| Summary of Significant Accounting Policies | 2. Summary of Significant Accounting Policies
(a) Basis of Presentation These consolidated financial statements
of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”)
and are expressed in U.S. dollars. The Company’s fiscal year end is June 30. We have prepared the accompanying condensed
consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”)
for interim financial reporting. These condensed consolidated financial statements are unaudited and, in our opinion, include all adjustments,
consisting of normal recurring adjustments and accruals necessary for a fair presentation of our balance sheets, operating results, and
cash flows for the periods presented. Operating results for the periods presented are not necessarily indicative of the results that may
be expected for fiscal year 2022. Certain information and footnote disclosures normally included in condensed consolidated financial statements
prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been omitted in accordance
with the rules and regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the audited
financial statements and accompanying notes. Revision of Prior Period Financial
Statements In the Company’s quarterly report
for the six months ended December 31, 2020, the Company included $ 600,000 165,000
(b) Principles of Consolidation These condensed consolidated financial
statements include the accounts of the Company and its wholly-owned subsidiaries: Dalrada Precision, a company incorporated in the State
of California, since June 25, 2018 (date of incorporation), Dalrada Health, a company incorporated in the State of California, since October
2, 2018 (date of incorporation), as well as its subsidiaries (Likido, Prakat, Shark, IHG, Pacific Stem, Ignite, Empower, Solas) since
their respective acquisition dates (see Note 3) and Controlling Interest in Pala (see Note 4) . All inter-company transactions and balances
have been eliminated on consolidation. The condensed 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 condensed 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.
(c) Use of Estimates The preparation of these condensed
consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial
statements and the reported amounts of revenues and expenses during the reporting period. The Company regularly evaluates estimates and
assumptions related to the valuation of inventory, valuation of accrued payroll tax liabilities, valuation of acquired assets and liabilities,
variables used in the computation of share-based compensation, and deferred income tax asset valuation allowances. The Company bases its estimates and
assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs
and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and
adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results,
future results of operations will be affected.
(d) Cash and Cash Equivalents The Company considers all highly liquid
instruments with a maturity of three months or less at the time of issuance to be cash equivalents.
(e)
Concentrations
of Credit Risk Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of cash and cash equivalents. The Company generally maintains
balances in various operating accounts at financial institutions that management believes to be of high credit quality, in amounts that
may exceed federally insured limits. The Company has not experienced any losses related to its cash and cash equivalents and does not
believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships. During the six months ended
December 31, 2021, healthcare insurers and government payers accounted for over 75% $5,329,571 2,818,206 5,338,135
(f) Fair Value Measurements Pursuant to ASC 820, Fair Value
Measurements and Disclosures Level 1 - applies to assets or liabilities
for which there are quoted prices in active markets for identical assets or liabilities. Level 2 - applies to assets or liabilities
for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets
or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent
transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally
from, or corroborated by, observable market data. Level 3 - applies to assets or liabilities
for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the
assets or liabilities. The Company’s financial instruments
consist principally of cash, accounts receivable, accounts payable and accrued liabilities, notes payable, and amounts due to related
parties. Pursuant to ASC 820, the fair value of cash is determined based on “Level 1” inputs, which consist of quoted prices
in active markets for identical assets. The recorded values of all other financial instruments approximate their current fair values because
of their nature and respective maturity dates or durations.
(g) Accounts Receivable Accounts receivable are derived from
products and services delivered to customers and are stated at their net realizable value. Each month, the Company reviews its receivables
on a customer-by-customer basis and evaluates whether an allowance for doubtful accounts is necessary based on any known or perceived
collection issues. Any balances that are eventually deemed uncollectible are written off against the allowance after all means of collection
have been exhausted and the potential for recovery is considered remote. As of December 31, 2021 and June 30, 2021, the Company had an
allowance of doubtful accounts of $ 48,135 37,465 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. As a result of Pala and Empower’s limited transaction
history, collection and payer reimbursement is based on industry standards and third-party experts. 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.
(h) Inventory Inventory is recorded at the
lower of cost or net realizable value on a first-in first-out basis. As of December 31, 2021 and June 30, 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 net realizable value based upon assumptions about future market conditions.
