Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis
of Financial Condition and Results of Operations
This Management’s Discussion and Analysis
of Financial Condition and Results of Operations contain certain forward-looking statements. Historical results may not indicate future
performance. Our forward-looking statements reflect our current views about future events; are based on assumptions and are subject to
known and unknown risks and uncertainties that could cause actual results to differ materially from those contemplated by these statements.
Factors that may cause differences between actual results and those contemplated by forward-looking statements include, but are not limited
to, those discussed in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2020.
We undertake no obligation to publicly update or revise any forward-looking statements, including any changes that might result from any
facts, events, or circumstances after the date hereof that may bear upon forward-looking statements. Furthermore, we cannot guarantee
future results, events, levels of activity, performance, or achievements
Critical Accounting Policies
The following discussions are based upon our financial statements and accompanying notes, which have been prepared in accordance
with accounting principles generally accepted in the United States.
The preparation of these financial statements
requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosures of contingencies. We continually evaluate the accounting policies and estimates used to prepare the
financial statements. We base our estimates on historical experiences and assumptions believed to be reasonable under current facts and
circumstances. Actual amounts and results could differ from these estimates made by management.
Background
DarkPulse, Inc., a Delaware corporation (the “ Company ”),
is a technology-security company created to develop, market, and distribute a full suite of engineering, monitoring, installation and
security management solutions for critical infrastructure/key resources to both industries and governments. Coupled with our patented
BOTDA dark-pulse technology (the “ DarkPulse Technology ”), DarkPulse provides its customers a comprehensive data stream
of critical metrics for assessing the health and security of their infrastructure. Our comprehensive system provides for rapid, precise
analysis and responsive activities predetermined by the end-user customer. Our activities since inception have consisted of developing
various solutions, obtaining patents and trademarks related to its technology, raising capital, creating key partnerships to expand our
suite of products and services. Our activities have evolved to a sales-focused mission since the successful completion of our BOTDA system
in December 2020.
Recent Events
Financings
On January 4, 2021, we entered into a securities
purchase agreement with Geneva Roth Remark Holdings, Inc. (“ Geneva ”) issuing to Geneva a convertible promissory note
in the aggregate principal amount of $42,350 with a $3,850 original issue discount and $3,500 in transactional expenses due to Geneva
and its counsel. The note bears interest at 8% per annum and may be converted into common shares of the Company's common stock at a conversion
price equal to 70% of the lowest trading price of our common stock during the 20 prior trading days. We received $35,000 net cash.
On February 3, 2021, we entered into a securities
purchase agreement with Geneva issuing to Geneva a convertible promissory note in the aggregate principal amount of $94,200 with a $15,700
original issue discount and $3,500 in transactional expenses due to Geneva and its counsel. The note bears interest at 4.5% per annum
and may be converted into common shares of our common stock at a conversion price equal to 81% of the lowest two trading prices of our
common stock during the 10 prior trading days. We received $75,000 net cash.
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On February 18, 2021, we entered into a securities
purchase agreement with Geneva issuing to Geneva a convertible promissory note in the aggregate principal amount of $76,200 with a $12,700
original issue discount and $3,500 in transactional expenses due to Geneva and its counsel. The note bears interest at 4.5% per annum
and may be converted into common shares of our common stock at a conversion price equal to 81% of the lowest two trading prices of our
common stock during the 10 prior trading days. We received $60,000 net cash.
On April 5, 2021, the Company entered into
a securities purchase agreement with Geneva Roth issuing to Geneva a convertible promissory
note in the aggregate principal amount of $64,200 with a $10,700 original issue discount and $3,500 in transactional expenses due to Geneva
and its counsel. The note bears interest at 4.5% per annum and may be converted into common shares of the Company's common stock at a
conversion price equal to 81% of the lowest 2 trading prices of the Company's common stock during the 10 prior trading days. The Company
received $50,000 net cash.
