022, the Company acquired 100% of Bothof Brothers Construction, Inc., a California corporation, for a transaction valued at $1,530,000, of which $1,080,000 will be paid in salary to the seller over a 36-month period, plus 3,000,000 cashless warrants with a strike price of $0.15 per share, valued at $450,000. The warrants will vest quarterly over a 24-month period.

Critical Accounting Policies

Our financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. A complete summary of these policies is included in note (1) of the notes to our financial statements. In general, management's estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.

Accrued Payroll Taxes

The total balance for Federal Accrued Payroll Taxes is accumulated on a quarterly basis beginning on their respective quarterly filing dates. Accrued Interest is compounded daily at an Effective Annual Interest Rate of approximately seven percent. The individual quarterly sub-totals have a calculated expiration date of Ten years according to the Internal Revenue Service statute of limitations. This timeline can be extended as a result of bankruptcy or other legal action that is filed by the Company (Code 520 per IRS Federal Account Transcripts). Code 520 effectively stops the clock for the Statute of limitations until the Bankruptcy or other legal action has been removed (Code 521 per IRS Federal Account Transcripts). In addition to the number of days between Code 520 and 521, every Code 520 automatically extends the IRS Statute of limitations by 30 days. As the quarterly sub-totals surpass their respective “Calculated 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” on the Statements of Operations. The amount owing may be subject to additional late filing fees and penalties that are not quantifiable as at the date of these consolidated financial statements.

Revenue Recognition

The Company recognizes and accounts for revenue in accordance with ASC 606 as a principal on the sale of goods and services. 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.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions take into account historical and forward-looking factors that the Company believes are reasonable, including but not limited to the potential impacts arising from the novel coronavirus (COVID-19) and related public and private sector policies and initiatives. Actual results could differ from those estimates and assumptions. A couple key categories that use estimates are Goodwill, Intangible Assets, and Impairment.

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 using quoted market prices of the equity instruments issued.

Business Combination

ASC 805, Business Combinations (“ASC 805”), applies the acquisition method of accounting for business combinations to all acquisitions where the acquirer gains a controlling interest, regardless of whether consideration was exchanged. ASC 805 establishes principles and requirements for how the acquirer: a) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree; b) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and c) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the  business  combination. Accounting for acquisitions requires the Company to recognize, separately from goodwill, the assets acquired, and the liabilities assumed at their acquisition-date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred and the net of the acquisition-date fair values of the assets acquired and the liabilities assumed. While the Company uses its best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, the estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments 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 recorded to the consolidated statements of comprehensive loss.

Goodwill and Intangible Assets

The Company accounts for goodwill and intangible assets in accordance with ASC 350, Intangibles – Goodwill and Other (“ASC 350”). ASC 350 requires that goodwill and other intangibles with indefinite lives should be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value.

Goodwill is tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis (June 30 for the Company) and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. The Company considers its market capitalization and the carrying value of its assets and liabilities, including goodwill, when performing its goodwill impairment test. When conducting its annual goodwill impairment assessment, the Company initially performs a qualitative evaluation of whether it is more likely than not that goodwill is impaired. If it is determined by a qualitative evaluation that it is more likely than not that goodwill is impaired, the Company then applies a two-step impairment test. The two-step impairment test first compares the fair value of the Company's reporting unit to its carrying or book value. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and the Company is not required to perform further testing. If the carrying value of the reporting unit exceeds its fair value, the Company determines the implied fair value of the reporting unit's goodwill and if the carrying value of the reporting unit's goodwill exceeds its implied fair value, then an impairment loss equal to the difference is recorded in the consolidated statements of operations. There was impairment of goodwill in the amount of $218,308 as of June 30, 2022.

An intangible asset is an identifiable non-monetary asset without physical substance. Such an asset is identifiable when it is separable, or when it arises from contractual or other legal rights. Separable assets can be sold, transferred, licensed, etc. Examples of intangible assets include computer software, licenses, trademarks, patents, films and copyrights. The Company’s intangible assets are finite lived assets and are amortized on a straight-line basis over the estimated useful lives of the assets.

Purchase Price Allocation

Upon the completion of a business combination, the consideration transferred as well as the assets and liabilities acquired must be recorded at their acquisition date fair values. Upon identification of the acquirer and determination of the acquisition date, business combinations are accounted for through the preparation of a Purchase Price Allocation (PPA). We take into consideration the five steps when completing a PPA:

Step 1: Determine the fair value of consideration paid;

Step 2: Revalue all existing assets and liabilities (excluding intangible assets and goodwill which are addressed in step 3 to 5 below) to their acquisition date fair values;

Step 3: Identify the intangible assets acquired;

Step 4: Determine the fair value of identifiable intangible assets acquired; and,

Step 5: Allocate the remaining consideration to goodwill and assess the reasonableness of the overall

Related Party Transactions

Related party transactions are conducted with parties with which DFCO has a close association, such as majority owned subsidiaries, its executive, managers, and their families. The types of transactions that can be conducted between related parties are many, such as sales, asset transfers, leases, lending arrangements, guarantees, allocations of common costs, and the filing of consolidated tax returns. DFCO discloses any transaction that would impact the decision making of the users of a company’s financial statements. This involves the following disclosures:

Recently Issued Accounting Pronouncements

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes. The amendments in this Update simplify the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. The Company adopted this pronouncement on July 1, 2020, and there was not a material impact on the financial statements.

