| 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.
(b) Principles of Consolidation 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.
(c) Use of Estimates 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.
(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, 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 11,824,717 4,129,953 As of the year ended June 30, 2022,
$ 880,500
(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. 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:
Schedule of fair value of assets and liabilities
Fair Value Measurements
Level 1 Level 2 Level 3 Total
Liabilities:
Contingent consideration – $ 4,870,800 – $ 4,870,800
$ – $ 4,870,800 $ – $ 4,870,800 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:
Schedule of contingent consideration liability
Contingent
Consideration
Liability
Balance as of June 30, 2021 $ –
Initial recognition in connection with acquisition of DepTec 5,053,000
Change in fair value (182,200 )
Balance as of June 30, 2022 $ 4,870,800 The change in fair value was due
to the issuance of 333,333
(g) Convertible Instruments 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.
(h) Accounts Receivable 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 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. 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 26
(i) Inventory 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.
(j) 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.
(k) 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.
(l) Contingent Consideration 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.
(m) Impairment of Long-Lived Assets 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.
(n) 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 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 $ 720,923 219,999 Disaggregation
of Revenue The following table presents the Company's
revenue disaggregated by revenue source:
Schedule of disaggregated revenue
Year Ended
June 30,
2022 2021
Product sales - third parties $ 2,280,403 $ 1,053,720
Product sales - related party 75,324 62,607
Service revenue - third parties 15,584,154 2,020,307
Service revenue - related party 1,327,732 270,050
Total revenue $ 19,267,613 $ 3,406,684 Contract Balances The following table provides information
about receivables and contract liabilities from contracts with customers:
Schedule of receivables and contract liabilities
June 30, June 30,
2022 2021
Accounts receivable, net $ 6,406,555 $ 265,812
Accounts receivable, net - related parties 41,603 69,952
Long-term receivables 42,395 –
Long-term receivables - related parties 1,209,103 –
Deferred revenue 720,923 219,999 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.
(o) Cost of Revenue 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:
Schedule of cost of revenue
Year Ended
June 30,
2022 2021
Product sales $ 2,547,392 $ 1,331,329
Service revenue 6,213,874 1,140,637
Total cost of revenue $ 8,761,266 $ 2,471,966
(p) Advertising Advertising costs are expensed as incurred.
During the fiscal years ended June 30, 2022, and 2021, advertising expenses were $ 560,777 563,907
(q) Stock-based Compensation The Company records stock-based compensation
in accordance with ASC 718, Compensation – Stock Compensation 2,772,770 801,672
(r) Foreign Currency Translation 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
(s) Comprehensive Income (Loss) ASC
220, Comprehensive Income, , and 2021, the Company’s
only component of comprehensive income was foreign currency translation adjustments.
(t) 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’ 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.
(u) Basic and Diluted Net Income (Loss) per Share The Company computes net income (loss)
per share in accordance with ASC 260, Earnings per Share 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:
Schedule of anti-dilutive shares
June 30, 2022
Convertible notes payable 2,999,148
Common stock warrants 12,025,000
Total potentially dilutive items outstanding 15,024,148 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:
Reconciliation of common shares outstanding basic to diluted
Year Ended
June 30, 2021
Weighted average number of common shares outstanding - Basic 70,318,073
Potentially dilutive common stock equivalents (convertible note payable - related party and accrued interest) 58,628,294
Weighted average number of common shares outstanding - Diluted 128,946,367 The adjustments to the numerator were
insignificant during the year ended June 30, 2021.
(v) Income Taxes The Company accounts for income taxes
using the asset and liability method in accordance with ASC 740, Accounting for Income Taxes
(w)
Recent Accounting Pronouncements In December 2019, the FASB issued ASU No. 2019-12, Income
Taxes (Topic 740), Simplifying the Accounting for Income Taxes In August 2020, the FASB issued ASU 2020-06, Accounting
for Convertible Instruments and Contracts in an Entity’s Own Equity 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 January 1, 2022. 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. 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. |
