| 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, and the instructions to Form 10-Q and Article 10 of Regulation S-X. 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 2023. 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 in our Annual
Report on Form 10-K for the year ended June 30, 2022, as filed with the United States Securities and Exchange Commission (“SEC”).
(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. All inter-company transactions and balances have been eliminated in consolidation. The consolidated financial statements include
the accounts of Dalrada Financial Corp., Dalrada Health Products Inc., Solas Corp., Empower Genomics, Inc., International Health Group,
Inc., Pala Diagnostics, LLC, Pacific Stem Cells, LLC, Watson Rx Solutions, Inc., Dalrada Precision Corp., Dalrada Energy Services, Inc.,
Likido Corp., Ignite I.T., Bothof Brothers Inc., Prakat Solutions, Inc., Prakat Solutions Private Limited, Likido Ltd., and Deposition
Technologies Ltd., 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 the statement of
stockholders' equity, consolidated balance sheet, and statement of cash flows.
(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 six months or less at the time of issuance to be cash equivalents. Restricted cash includes the cash restricted
to withdrawal or usage.
(e) Concentrations of Credit Risk Financial instruments that potentially
subject the Company to concentrations of credit risk consist principally of cash and accounts receivable. 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 six months ended December 31,
2022, healthcare insurers accounted for over 25 2,372,415 2,791,579
(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 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 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. 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”).
(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 December 31, 2022, and June 30, 2022, the Company had an allowance
of doubtful accounts of $ 210,945 119,791 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. Although we believe that our estimates
for contractual allowances and patient price concessions are appropriate, actual results could differ from those estimates.
(i) Inventory Inventory is recorded at the lower of cost
or net realizable value on a first-in first-out basis. As of December 31, 2022 and June 30, 2022, 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 selling price in
the ordinary course of business, less estimated costs to sell.
(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, indefinite life intangible assets, or a gain from a bargain purchase.
(l) 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
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 no 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.
(m) 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 December 31, 2022, or 2021. Net revenues from COVID-19 testing accounted
for over 25% of the Company’s total net revenues for the six months ended December 31, 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 recognizes revenue on energy savings
contracts where it provides design, engineering and equipment upgrades to obtain energy savings through Environmental, Social, and Governance
(“ESG”) targets. Up to and upon completion of an energy savings project, DES calculates the monthly energy savings based on
prior and current energy consumption totals. The monthly energy savings total is split between the customer and DES where DES recognizes
revenue on a certain negotiated percentage of the total savings. Upon completion of an energy savings contract, the customer will then
retain 100% of such energy savings. DES records revenue as it provides additional management, consulting and other services as they are
incurred. DES records a sales-type lease 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 and Bothof recognize 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. 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,
2022 2021 2022 2021
Product sales - third parties $ 1,516,285 $ 301,693 $ 2,512,764 $ 343,643
Product sales - related party 9,576 14,575 73,999 29,884
Service revenue - third parties 3,087,593 5,062,756 6,263,363 9,613,850
Service revenue - related party 639,666 62,240 660,761 62,240
Total revenue $ 5,253,120 $ 5,447,264 $ 9,510,887 $ 10,049,617 Accounts Receivable and Deferred Revenue The following table provides information
about receivables and liabilities from contracts with customers:
Schedule of receivables and contract liabilities
December 31, June 30,
2022 2022
Accounts receivable, net $ 5,491,884 $ 6,406,555
Accounts receivable, net - related parties 93,516 41,603
Long-term receivables 41,589 42,395
Long-term receivables - related parties 1,191,760 1,209,103
Deferred revenue 1,530,301 720,923 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.
(n) 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,
2022 2021 2022 2021
Product sales $ 928,237 $ 526,063 $ 1,703,314 $ 590,096
Service revenue 2,026,895 1,530,280 3,608,146 2,670,582
Total cost of revenue $ 2,955,132 $ 2,056,343 $ 5,311,460 $ 3,260,678
(o) Advertising Advertising costs are expensed as incurred.
During the three months ended December 31, 2022 and 2021, advertising expenses were approximately $ 92,000 135,000 201,000 228,000
(p) Stock-based Compensation The Company records stock-based compensation
in accordance with ASC 718, Compensation – Stock Compensation 901,721 1,105,587 1,369,238 1,783,094
(q) 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
(r) Comprehensive Loss ASC 220, Comprehensive Income,
(s) 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, 2022, non-controlling
interests pertained to the Company’s Prakat and Pala subsidiaries.
(t) 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 790,976 0 17,225,000 1,000,000 There were no adjustments to the numerator
during the three and six months ended December 31, 2022 and 2021, respectively.
(u) Income Taxes The Company accounts for income taxes using
the asset and liability method in accordance with ASC 740, Accounting for Income Taxes
(v) 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.
(w) 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. The contingent consideration decreased by $ 139,200 4,731,600 |