In August 2020, the FASB issued ASU 2020-06, Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. Among other changes, the new guidance removes from GAAP separation models for convertible debt that require the convertible debt to be separated into a debt and equity component, unless the conversion feature is required to be bifurcated and accounted for as a derivative or the debt is issued at a substantial premium. As a result, after adopting the guidance, entities will no longer separately present such embedded conversion features in equity, and will instead account for the convertible debt wholly as debt. The new guidance also requires use of the “if-converted” method when calculating the dilutive impact of convertible debt on earnings per share, which is consistent with the Company’s current accounting treatment under the current guidance. The guidance is effective for financial statements issued for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, with early adoption permitted, but only at the beginning of the fiscal year. The Company adopted this pronouncement on July 1, 2021.

In October 2021, the FASB issued ASU 2021-08 – Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”). Under current accounting standards, contract assets and contract liabilities acquired in a business combination are to be recorded at fair value using the ASC 805 measurement principle. ASU 2021-08 requires the acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606: Revenue from Contracts with Customers as if the acquirer had originated the contracts rather than at fair value. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company elected to early adopt ASU 2021-08 on a prospective basis as of July 1, 2021. The election to use practical expedients allowed under ASU 2021-08 will be applied on an acquisition-by-acquisition basis. There was no impact to the Company’s consolidated financial statements as of the adoption date.

We have reviewed all the recently issued, but not yet effective, accounting pronouncements and we do not believe any of these pronouncements will have a material impact on the Company.

Contractual Obligations

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

Not applicable to smaller reporting companies.

Item 8. Financial Statements

DALRADA FINANCIAL CORPORATION

Consolidated Financial Statements

For the Years Ended June 30, 2022 and 2021

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and
Stockholders of Dalrada Financial Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Dalrada Financial Corporation and subsidiaries (collectively the “Company”) as of June 30, 2022 and 2021, the related consolidated statements of operations, stockholders’ deficit and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of June 30, 2022 and 2021, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has had recurring losses, used cash flows from operating activities and has a significant working capital deficit, which raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Critical Audit Matters

The critical audit matters communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which it relates.

Related Party Transactions including Revenue Recognition

Description of the Matter:

As discussed in Notes 2, 4, 7, 8, 9, 10, 11, 12 and 14 to the consolidated financial statements, the Company has significant related party transactions involving revenue, accounts receivable, accounts payable, loans payable, advances, and expenses paid by and to multiple related parties. Our auditing of management’s identification of related parties and the related transactions including recognition of revenue was complex and is based on a thorough understanding the Company’s related party relationships, contracts, and business activities. These were the principal considerations that led us to determine this as a critical audit matter.

How We Addressed the Matter in our Audit:

We evaluated the controls over the Company’s identification of, and recording of related party transactions, and of the revenue recognition process, including walkthroughs of internal controls. We confirmed certain balances and transactions with related parties. To evaluate the related party’s satisfaction of performance obligations, our audit procedures included, among others, reviewing contracts and evaluating management’s assumptions used to determine the distinct performance obligations, and reviewing the branding work performed by the Company for various products. In addition, to identify undisclosed related party transactions we performed the following: 1) made inquiries of management and other individuals throughout the Company; 2) obtained a selection of expenses and reviewed for related party indicators; 3) reviewed public filings and other online information available; 4) confirmed with the transfer agent regarding significant shareholders; and 5) related procedures performed in other parts of the audit engagement.

Revenue Recognition

Description of the Matter:

As disclosed in Note 2, 9 and 12, the Company recognizes revenue when or as the Company satisfies a customer agreement performance obligation by transferring control of a product or service to a customer, in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. In determining revenue recognition for certain customer agreements, significant judgment was exercised by the Company, and included the following: 1) An assessment of the products and services promised in contracts or customer agreements, and the identification of a performance obligation for each promise to transfer to the customer a product or service that is distinct. 2) Determination of relative standalone selling price for distinct performance obligations. 3) The timing of product or service delivery for performance obligations. 4) Net revenues and accounts receivable recognized from healthcare insurers and government payers consist of amounts billed net of contractual allowances for differences between amounts billed and the estimated consideration the Company expects to receive from such payers, which considers historical denial and collection experience and, additionally for healthcare insurers, the terms of the Company’s contractual arrangements. As disclosed by management, the process for estimating revenues and the ultimate collection of receivables associated involves significant assumptions and judgments. Given these factors, the related audit effort in evaluating management’s judgments in determining revenue recognition for these customer agreements was extensive, which led us to determine this as a critical audit matter.

