Dalrada Corporation - Good to be green

The following schematic summarises the businesses.

Three business units offering multiple avenues for growth driven by highly specialised capabilities

During the remainder of the calendar year 2021 and into 2022, we believe that Dalrada could potentially achieve important commercial breakthrough events in several of its businesses, leading to a strong acceleration in revenues. Factors behind this include:

• Likido Energy targeting large deployments of its clean energy-saving systems in multiple customer segments — retail, pharmaceutical, energy, industrials. This could be the largest opportunity for the group in our view
• Cervical cancer screening kits break-through in India and associations such as the World Health Organization (WHO)
• Prakat, technology services expansion in additional regions and markets such as Asia, EU, UK, Middle East, and additional successes in the US
• New healthcare and chemical products within the human & animal health wound care and sanitising offerings and industrial cleaning/degreasing products
• Regenerative division opening new clinics in additional US states, continuing the growth trend for this business, expansion of nurse certification programmes, and growth potential of genomics division
• Dalrada health is also developing opportunities that may result in significant personal protection equipment (PPE) product sales

The following chart shows our revenue forecasts for the coming quarters.

Biggest growth driver is from the Engineering division – Likido products

We argue that the potential revenue growth is not reflected in the current share price, and we provide an outline of the near-term valuation upside on p11.

Likido Green Energy

Likido Energy is an engineering technology company with a range of clean energy efficiency products that offer transformational energy savings in various industrial, commercial and domestic applications. The core technology is an innovative proprietary design of a heat pump.

A heat pump is a mechanical device that transfers heat from one medium to another. It does this by circulating cold fluid via one circuit that absorbs heat, and circulating hot fluid around another circuit that discharges heat. The temperature step between the two circuits is achieved by compression and decompression of the fluid. For example, in a domestic refrigerator, the cold circuit absorbs heat out of the fridge compartment, and the hot circuit discharges heat into the air out of the back of the unit.

Supercritical CO₂ provides the performance advantage

Likido’s flagship product is the LikidoONE high temperature heat pump, which delivers efficient heat transfer using supercritical CO₂ as its working fluid. Compared with conventional heat pumps that use hydrochlorofluorocarbons (HCFCs) as their working fluid, the use of supercritical CO₂ allows a bigger heat step-down; a hotter hot circuit and colder cold circuit. By using CO₂ LikidoONE opens up new markets that are not addressable with conventional heat pumps, where the LikidoONE operates between temperatures of -40C to 140C.

The following illustration shows a LikidoONE unit.

Up to 75% energy savings compared with existing systems

A good example of an application is the use of the Likido system in a chemical plant. In a conventional chemical plant waste heat is vented out through the boiler room chimney, through the heat discharge from the chiller system, and through the distillation plant. The Likido system recycles all of that heat and can deliver a 75% energy saving. The following schematic illustrates how this works.

Multiple customer markets addressable with the same core technology

In addition to chemical plants, Likido can address several other market applications. End users can choose to acquire the Likido system as an upgrade/overhaul to existing systems or as part of a new build project due to the smaller size of the Likido units. The following schematic gives some examples of target markets. In total, these markets add up to US$120bn annually.

LikidoHOME

In addition to these applications, the company recently launched the development of LikidoHOME, a system for household heating and hot water which replaces the gas boiler. The International Energy Agency recently called for a ban on new household gas boilers globally from 2025 in order to meet carbon emissions goals. There are already heat pumps being used as an alternative to gas boilers in some eco-homes and demonstration projects. We believe that the Likido heat pump system may provide a breakthrough for heat pumps into the mass market.

Generator technology provides additional market breadth

The Likido product portfolio also includes a highly efficient electric on-and-off grid generator, LikidoVOLT and LikidoSPARK offerings include 50 kilowatt (kW) to 250kW power units, which will be ready for commercialisation as early as September 2021. The benefits of these units will include high endurance, better user interface, less maintenance, and efficiency gains over the competition.

Background and next steps

Likido is based in Scotland and was acquired by Dalrada in 2019. Dalrada has provided an enlarged marketing capability for Likido and is targeting larger-scale deployments. We believe that some of these could deliver contract wins during 2021, with customer segments including:

• Retailers
• Pharmaceutical/Biotechnology
• Energy sector
• Industrials
• Original equipment manufacturers (OEMs)

Likido has received grant funding support from Innovate UK, and we believe that other incentive schemes in Europe and the US could provide additional income for the business and/or incentives for its customers to move ahead with orders.