On April 26, 2021, we entered a Securities Purchase
Agreement (the “ SPA ”) and Registration Rights Agreement (the “ Registration Rights Agreement ”) with
FIRSTFIRE GLOBAL OPPORTUNITIES FUND, LLC, a Delaware limited liability company (the “ FirstFire ”), pursuant to which
we issued to FirstFire a Convertible Promissory Note in the principal amount of $825,000 (the “ FirstFire Note ”). The
purchase price of the FirstFire Note is $750,000. The FirstFire Note matures on January 26, 2022 upon which time all accrued and unpaid
interest will be due and payable. Interest accrues on the FirstFire Note at 10% per annum guaranteed until the FirstFire Note becomes
due and payable, whether at maturity or upon acceleration or by prepayment or otherwise. The FirstFire Note is convertible at any time
after 180 days from issuance, upon the election of the FirstFire, into shares of our Common Stock at $0.015 per share. The FirstFire Note
is subject to various “Events of Default,” which are disclosed in the FirstFire Note. Upon the occurrence of an “Event
of Default,” the conversion price will become $0.005. In the event of a DTC “chill” on our shares, an additional discount
of 10% will apply to the conversion price while the “chill” is in effect. Upon the issuance of the FirstFire Note, we have
initially agreed to reserve 550,000,000 shares of Common Stock.
The Registration Rights Agreement
provides that we shall (i) use our best efforts to file with the Commission an S-1 Registration Statement within 90 days of the date
of the Registration Rights Agreement to register the shares into which the FirstFire Note is convertible; and (ii) have the Registration
Statement declared effective by the Commission within 180 days after the date the Registration Statement is filed with the Commission.
On July 14, 2021, the Company entered a Securities
Purchase Agreement with GS Capital Partners, LLC (the “Lender”), pursuant to which the Company issued
to the Lender a 6% Redeemable Note in the principal amount of $2,000,000 (the “Note”). The purchase price of the Note is $1,980,000.
The Note matures on July 14, 2022 upon which time all accrued and unpaid interest will be due and payable. Interest accrues on the Note
at 6% per annum until the Note becomes due and payable. The Note is subject to various “Events of Default,” which are disclosed
in the Note. Upon the occurrence of an “Event of Default,” the interest rate on the Note will be 18%. The Note is not convertible
into shares of the Company’s Common Stock and is not dilutive to existing or future shareholders and the Company plans on using
a portion of the proceeds of the Note to retire existing convertible debt.
Partnerships
We have entered into a consulting agreement with
the Bachner Group to assist in the successful transformation from an R&D focused company to a sales-focused company, and assist us
with federal contract opportunities.
We have entered into a partnership with Remote
Intelligence to expand our service offerings to include “eye in the sky” drone capabilities.
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We have entered into a partnership with Unleash
Live to expand our service offerings to include AI enhanced image evaluation and secure private networking capabilities.
We continue to evaluate partnership and licensing
opportunities we deem important to our transformation to a sales-focused company.
Going Concern Uncertainty
As shown in the accompanying financial statements,
during the six months ended June 30, 2021, the Company did not generate any revenues and reported a net loss of $237,481. As of June 30,
2021, the Company’s current liabilities exceeded its current assets by $2,915,206. As of June 30, 2021, the Company had $148,562
of cash.
We will require additional funding to finance
the growth of our operations and achieve our strategic objectives. These factors, as relative to capital raising activities, create doubt
as to our ability to continue as a going concern. We are seeking to raise additional capital and are targeting strategic partners in an
effort to accelerate the sales and marketing of our products and begin generating revenues. Our ability to continue as a going concern
is dependent upon the success of future capital offerings or alternative financing arrangements, expansion of our operations and generating
sales. The accompanying financial statements do not include any adjustments that might be necessary should we be unable to continue as
a going concern. Management is actively pursuing additional sources of financing sufficient to generate enough cash flow to fund its operations;
however, management cannot make any assurances that such financing will be secured.
Results of Operations
Revenues
To date, the Company has not generated any operating
revenues.
Operating Expenses
General and administrative
expenses for three months ended June 30, 2021 increased by $50,455 to $95,165 from $44,710 for the three months ended June 30, 2020.
General and administrative expenses for six months
ended June 30, 2021 increased by $38,582 to $124,853 from $86,271 for the six months ended June 30, 2020.
Legal expenses for three months ended June 30,
2021, increased by $102,434 to $146,619 from $44,185 for the three months ended June 30, 2020. The increase is related to legal expenses
associated with the increase in litigation.
Legal expenses for six months ended June 30, 2021,
increased by $172,675 to $220,972 from $48,297 for the six months ended June 30, 2020. The increase is related to legal expenses associated
with the increase in litigation.