How We Addressed the Matter in our Audit:

Our principal audit procedures related to the Company’s revenue recognition for these customer agreements included an evaluation of the controls related to the identification of distinct performance obligations and the determination of the timing of revenue recognition. We also evaluated management’s significant accounting policies related to certain customer agreements. In addition, we selected customer agreements and performed the following procedures: 1) Obtained and read the customer agreements or contracts for each selected agreement. 2) Evaluated and tested management’s identification of significant terms for completeness, including the identification of distinct performance obligations. 3) Evaluated the appropriateness of management’s application of their accounting principles, in their determination of revenue recognition conclusions. 4) Tested the mathematical accuracy of management’s calculations of revenue and the associated timing of revenue recognized in the consolidated financial statements. 5) These procedures also included, among others, testing management's process for developing the estimate for contractual allowances, including (i) evaluating the appropriateness of the methodology, (ii) testing the completeness and accuracy of the historical contractual allowance and collection data from the Company’s billing system, which is an input to the methodology, and (iii) evaluating the reasonableness of management’s assumptions used to estimate contractual allowances (net accounts receivable).

/s/ dbbmckennon

We have served as the Company’s auditor since 2019.

San Diego, California

October 31, 2022

PCAOB No. 3501

DALRADA FINANCIAL CORPORATION

Consolidated Balance Sheets

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

DALRADA FINANCIAL CORPORATION

Consolidated Statements of Operations

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

DALRADA FINANCIAL CORPORATION

Consolidated Statements of Changes in Stockholders’ Deficit

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

DALRADA FINANCIAL CORPORATION

Consolidated Statements of Cash Flows

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

DALRADA FINANCIAL CORPORATION

Notes to the Consolidated Financial Statements

Years ended June 30, 2022, and 2021

Dalrada Financial Corporation, (“Dalrada”), was incorporated in September 1982 under the laws of the State of California. It was reincorporated in May 1983 under the laws of the State of Delaware and reincorporated again on May 5, 2020, under the laws of the state of Wyoming. Dalrada Financial Corporation trades under the symbol, OTCQB: DFCO.

In June 2018, the Company created a new subsidiary, Dalrada Precision Corp. (“Dalrada Precision”). Dalrada Precision was formed to provide manufacturing solutions which start with the design and development of high-quality machine parts and components, and end with an efficient global supply chain.

In October 2018, the Company created a new subsidiary, Dalrada Health Products Corp (“Dalrada Health”) for the distribution of medical disposables, hospital equipment and furniture, medical devices, laboratory and dental products, and sanitizing, disinfectant and PPE products & services.

On December 6, 2019, Dalrada, via its wholly owned subsidiary, Dalrada Precision, acquired 100% of the issued and outstanding shares of Likido Ltd. (HQ), a United Kingdom company (“Likido”). Likido is an international technology company developing advanced solutions for the harvesting and recycling of energy.

On January 9, 2020, Dalrada acquired 72% of the issued and outstanding shares of Prakat Solutions Inc. a Texas corporation, (“Prakat”). Prakat provides global customers with software and technology solutions specializing in Test Engineering,

On or about March 23, 2020, Dalrada Health acquired 100% of the issued and outstanding shares of Shark Innovative Technologies Corp. (“Shark”). Shark is a cleaning solutions provider using electrostatic machines to spray and deodorize residential spaces, healthcare facilities, hospitality, transportation, manufacturing, automotive, schools/education systems, and other facilities requiring cleaning services.

On January 29, 2021, Dalrada Health acquired 100% of the issued and outstanding shares of International Health Group, Inc., a California corporation (“IHG”). IHG provides highly trained nursing and medical assistants for hospitals and home health facilities since 2006. IHG Medical Assistant programs include CNA (“Certified Nursing Assistant”) and HHA (“Home Health Aide”) training and the fast-track 22-Day CNA Certification Program at its state-approved testing facility (see “Note 4. Business Combinations and Acquisition” for additional information).

On February 3, 2021, Dalrada Health acquired 100% of the limited liability units of Pacific Stem Cells, LLC, a California limited liability company (“Pacific Stem”). Pacific Stem provides regenerative therapy as a potential solution for the prevention, detection, and treatment of cellular breakdown associated with aging and a variety of other conditions (see “Note 4. Business Combinations and Acquisition” for additional information).

On April 21, 2021, the Company acquired 100% of the limited liability units of Ignite IT LLC, a Wisconsin limited liability company (“Ignite”). Ignite is a manufacturer and seller of eco-friendly deep cleaners, parts washers and degreasers that are specially formulated to lift hydrocarbon-based dirt and grease (see “Note 4. Business Combinations and Acquisition” for additional information).

In June 2021, the Company launched Empower Genomics Corp. (“Empower”) to enter the genetic and diagnostics testing industry.

In June 2021, the Company launched Solas Corp. (“Solas”) as an end-to-end management and oversight company for health and wellness practices throughout the California.