The company has manufacturing facilities in Edinburgh, Scotland and is ramping up large-scale production capabilities in Bonham, Texas. We believe that Dalrada could also potentially look at technology licensing deals as demand will exceed the company’s own manufacturing capacity in the coming years, specifically in worldwide markets requiring locally sourced and produced products.

Based on the potential for transformational new orders in the coming quarters, we believe that Likido could deliver a dramatic revenue uplift for Dalrada. The following chart summarises our forecasts.

Revenue inflexion point in the coming quarters

We conclude that Likido has the potential to become a significant player in the energy-saving and renewable technologies space and a major value driver for the Dalrada share price.

Information Technology Solutions – Prakat

Prakat Solutions, acquired by Dalrada in November 2019, is an ISO-certified company offering software services including product engineering, test engineering, accessibility engineering, application modernisation, Oracle billing and revenue management, and Salesforce & SAP implementations. The company provides bespoke services to small and medium businesses as well as multinational corporations, with customers in sectors including financial services, healthcare, telecom, and industrials.

Among its areas of specialisation, Prakat helps to implement business continuity solutions using secure information technology. This has become more of a focus for most enterprises due to the increased level of work-from-home during the pandemic.

Work-from-home demands transformational change for businesses

The work-from-home driver, increasing reliance on technology, together with a general demand for Prakat’s services, have driven strong growth in revenue since the business was acquired.

In addition to providing a revenue driver for the group, Prakat also gives Dalrada:

• In-house software capabilities in support of Dalrada’s other business units including hardware & software needs for the Likido machines
• A call centre facility for outbound and inbound customer service

We expect Prakat to remain a positive contributor to Dalrada’s revenue growth during the remainder of FY 2021 and in 2022.

Health care – Regenerative Therapies

Regenerative therapies is a fast-growing area of medical technology and cosmetics that has numerous preventative and therapeutic applications. Stem cells can mediate the repair of human tissues through their anti-inflammatory properties and by stimulating the production of new cells required to reverse existing damage. Applications include:

• Joint and tendon pain and arthritis
• Cosmetics
• Botox
• Heart and lung health
• Diabetes symptoms
• Baldness
• Chronic kidney disease
• Autoimmune disorders

Increasing numbers of customers are choosing regenerative therapies as an alternative or a supplement, particularly for ageing-related conditions.

Healthcare – cerVIA

Cervical cancer is a life-threatening condition that affects some 600,000 women per year globally, leading to around 320,000 deaths. Mortality rates are highest in low income and middle-income countries. The following chart illustrates.

Big disparities in mortality rates for cervical cancer

There are a number of reasons for the disparity in the case fatality rate (deaths relative to the number of cases) between wealthier and poorer countries. One of the main reasons is access to screening services, which lead to earlier identification of cervical cancer and therefore higher survival rates. Conventional smear tests require attendance at an equipped medical centre with results delivered at a later date.

Dalrada Health offers an innovative screening system called cerVIA. This is a single-use disposable test kit that can produce rapid results and is suited for use in localities with limited healthcare infrastructure.

Patient tests show high levels of accuracy

In its first patient tests, conducted in Indiat at KIMS (Kempegowda Institute of Medical Sciences), the cerVIA test kit produced 94.9% accuracy compared with PAP smear testing. The trial programme is now moving to its second phase.

We are not forecasting any revenue from this product line in the calendar year 2021; however, once cerVIA achieves approval from an initial customer, likely a national health authority, we believe that revenues could ramp up very quickly, and we believe that this approval could be achieved in the next 12 months.

Other businesses

The other businesses in Dalrada’s portfolio also have high growth potential. Breakthrough opportunities for any one of these could provide additional upside to our revenue expectations for the group.

Dalrada Precision

Dalrada Precision offers design and manufacturing services to provide custom-made precision components for major OEMs (original equipment manufacturers). Outsourcing of component manufacture is increasingly used by OEMs to provide flexibility and efficiency. The business has its operations in California and Malaysia and holds ISO 9001, ISO 14001, and AS 9100 certifications.

Dalrada Precision is also launching a new degreasing industrial product line, complementing the Likido & Bespoke parts divisions targeting industrial and manufacturing facilities requiring recurring cleaning of equipment.