(i) Property and Equipment Property and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation and amortization expense is recognized using the straight-line method over the estimated
useful life of each asset, as follows:
Schedule of property and equipment, estimated useful life
Estimated Useful Life
Computer and office equipment 3 5
Machinery and equipment 5
Leasehold improvements Shorter of lease term or useful life Estimated useful lives are periodically
assessed to determine if changes are appropriate. Maintenance and repairs are charged to expense as incurred. When assets are retired
or otherwise disposed of, the cost of these assets and related accumulated depreciation or amortization are eliminated from the balance
sheet and any resulting gains or losses are included in the statement of operations loss in the period of disposal.
(j) Business Combinations and Acquisitions The Company accounts for acquisitions
in which it obtains control of one or more businesses as a business combination. The purchase price of the acquired businesses is allocated
to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. The
excess of the purchase price over those fair values is recognized as goodwill. During the measurement period, which may be up to one year
from the acquisition date, the Company may record adjustments, in the period in which they are determined, to the assets acquired and
liabilities assumed with the corresponding offset to goodwill. If the assets acquired are not a business, the Company accounts for the
transaction or other event as an asset acquisition. Under both methods, the Company recognizes the identifiable assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquired entity. In addition, for transactions that are business combinations, the Company
evaluates the existence of goodwill or a gain from a bargain purchase.
(k) Impairment of Long-Lived Assets The
Company reviews its long-lived assets (property and equipment) for impairment whenever events or circumstances indicate that the carrying
amount of an asset may not be recoverable. If the sum of the expected cash flows, undiscounted, is less than the carrying amount of the
asset, an impairment loss is recognized as the amount by which the carrying amount of the asset exceeds its fair value. Goodwill is tested annually at June
30 for impairment and upon the occurrence of certain events or substantive changes in circumstances. The annual goodwill impairment
test allows for the option to first assess qualitative factors to determine whether it is more likely than not that the fair value
of a reporting unit is less than its carrying amount. An entity may choose to perform the qualitative assessment on none, some or
all of its reporting units or an entity may bypass the qualitative assessment for any reporting unit and proceed directly to step
one of the quantitative impairment test. If it is determined, on the basis of qualitative factors, that the fair value of a
reporting unit is, more likely than not, less than its carrying value, the quantitative impairment test is required. The
quantitative impairment test calculates any goodwill impairment as the difference between the carrying amount of a reporting unit
and its fair value, but not to exceed the carrying amount of goodwill. As of December 31, 2021 and June 30, 2021, there were no
significant qualitative factors that indicated goodwill was impaired.
(l) Revenue Recognition The Company adopted ASU 2014-09, Revenue
from Contracts with Customers
· Identification of a contract with a customer;
· Identification of the performance obligations in the contract;
· Determination of the transaction price;
· Allocation of the transaction price to the performance obligations in the contract; and
· Recognition of revenue when or as the performance obligations are satisfied. Revenue is recognized when control
of the promised goods or services is transferred to customers, in an amount that reflects the consideration the Company expects to be
entitled to in exchange for those goods or services. As a practical expedient, the Company does not adjust the transaction price for the
effects of a significant financing component if, at contract inception, the period between customer payment and the transfer of goods
or services is expected to be one year or less. The Company’s revenue is derived
from the sales of its products, which represents net sales recorded in the Company’s condensed consolidated statements of operations.
Product sales are recognized when performance obligations under the terms of the contract with the customer are satisfied. Typically,
this would occur upon transfer of control, including passage of title to the customer and transfer of risk of loss related to those goods.
The Company measures revenue as the amount of consideration to which it expects to be entitled in exchange for transferring goods (transaction
price). The Company records reductions to revenue for estimated customer returns, allowances, markdowns and discounts. The Company bases
its estimates on historical rates of customer returns and allowances as well as the specific identification of outstanding returns, markdowns
and allowances that have not yet been received by the Company. The actual amount of customer returns and allowances is inherently uncertain
and may differ from the Company’s estimates. If the Company determines that actual or expected returns or allowances are significantly
higher or lower than the reserves it established, it would record a reduction or increase, as appropriate, to net sales in the period
in which it makes such a determination. Reserves for returns, and markdowns are included within accrued expenses and other liabilities.