On July 23, 2021, the Company, through Dalrada Health, entered into a Limited Liability Company Agreement, for a 51% membership interest, with Pala Diagnostics, LLC, a California limited liability company (“Pala”). Pala was formed to provide diagnostic testing, specifically COVID-19.

On April 7, 2022, the Company acquired 100% of the issued and outstanding shares of Silicon Services Consortium (Europe) LTD, a United Kingdom company (“DepTec”). DepTec designs, develops, manufactures, and services chemical vapor and physical vapor deposition systems for the microchip and semiconductor industries (see “Note 4. Business Combinations and Acquisition” for additional information).

On June 7, 2022, the Company acquired 100% of the limited liability units of RxHealth LLC, a Louisiana limited liability company (“Watson”). Watson specializes in providing expert care and managing disease states through comprehensive prescription management, education, nursing, and total health solutions (see “Note 4. Business Combinations and Acquisition” for additional information).

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 June 30, 2022, the Company had a working capital deficit of $9,357,651 and an accumulated deficit of $121,436,490. The Company incurred negative cash flows from operations for the years ended June 30, 2022, and 2021, and raises substantial doubt about the Company’s ability to continue as a going concern. The continuation of the Company as a going concern is dependent upon the successful financing through equity and/or debt investors and growing the subsidiaries anticipated to be profitable while reducing investments in areas that are not expected to have long-term benefits. The Company expects to fund any short-term operational deficits through collection of outstanding accounts receivable from HRSA, insurance providers, the sale of Likido units as well as loans from related parties.

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.

These consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries: Dalrada Precision Corp., a company incorporated in the State of California, since June 25, 2018 (date of incorporation), Dalrada Health Products, a company incorporated in the State of California, since October 2, 2018 (date of incorporation), Dalrada Technologies, LLC, a company incorporated in the State of Wyoming, since January 1, 2020 (date of incorporation), Dalrada Energy Services, Inc., a company incorporated in the State of Wyoming, since March 17, 2022 (date of incorporation), since their respective acquisition dates (see Note 4). All inter-company transactions and balances have been eliminated in consolidation.

The consolidated financial statements include the accounts of all entities controlled by the Company through its direct or indirect ownership of a majority voting interest. Additionally, the consolidated financial statements include the accounts of variable interest entities (“VIEs”) in which the Company has a variable interest and for which the Company is the “primary beneficiary” as it has both: (1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses of the VIE that potentially could be significant to the VIE or the right to receive benefits from the VIE that potentially could be significant to the VIE. All significant intercompany accounts and transactions are eliminated in consolidation.

Income attributable to the minority interest in the Company's majority owned and controlled consolidated subsidiaries is recorded as net income attributable to noncontrolling interests in the consolidated statements of operations and the noncontrolling interest is reflected as a separate component of consolidated stockholders' equity in the consolidated balance sheet.

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 revenue, valuation of inventory, valuation of accrued payroll tax liabilities, valuation of acquired assets and liabilities, variables used in the computation of share-based compensation, litigation, and evaluation of goodwill and intangible assets for impairment.

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 considers all highly liquid instruments with a maturity of three months or less at the time of issuance to be cash equivalents.

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, accounts receivable, and cash equivalents. The Company generally maintains balances in various operating accounts at financial institutions that management believes to be of high credit quality, in amounts that may exceed federally insured limits. The Company has not experienced any losses related to its cash and cash equivalents and does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.

When estimating its allowance for credit losses related to revenues from Covid Testing, the Company differentiates its receivables based on the following customer types: healthcare insurers, government payers, and cash payers. Additionally, the Company applies assumptions and judgments for assessing collectability and determining net revenues and accounts receivable from its customers. Historical collection factors we considered for assessing collectability and determining net revenues and accounts receivable from our customers include the period of time that the receivables have been outstanding, history of payment amounts, status of collections due, and applicable statutes of limitations.

During the year ended June 30, 2022, healthcare insurers and government payers accounted for over 61% of total revenues. Also, healthcare insurers and government payers amounted to total revenue of $11,824,717. The accounts receivable related to both healthcare insurers and government payers is $4,129,953 as of June 30, 2022.

As of the year ended June 30, 2022, $880,500 is owed by a customer from the sale of several Likido units.

Pursuant to ASC 820, Fair Value Measurements and Disclosures, an entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. ASC 820 prioritizes the inputs into three levels that may be used to measure fair value:

Level 1 - applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

Level 2 - applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

Level 3 - applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

The Company’s financial instruments consist principally of cash, accounts receivable, accounts payable and accrued liabilities, notes payable, and amounts due to related parties. Pursuant to ASC 820, the fair value of cash is determined based on “Level 1” inputs, which consist of quoted prices in active markets for identical assets. The recorded values of all other financial instruments approximate their current fair values because of their nature and respective maturity dates or durations.

The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis and indicates the level of the fair value hierarchy used to determine such fair values: 

The Company records a contingent consideration liability relating to stock price guarantees included in its acquisition and consulting agreements. The estimated fair value of the contingent consideration is recorded using a significant observable measure and is therefore classified as a Level 2 financial instrument.