Glanhealth

Glanhealth provides a range of alcohol-free sanitising products which are EPA and FDA registered and which deliver long-lasting protection against germs and bacteria. The products are non-flammable, dermatologically safe, non-corrosive and non-hazardous. The product line will soon include sanitizing & cleaning products for the animal health space, animal & human wound care products, and child sanitising & wound care lines.

International Health Group

IHG provides training, certification, and staffing services for nursing and healthcare assistants, including CNA and HHA training. IHG became the first nursing school in San Diego to offer a fast-track 22 day CNA certification programme, which offers IHG a significant competitive advantage.

Empower Genomics

Empower, launched by Dalrada in March 2021, provides DNA analysis services including pharmacogenomics to determine an individual’s likely response to medications. Empower has services aimed at healthcare practitioners, researchers and individuals.

Strong revenue growth, and other positive recent developments

Progress of the business

In addition to reporting 352% revenue growth YoY for the latest financial quarter (period end March 2021), Dalrada has announced some significant corporate developments in recent months. Some key events have included:

• Captain David Bacon PhD appointed to the board of directors. Bacon is an active navy captain with 22 years of active duty service. During the SARS-CoV-2 pandemic, Bacon was responsible for reviewing proposals for funding in the areas of therapeutics, diagnostics, and wearable monitors. He reviewed more than 400 proposals and provided his expert opinion on the scientific rationale and study design.
• LikidoVOLT high-efficient generators ordered first by Hidden Villa Ranch, the largest US egg producer. LikidoVOLT generators provide up to 8% efficiencies with on-and-off grid solutions, powered by natural gas and ultimately wind turbines.
• The announcement of Kyle McCollum as chief financial officer. McCollum has nearly 20 years’ experience in accounting, finance and management in international businesses in sectors including property, mining, and nutraceuticals. His background includes investment strategy, due diligence, mergers & acquisitions, compliance, fund structuring, fundraising, investor relations and securities.
• The launch of the development of the LikidoHome product suite. These products provide residential water heating with a 300% efficiency improvement compared with fossil fuel boilers. This development aligns Dalrada nicely with recent policy announcements from national governments and international bodies such as the International Energy Agency, which has recommended a ban on new gas boilers from 2025.

Multiple share price catalysts in the remainder of 2021

Looking forward, we believe that the remainder of the calendar year 2021 offers a number of potential additional catalysts for the Dalrada share price. Potential news flows include:

• Large new orders for Likido’s industrial-scale systems
• Potential to sign reference customers for early-stage business lines including cerVIA cancer screening or other health-related products & services
• Continuation of strong revenue growth for businesses including Prakat or Regenerative therapies or IHG expansion of educational facilities

We argue that any combination of these catalysts could lead to a substantial upside for the share price.

Financials

We are forecasting strong revenue growth for Dalrada in FY June 2021 (three quarters already complete) and FY 2022, based on the inclusion of the businesses acquired during FY June 2021 and on strong incremental revenue opportunities across all three divisions.

Based on our revenue forecasts, and with limited growth in operating expenditure (OpEx), we expect the company to achieve positive profitability (EBITDA — earnings before interest, tax, depreciation and amortisation) by FY 2022. The following charts summarise our profit & loss (P&L) forecasts.

Our full financial forecasts are on pages 12-13.

Conclusions:

An exceptional growth opportunity, with significant valuation upside potential

We believe Dalrada represents an exceptional growth opportunity for investors, based on proprietary technologies in healthcare and engineering that are close to important commercial inflexion points, and based on continued growth in the information technology division. We are forecasting US$20mln of revenue for FY 2022, and we believe that revenues could exceed US$100mln in the medium term. We believe that the current valuation, at a market cap of US$25mln, does not fully reflect this growth potential.

We can consider the valuation in terms of EV (Enterprise Value)/Sales ratios:

We argue that a company on Dalrada’s revenue trajectory could easily trade on EV/Annual Sales of 4.0x. That would imply an EV of US$80mln, based on our FY 2022 revenue forecast of US$20mln.

An EV of US$80mln would imply a market cap of US$72.8lmn after stripping out the value of our FY 2022 net debt forecast (see p13). Based on our increased share count forecast to take account of additional capital raised, a market cap of US$72.8mln equates to a stock price of US$0.62 or 81% upside to the current price.

We believe that order flow during the remainder of the calendar year 2021 could provide the market with additional confidence in Dalrada’s growth potential, which in turn could lead to a substantial re-rating for the stock price.

Financial forecasts

The following tables summarise our financial forecasts for Dalrada

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