Allowance and discounts are recorded in accounts receivable, net and the value of inventory associated with reserves for sales returns
are included within prepaid expenses and other current assets on the condensed consolidated balance sheets. The Company estimates warranty claims
reserves based on historical results and research and determined that a warranty reserve was not necessary as of December 31, 2021. The Company also earns service revenue
from its other subsidiaries, including information technology and consulting services via Prakat, educational programs and courses via
IHG, and stem cell therapy procedures from Pacific Stems. For Prakat and Pacific Stems, revenues are recognized when performance obligations
have been satisfied and the services are complete. This is generally at a point of time upon written completion and client acceptance
of the project, which represents transfer of control to the customer. For IHG, revenues are recognized over the course of a semester while
services are performed. Net revenues from Pala accounted for
over 75% of the Company’s total net revenues for the three and six months ended December 31, 2021 and primarily comprised of a high
volume of relatively low-dollar transactions. Pala, 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 does 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. As a result of Pala’s limited transaction
history, collection and payer reimbursement is based on industry standards and third-party experts. 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. Disaggregation of Revenue The following table presents the Company's
revenue disaggregated by revenue source:
Schedule of disaggregated revenue
Three Months Ended Six Months Ended
December 31, December 31,
2021 2020 2021 2020
Product sales - third parties $ 301,693 $ 123,090 $ 343,643 $ 496,873
Product sales - related party 14,575 39,115 29,884 57,648
Service revenue - third parties 5,062,756 243,312 9,613,850 562,889
Service revenue - related party 62,240 50,000 62,240 97,500
Total revenue $ 5,447,264 $ 455,517 $ 10,049,617 $ 1,214,910 Contract Balances The following table provides information
about receivables and liabilities from contracts with customers:
Schedule of receivables and contract liabilities
December 31, June 30,
2021 2021
Accounts receivable, net $ 6,045,187 $ 265,812
Accounts receivable, net - related parties 119,480 69,952
Deferred revenue 657,159 219,999 The Company invoices customers based
upon contractual billing schedules, and accounts receivable are recorded when the right to consideration becomes unconditional. Contract
liabilities represent a set-up fee prepayment received from a customer in advance of performance obligations met.
(m) Cost of Revenue Cost of revenue consists primarily
of inventory sold for product sales and direct labor for information technology and consulting services. The following table is a breakdown
of cost of revenue:
Schedule of cost of revenue
Three Months Ended Six Months Ended
December 31, December 31,
2021 2020 2021 2020
Product sales $ 526,063 $ 315,763 $ 590,096 $ 397,143
Service revenue 1,530,280 143,070 2,670,582 295,118
Total cost of revenue $ 2,056,343 $ 458,833 $ 3,260,678 $ 692,261
(n) Advertising Advertising costs are expensed as incurred.
During the six months ended December 31, 2021 and 2020, advertising expenses were approximately $ 228,000 15,000
(o) Stock-based Compensation The Company records stock-based compensation
in accordance with ASC 718, Compensation – Stock Compensation 1,783,094 0
(p) Foreign Currency Translation The
functional currency of the Company is the United States dollar. The functional currency of the Likido subsidiary is the British pound.
The functional currency of Prakat is the Indian rupee. The financial statements of the Company’s subsidiaries were translated to
United States dollars in accordance with ASC 830, Foreign Currency Translation Matters consolidated statements of operations.
(q) Comprehensive Loss ASC
220, Comprehensive Income,
(r) Non-controlling Interests Non-controlling interests are classified
as a separate component of equity in the Company's consolidated balance sheets and statements of changes in stockholders’ equity.
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’ equity. 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. As of December 31, 2021, non-controlling
interests pertained to the Company’s Prakat and Pala subsidiaries.
(s) Basic and Diluted Net Loss per Share The Company computes net income (loss)
per share in accordance with ASC 260, Earnings per Share The weighted average number of common
stock equivalents related to convertible notes payable of 0 57,628,876 1,000,000 0 8,775,000 0 There were no adjustments to the numerator
during the three and six months ended December 31, 2021 and 2020.
(t) Income Taxes The Company accounts for income taxes
using the asset and liability method in accordance with ASC 740, Accounting for Income Taxes
(u)
Recent Accounting Pronouncements The Company has implemented all new accounting
pronouncements that are in effect and that may impact its financial statements and does not believe that there are any other new accounting
pronouncements that have been issued that might have a material impact on its financial position or results of operations. |