The fair value of the contingent consideration liability related to the Company’s business combinations is valued based on a forward contract and the guaranteed equity value at settlement as defined in the acquisition agreement (see “Note 4. Business Combinations and Acquisition). The fair value of the contingent consideration is then calculated based on the guaranteed equity value at settlement as defined in the acquisition agreement. (See “Note 14. Commitments and Contingencies”).

Changes in contingent consideration liability during the year ended June 30, 2022, are as follows: 

The change in fair value was due to the issuance of 333,333 common stock shares pursuant to the acquisition and the change in exchange rates for which the liability needs to be satisfied, British Pounds.

The Company evaluates and accounts for conversion options embedded in convertible instruments in accordance with ASC Topic 815, Derivatives and Hedging Activities (“ASC 815”).

Applicable U.S. GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free-standing derivative financial instruments according to certain criteria. The criteria includes circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.

The Company accounts for convertible instruments (when the Company has determined that the embedded conversion options should not be bifurcated from their host instruments) as follows. The Company records, when necessary, deemed dividends for the intrinsic value of conversion options embedded in shares based upon the differences between the fair value of the underlying common stock at the commitment date of the transaction and the effective conversion price embedded in the shares. 

Accounts receivables are derived from products and services delivered to customers and are stated at their net realizable value. Each month, the Company reviews its receivables on a customer-by-customer basis and evaluates whether an allowance for doubtful accounts is necessary based on any known or perceived collection issues.  Any balances that are eventually deemed uncollectible are written off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. As of June 30, 2022, and 2021, the Company had an allowance of doubtful accounts of $119,791 and $37,465, respectively.

Pala and Empower have a standardized approach to estimate the amount of consideration that we expect to be entitled to for its COVID-19 testing revenue, including the impact of contractual allowances (including payer denials), and patient price concessions. The Company principally estimates the allowance for credit losses by pool based on historical collection experience, the current credit worthiness of the customers, current economic conditions, expectations of future economic conditions and the period of time that the receivables have been outstanding. Adjustments to our estimated contractual allowances and implicit patient price concessions are recorded in the current period as changes in estimates.

In March 2022, the U.S. Health Resources and Services Administration (“HRSA”) informed providers that, after March 22, 2022, it would stop accepting claims for testing and treatment for uninsured individuals under the HRSA COVID-19 Uninsured Program and that claims submitted prior to that date would be subject to eligibility and availability of funds. For the year ended June 30, 2022, revenue for testing of uninsured individuals under the HRSA COVID-19 Uninsured Program represented 41% of our COVID-19 testing net revenue. As of June 30, 2022, 26% of our net accounts receivable was associated with claims for reimbursement for COVID-19 testing of uninsured individuals. As a result of HRSA ceasing the COVID-19 Uninsured Program, the Company reduced its Accounts Receivable by $1,661,618 for the year ended June 30, 2022. Although we believe that our estimates for contractual allowances and patient price concessions are appropriate, actual results could differ from those estimates.

Inventory is recorded at the lower of cost or net realizable value on a first-in first-out basis. As of June 30, 2022 and 2021, inventory is comprised of raw materials purchased from suppliers, work-in-progress, and finished goods produced or purchased for resale. The Company establishes inventory reserves for estimated obsolete or unsaleable inventory equal to the difference between the cost of inventory and the estimated realizable value based upon assumptions about future market conditions.

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization expense is recognized using the straight-line method over the estimated useful life of each asset, as follows: 

Estimated useful lives are periodically assessed to determine if changes are appropriate. Maintenance and repairs are charged to expense as incurred. When assets are retired or otherwise disposed of, the cost of these assets and related accumulated depreciation or amortization are eliminated from the balance sheet and any resulting gains or losses are included in the statement of operations loss in the period of disposal.

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.

The Company estimates and records the acquisition date fair value of contingent consideration as part of purchase price consideration for acquisitions. Additionally, each reporting period, the Company estimates changes in the fair value of contingent consideration and recognizes any change in fair in the consolidated statement of operations. The estimate of the fair value of contingent consideration requires very subjective assumptions to be made of future operating results, discount rates and probabilities assigned to various potential operating result scenarios. Future revisions to these assumptions could materially change the estimate of the fair value of contingent consideration and therefore, materially affect the Company’s future financial results. The contingent consideration liability is to be settled with the issuance of shares of common stock once contingent provisions set forth in respective acquisition agreements have been achieved. Upon achievement of contingent provisions, respective liabilities are relieved and offset by increases to common stock and additional paid in capital in the stockholders’ deficit section of the Company’s consolidated balance sheets.

The Company reviews its long-lived assets (property and equipment and amortizable intangible assets) 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 tests. 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 June 30, 2022, there were quantitative factors that indicated goodwill was impaired in the amount of $218,308.