Amortization of patents expense for three months
ended June 30, 2021, remained the same at $12,757 for the three months ended June 30, 2020.
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Other Income (Expense)
Interest expense was $318,921 and $25,154 for
the three months ended June 30, 2021 and 2020, respectively. This $293,767 increase is primarily related to the increase in non-cash expenses
related to notes payable issued in 2021.
Interest expense was $350,584 and $60,524 for
the six months ended June 30, 2021 and 2020, respectively. This $290,060 increase is primarily related to the increase in non-cash expenses
related to notes payable issued in 2021
Gain on convertible notes expense was $138,615
for the three months ended June 30, 2021.
The gain on the change in fair market value of
derivative liabilities was $358,440 for the three months ended June 30, 2021.
Gain on convertible notes expense was $308,896
for the six months ended June 30, 2021. The gain on the change in fair market value of derivative liabilities was $327,496 for the six
months ended June 30, 2021.
Provision for Income Taxes
The provision for income taxes was $0 and $0 for
the three months ended June 30, 2021 and 2020, respectively.
Net Income (Loss)
As a result of the above, we reported a net loss
of $185,607 for the three months ended June 30, 2021 compared to a net loss of $140,240 for the three months ended June 30, 2020.
Additionally, as a result of the above, we reported
a net loss of $237,481 for the six months ended June 30, 2021 compared to a net loss of $214,538 for the six months ended June 30, 2020.
Liquidity and Capital Resources
We require working capital to fund the continued
development and commercialization of our proprietary fiber optic sensing devices, and for operating expenses. During the three months
ended June 30, 2021, we had $889,200 in new cash proceeds compared to the three months ended June 30, 2020, when we had no new cash proceeds.
As of June 30, 2021, we had cash of $148,562,
compared to $337 as of December 31, 2020. As of June 30, 2021, our current liabilities exceeded our current assets by $2,915,206.
Cash Flows from Operating Activities
During the six months ended June 30, 2021, net cash
provided by operating activities was $712,611, resulting from our net loss of $237,481 and an increase in expenses related to our convertible
notes payables, including amortization of debt discount of $171,554, decrease in derivative liability of $327,496, decrease in accounts
payable of $148,344 and an increase in accrued liabilities of $34,759.
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By comparison, during the six months ended June
30, 2020, net cash provided by operating activities was $5,180, resulting from our net loss of $214,539 and an increase in expenses related
to our convertible notes payables, including amortization of debt discount of $38,101, decrease in derivative liability of $43,169, increase
in accounts payable of $140,423 and accrued liabilities of $68,749.
Cash Flows from Investing Activities
During the six months ended June 30, 2021, we
had net cash used in investing activities of $87,864. During the six months ended June 30, 2020, we had net cash used in investing activities
of $4,969.
Cash Flows from Financing Activities
During the six months ended June 30, 2020, net
cash provided by financing activities was $952,700, comprised of proceeds from the issuance of convertible debt in the amount of $1,102,700,
offset by payments on convertible debt of $150,000. During the six months ended June 30, 2020, we had no net cash provided by or used
in financing activities.
Factors That May Affect Future Results
Management’s Discussion and Analysis contains
information based on management’s beliefs and forward-looking statements that involve a number of risks, uncertainties, and assumptions.
There can be no assurance that actual results will not differ materially from the forward-looking statements as a result of various factors,
including but not limited to, our ability to obtain the equity funding or borrowings necessary to market and launch our products, our
ability to successfully serially produce and market our products; our success establishing and maintaining collaborative licensing and
supplier arrangements; the acceptance of our products by customers; our continued ability to pay operating costs; our ability to meet
demand for our products; the amount and nature of competition from our competitors; the effects of technological changes on products and
product demand; and our ability to successfully adapt to market forces and technological demands of our customers.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements
that have or are reasonably likely to have a current or future material effect on our consolidated financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity capital expenditures or capital resources.
Recent Accounting Pronouncements
We have provided a discussion of recent accounting
pronouncements in Note 1 to the Condensed Financial Statements.
Item 3. Quantitative and Qualitative Disclosures
About Market Risk
As a smaller reporting company, we have elected
not to provide the disclosure required by this item.
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