An intangible asset is an identifiable non-monetary asset without physical substance. Such an asset is identifiable when it is separable, or when it arises from contractual or other legal rights. Separable assets can be sold, transferred, licensed, etc. Examples of intangible assets include computer software, licenses, trademarks, patents, films, and copyrights. The Company’s intangible assets are finite lived assets and are amortized on a straight-line basis over the estimated useful lives of the assets.

The Company adopted ASU 2014-09, Revenue from Contracts with Customers, and its related amendments (collectively known as “ASC 606”), effective January 1, 2019. The Company determines revenue recognition through the following steps:

Revenue is recognized when control of the promised goods or services is transferred to customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. As a practical expedient, the Company does not adjust the transaction price for the effects of a significant financing component if, at contract inception, the period between customer payment and the transfer of goods or services is expected to be one year or less.

The Company’s revenue is derived from the sales of its products, which represents net sales recorded in the Company’s 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 will 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.

The Company estimates warranty claims reserves based on historical results and research and determined that a warranty reserve was not necessary as of June 30, 2022, or 2021.

Net revenues from COVID-19 testing accounted for over 61% of the Company’s total net revenues for the twelve months ended June 30, 2022, and primarily comprised of a high volume of relatively low-dollar transactions. Pala and Empower, which provides clinical testing services and other services, satisfies its performance obligations and recognizes revenues primarily upon completion of the testing process (when results are reported) or when services have been rendered. Pala and Empower do not invoice the patients themselves for testing but relies on healthcare insurers and government payers for reimbursement for COVID-19 testing. Pala has a standardized approach to estimate the amount of consideration that we expect to be entitled to, including the impact of contractual allowances (including payer denials), and patient price concessions. We regularly assess the state of our billing operations in order to identify issues which may impact the collectability of receivables or revenue estimates. We believe that the collectability of our receivables is directly linked to the quality of our billing processes, most notably those related to obtaining the correct information in order to bill effectively for the services we provide. As such, we strive to implement “best practices” and work with our third-party billing company to reduce the number of requisitions that we receive from healthcare providers with missing or incorrect billing information. We believe that our collection and revenue estimation processes, along with our close monitoring of our billing operations, help to reduce the risk associated with material adjustments to reserve estimates. However, changes to our estimate of the impact of contractual allowances (including payer denials) and patient price concessions could have a material impact on our results of operations and financial condition in the period that the estimates are adjusted. Adjustments to our estimated contractual allowances and implicit patient price concessions are recorded in the current period as changes in estimates. Although we have limited track record, further adjustments to the allowances, based on actual receipts, may be recorded upon settlement.

DES records a sales-type where the Company is the lessor. The Company records its investment in the plant and equipment, used to upgrade a customer’s real property, leased to franchisees on a net basis, which is comprised of the present value of fixed lease payments not yet received over the course of the energy savings agreements. The current and long-term portions of our net investment in sales-type leases are included in “Accounts Receivable, net – related parties” and “Long-term receivables – related parties” respectively. Unearned income is recognized as interest income over the lease term. Sales-type leases result in the recognition of gain or loss at the commencement of the lease, which is recorded to “Revenues – related party.”

DepTec recognizes revenues using a cost-based input method, by which we use actual costs incurred relative to the total estimated contract costs to determine, as a percentage, progress toward contract completion. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined.

The Company also earns service revenue from its other subsidiaries, including information technology and consulting services via Prakat, educational programs, and courses via IHG, and management services for Solas. For Prakat and Solas, revenues are recognized when performance obligations have been satisfied and the services are complete. This is generally at a point of time upon written completion and client acceptance of the project, which represents transfer of control to the customer. For IHG, revenues are recognized over the course of a semester while services are performed.

Deferred Revenue:

ASC 606 requires disclosure of the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied at the end of the reporting period and an explanation of when the entity expects to recognize revenue by either a quantitative basis or a qualitative basis.

Deferred Revenues are made up of deposits and pre-payments related to products not yet delivered, and/or services not yet performed. Deferred revenues for the year ended June 30, 2022, was $720,923 compared to $219,999 as of the year ended June 30, 2021.

Disaggregation of Revenue

The following table presents the Company's revenue disaggregated by revenue source: 

Contract Balances

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

The Company invoices customers based upon contractual billing schedules, and accounts receivable are recorded when the right to consideration becomes unconditional. Contract liabilities represent a set-up fee prepayment received from a customer in advance of performance obligations met.

Cost of revenue consists primarily of inventory sold and related freight for product sales and direct labor for information technology and consulting services. The following table is a breakdown of cost of revenue: 

Advertising costs are expensed as incurred. During the fiscal years ended June 30, 2022, and 2021, advertising expenses were $560,777 and $563,907, respectively.

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 quoted market price of the equity instruments issued. During the years ended June 30, 2022, and 2021, stock-based compensation expenses were $2,772,770 and $801,672, respectively.

The functional currency of the Company is the United States dollar. The functional currency of the Likido and DepTec subsidiaries is the Great British Pound. The functional currency of Prakat is the Indian Rupee. The financial statements of the Company’s subsidiaries were translated to United States dollars in accordance with ASC 830, Foreign Currency Translation Matters, using period-end rates of exchange for assets and liabilities, and average rates of exchange for the year for revenues and expenses. Gains and losses arising on foreign currency denominated transactions are included in consolidated statements of operations.

ASC 220, Comprehensive Income, establishes standards for the reporting and display of comprehensive loss and its components in the consolidated financial statements. During the years ended June 30, 2022, and 2021, the Company’s only component of comprehensive income was foreign currency translation adjustments.

Non-controlling interests are classified as a separate component of equity in the Company's consolidated balance sheets and statements of changes in stockholders’ deficit. Net loss attributable to non-controlling interests are reflected separately from consolidated net loss in the consolidated statements of comprehensive loss and statements of changes in stockholders’ deficit. Any change in ownership of a subsidiary while the controlling financial interest is retained is accounted for as an equity transaction between the controlling and non-controlling interests. In addition, when a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary will be initially measured at fair value and the difference between the carrying value and fair value of the retained interest will be recorded as a gain or loss.

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.

As all potentially dilutive securities are anti-dilutive as of June 30, 2022, diluted net loss per share is the same as basic net loss per share. Potentially dilutive items outstanding as of June 30, 2022 are as follows:  

The average closing price during the year exceeded the exercise prices; as a result, there was no effect during the year ended June 30, 2022.

In accordance with ASC 260, “Earnings Per Share”, the following table reconciles basic shares outstanding to fully diluted shares outstanding for the year ended June 30, 2021: 

The adjustments to the numerator were insignificant during the year ended June 30, 2021.

The Company accounts for income taxes using the asset and liability method in accordance with ASC 740, Accounting for Income Taxes. The asset and liability method provides that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance to reduce deferred tax assets to the amount that is believed more likely than not to be realized.

In August 2021, Dalrada, through its subsidiary Dalrada Health Products (“Dalrada Health”), entered a joint venture (“JV”) with Vivera Pharmaceuticals, Inc (“Vivera”) for a 51% ownership and controlling interest. The JV, Pala Diagnostics, LLC (“Pala”) is a CLIA-certified diagnostics lab focused on SARS-CoV-2 testing for now with additional testing capabilities to be introduced. The JV has been treated as a business combination.

The Company determined that Pala is a Variable Interest Entity (VIE); we believe that the Company has the power to direct the activities that most significantly impact the economic performance of Pala, and accordingly, Dalrada is considered the primary beneficiary of the VIE. The Company has consolidated the activities of the VIE.

Pursuant to the partnership agreement, Dalrada contributed equity in the amount of $500,000 for operating capital and Vivera contributed property and equipment at a fair value of $111,185. This amount was recorded to non-controlling interest equity balance in the consolidated balance sheets.

Pursuant to the JV agreement, Dalrada issued 250,000 shares of common stock to Vivera in October 2021. The fair value of $58,560 was recorded to goodwill as of June 30, 2022.

In December 2021, Dalrada Health filed suit against Vivera and Paul Edalat, Vivera’s Chairman and CEO, for misappropriation of funds on behalf of the joint venture in the amount of $2,104,509. See “Item 3. Legal Proceedings” for additional information related to the lawsuit with Vivera.

Fiscal 2022 Transactions

Deposition Technology Ltd. (“DepTec”)

Effective April 7, 2022, the Company acquired 100% of the common stock of DepTec at a valuation of 2,000,000 Great Britain Pounds (“GBP”). In consideration for the acquisition, the Company shall issue 3,000,000 shares of its common stock evenly every quarter for 24 months with the initial distribution to take place on the effective date (the “Share Consideration”).

If at the end of the 24-month stock distribution period, beginning on the effective date of April 7, 2022 (the “Distribution Period”), the value of common stock consideration does not equate to 4,000,000 GBP (the “Target Amount”) in value (based on the GBP to USD currency exchange rate of 1.30690 on April 7, 2022, is $5,228,000 USD), then the Company shall issue additional shares equal to the shortfall between the value of the Share Consideration and the Target Amount (the “Valuation Shortfall”). The value of the issued stock shall be deemed at the date of issue, which is the end of the Distribution Period.

As a result of the Valuation Shortfall, the Company recorded contingent consideration (see Note 2. Summary of Significant Accounting Policies) in connection to the acquisition. The following is a summary of the purchase price consideration: 

The Company acquired DepTec to expand it Precision Manufacturing segment into the microchip and semiconductor industries. Furthermore, DepTec’s location, experience and manufacturing capabilities can leverage synergies with Likido. A founder and principal of DepTec is a related party to the CEO of the Company.

The DepTec transaction was accounted for as a business combination in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”). The Company has determined preliminary fair values of the assets acquired and liabilities assumed. These values are subject to change as we perform additional reviews of our assumptions utilized.

The Company has made a preliminary allocation of the purchase price regarding the acquisition related to the assets acquired and liabilities assumed as of the purchase date. The following table summarizes the purchase price allocation: 

Intangible assets acquired include trademarks, developed technology and customer relationships, which are amortized on a straight-line basis over ten to fifteen years. The fair value estimates of the intangibles for the purchase price allocation were based on an analysis of the present value of future cash flows, relief from royalty, and a replacement cost approach.

Goodwill is primarily attributable to the go-to-market synergies that are expected to arise as a result of the acquisition and other intangible assets that do not qualify for separate recognition. The goodwill is not deductible for tax purposes.

Watson Rx LLC (“Watson”)

Effective June 7, 2022, the Company acquired 100% of the common stock of Watson. In consideration for the acquisition, the Company shall issue 2,000,000 shares of its common stock per the following schedule: 1,000,000 shares to be issued at the effective date of the Agreement; and 1,000,000 shares issued in even amounts every quarter over a period of two years beginning on the effective date of June 7, 2022.

The following is a summary of the purchase price consideration: 

The common stock value of $918,000 was based on the value of 2,000,000 common stock shares at the Company’s price per share on the effective date of acquisition, or June 7, 2022.

The Company acquired Watson to further integrate Dalrada Health Products into the education, nursing, and other health solutions through a comprehensive pharmaceutical opportunity with licenses in 50 States including Washington D.C. Dalrada Health Products expects to strategically integrate the services of the diagnostic laboratories with the pharmaceutical business.

The Watson transaction was accounted for as a business combination in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”). The Company has determined preliminary fair values of the assets acquired and liabilities assumed. These values are subject to change as we perform additional reviews of our assumptions utilized.

The Company has made a preliminary allocation of the purchase price regarding the acquisition related to the assets acquired, liabilities assumed and noncontrolling interests as of the purchase date. The following table summarizes the purchase price allocation: 

Intangible assets acquired include trademarks and licenses, which are amortized on a straight-line basis over fifteen to seventeen years. The fair value estimates of the intangibles for the purchase price allocation were based on an analysis of the present value of future cash flows, relief from royalty, and a replacement cost approach.

Goodwill is primarily attributable to the go-to-market synergies that are expected to arise as a result of the acquisition and other intangible assets that do not qualify for separate recognition. The goodwill is not deductible for tax purposes.

Fiscal 2021 Transactions

International Health Group, Inc. (“IHG”)

Effective January 29, 2021, the Company acquired 100% of the common stock of IHG. In consideration for the acquisition, the Company issued 1,000,000 shares of its common stock at $0.44 per share, or a total fair value of $440,000. The Company acquired IHG to expand into the educational sector of the Health and Human Services Industry.

The International Health Group transaction was accounted for as a business combination in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”). The Company has determined the fair values of the assets acquired and liabilities assumed.

The Company has made an allocation of the purchase price in regard to the acquisition related to the assets acquired, liabilities assumed and noncontrolling interests as of the purchase date. The following table summarizes the purchase price allocation: 

The intangible assets for IHG are in the form of its curriculum development and will be amortized on a straight-line basis over its determined useful life of ten years for the following reasons:

Pacific Stem Cells, LLC (“Pacific Stem”)

Effective February 3, 2021, the Company acquired 100% of the membership units of Pacific Stem. In consideration for the acquisition, the Company issued $352,650 in cash consideration and issued 1,000,000 shares of its common stock at $0.354 per share for a total fair value of $706,650. The Company acquired Pacific Stem as an opportunity to enter the growing alternative Health and Human Services Industry. 

The Pacific Stem Cells transaction was accounted for as a business combination in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations (“ASC 805”). The Company has determined preliminary fair values of the assets acquired and liabilities assumed. These values are subject to change as we perform additional reviews of our assumptions utilized. Goodwill is primarily attributable to the go-to-market synergies that are expected to arise because of the acquisition. The goodwill is not deductible for tax purposes.

The Company has made a preliminary allocation of the purchase price regarding the acquisition related to the assets acquired, liabilities assumed and noncontrolling interests as of the purchase date. The following table summarizes the purchase price allocation: 

Ignite

On April 21, 2021, the Company closed the transaction by moving into a Membership Interest Purchase Agreement to acquire Ignite IT LLC (“Ignite”). The Company acquired all of the issued and outstanding membership interests, including business plans and access to contacts of Ignite. In consideration for the acquisition, the Company issued a promissory note for $20,000.

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. Accordingly, the Company recorded the acquired research and development at a fair value of $20,000 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 various acquisitions had occurred as of July 1, 2021. 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:

Inventories

Inventories consisted of the following as of June 30, 2022, and 2021: 

Property and Equipment, Net

Property and equipment, net consisted of the following as of June 30, 2022, and 2021: 

Depreciation expense of $252,937 and $83,606 for the years ended June 30, 2022, and 2021, respectively, were included in selling, general and administrative expenses in the statements of operations.

Goodwill

Goodwill consisted of the following by entity as of June 30, 2022, and 2021: