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.
Business Overview
DarkPulse, Inc., a Delaware corporation (the “ Company ”),
is a technology-security company focused on the manufacture, sale, installation, and monitoring of laser sensing systems based on its
patented BOTDA dark-pulse sensor technology. The Company develops, markets, and distributes 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 systems provide rapid, precise analysis and responsive
activities predetermined by the end-user customer. The Company’s activities since inception have consisted of developing various
solutions, obtaining patents and trademarks related to its technology, raising capital, acquisition of companies deemed to expand global
operations and/or capabilities, 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.
Headquartered in New York, DarkPulse is a globally
based technology company with presence in United Kingdom, India, Dubai, Russian Federation, Turkey, Azerbaijan, Iraq, Libya, United States
and Canada. In addition to the Company’s BOTDA systems, through a series of strategic acquisitions the Company offers the manufacture,
sale, installation, and monitoring of laser sensing systems, O & G pipeline leak detection, physical security services, telecommunications
and satellite communications services, drone and rover systems. The Company is focused on expanding services through acquisitions and
partnerships to address global infrastructure and critical environmental resource challenges. DarkPulse offers a full suite of engineering
and environmental solutions that provide safety and security infrastructure projects. The sensing and monitoring capabilities offered
by DarkPulse and our subsidiary companies operate in the Air, Land, Sea. Our patented technology provides rapid, precise analysis to protect
and safeguard oil and gas pipelines above or below ground, physical security countermeasures, mining operations, and other critical infrastructure
/ key resources subject to vulnerability or risk. Our patented Brillouin scattering distributed fiber sensing system is best in class.
The Company is able to monitor areas in around critical infrastructure buried or above ground including pipelines 100km or more in length
and/ or localized pipes as small as 8 CM DIA, detecting internal anomalies before catastrophic failure. We are developing an Intelligent
Rock Bolt, to prevent causalities and fatalities in mining operations and include a real time sensor system that can detect the location
& movement of personnel & equipment throughout a mining operation. We monitor airflow, air quality, temperature, seismic events,
etc. Our sensors cover extended areas, protecting an area from intrusion by detecting events at any location along the sensing cable.
Working safely every day is our first core value and employees at DarkPulse and our subsidiary companies are recognized experts in their
fields, providing comprehensive services for all our clients' needs.
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Our Operating Units
Optilan
Telecommunications, Energy, Rail, Critical Network
Infrastructure, Pipeline Integrity Systems, Renewables and Security. Headquartered in Coventry, United Kingdom with a 30-year pedigree,
at Optilan our customers trust us to keep the integrity of their assets safe and secure, by managing the life cycle delivery risk of our
solutions. By fostering a collaborative design approach to complex problems, we provide innovative solutions, custom fit to even the most
demanding of sites and scale of projects. Importantly, our commitment to our safety culture remains unaverred, to ensure that everyone
goes home safely every day. We orchestrate business resilience with a suite of end-to-end solutions, combined with connectivity and professional
service at a global level. Today's business environment is more dynamic than ever, with continuous change and disruption accepted as the
new normal. We complement our tailored, integrated expertise with a curated ecosystem of leading manufacturers, to achieve both high quality
and enduring results. We are proud to foster a unique culture full of talented individuals. Our sector focus ensures that our account
teams are fully accredited in their operational areas. We are committed to creating individually tailored solutions, using collaborative
techniques and programming tools to deliver the networks of the future. Optilan has provided integrated solutions for leading Oil and
Gas, Industrial and Energy companies around the world. As an industry leader in deploying communication networks with exceptional reliability,
our reputation for delivering the highest quality products remains unsurpassed. This spans mobile, broadband, security systems and customer
premise works. Our professionals have the skill to adopt and embed our expertise into existing platforms, processes, and cultures, delivering
exceptional value for our clients. Beyond our operational scope, we strive to consider the impact of our global footprint and mitigate
associated environmental and sustainability risks. These factors combined set Optilan apart and establish why customers continue to trust
and invest in our services.
Remote Intelligence
Remote Intelligence provides Unmanned Aerial Drone
and UGC (unmanned ground crawler) Services to a variety of clients; from Industrial Mapping and Ecosystem Services, to Search and Rescue,
to Pipeline Security, we provide sales and consulting services for all markets. Remote Intelligence started in 2013 with a simple vision;
to use the new and developing field of unmanned aerial vehicles to produce higher quality, safer and more effective products for a variety
of markets. We strive to Equip, Educate and Advance the use of the most advanced Unmanned Aerial Systems and Unmanned Ground Crawlers
in the United States and around the world for commercial, government and domestic use. Our top priorities as we do that are to find safe
and ethical ways to use this new and exciting field of technology to make life better. Providing holistic intelligence consultation and
solutions including full-service Methane Detection and Monitoring. Quick, comprehensive site mapping and aerial inspection services. We
specialize in fully integrated, geo-rectified, 3D modeled mapping and AI for industrial applications, specializing in the energy
and environmental industries, with AI and live streaming capabilities anywhere in the world. Also providing aerial survey, video inspection
services, emergency support services, wildlife and habitat surveys, and comprehensive system design, training, and sales for both the
commercial and private sectors. Integrating the latest tech solutions like artificial intelligence. Globally connected with a base of
operation in Wellsboro Pennsylvania.
TerraData Unmanned
Comprised of a team with more than 30 years cumulative
experience in the unmanned industry, TerraData is well equipped to provide solutions that meet your unique requirements. We custom manufacture
NDAA compliant drones and unmanned ground crawlers to meet the needs of our customers. Aerial based data collection is a powerful new
tool for your industry, and TerraData is prepared to be your partner. TerraData Unmanned, has successfully delivered a custom drone platform
per a customer’s specifications which exceeds current industry offering by more than 30 minutes. The team has manufactured, and
successfully flight tested a Quad Copter drone with 1.5KG payload capabilities that delivers more than 60 minutes of continuous flight.
This cutting-edge design is a combination of proprietary software and hardware. The custom platform offers NDAA compliant autopilot, communications
links, TSO Certified GPS unit and ground control station. Future designs include integrating RTK for mapping, methane detectors, and true
terrain following capabilities. There are also improvements scheduled that are intended to further extend the endurance and provide over
4KG of payload capacity, not including batteries. TerraData has also announced the research, development and successful testing of an
autonomous crawler soon to be released to the market with Methane and Multi Gas Detection capabilities. Working seamlessly with our partners
at DarkPulse and our subsidiary companies. We can custom design, build and operate a system to meet our customers' needs 24 hours a day
365 days a year around the block or around the globe.
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Wildlife Specialists
Wildlife Specialists, LLC was founded in 2007
to provide clients with comprehensive wildlife and environmental assessment, planning, and monitoring services. We currently maintain
two regional offices located in north central and southeastern Pennsylvania and are available to provide services to clients nationwide
and around the globe. Our staff are well-established professionals who have a wide range of experience in wildlife management, research,
and monitoring at the local and statewide levels throughout the United States. In addition, we have specific expertise in providing the
full range of sensitive species and habitat assessments necessary for your development projects. Wildlife Specialists’ mission is
to provide consulting services that use the latest technology to produce the highest quality results compatible with our clients’
management goals and the appropriate protocols developed by state and federal wildlife management agencies. Wildlife Specialists is fully
insured to industry standards and committed to the safety of our staff, our clients, and the public. We have maintained safety certification
through ISNetWorld and other 3rd party certifiers. We are also officially PennDOT, GSA, Small Business and HUBZone Certified.
TJM West Electronics
TJM West Electronics is an ISO9001 and AS9100
certified electronics and electro-mechanical assembly operation. We operate out of a high tech, 20,000 Sq ft facility in Tempe, Arizona.
Our assembly team is trained to IPC 610 and J-STD-001 standards, Class 2 and 3. We have been in business since 1999. Our latest website
was developed to be a customer interface for rapid costing, build scheduling, open order status, and complete manufacturing history data
records. Registered users can enter build and fabrication parameters for quantities of 2-20 units. Our calculator provides itemized labor,
PCB fabrication cost and delivery. Registered users can also access factory floor for the updated status and delivery date of open orders,
a review of configuration, quotes and full quality history database.
As a U.S. manufacturer and test of
advanced electronics, cables and sub-assemblies. we specialize in advanced package and complex CCA and hardware. Certified to space
and flight AS9100D, TJM has over 20 years supplying ultra-high reliability, and fully documented electronic Hardware. Per AS9100D,
TJM maintains all material certifications, process and measurement reports electronically as part of a complete quality history
record. Manufacturing PCB Design services on the most popular platforms including Cadence, Altium, and Mentor. Design output data
integrates seamlessly to our automated manufacturing line. Test Development ICT to functional and burn-in. We develop a test plan
and hardware system to deliver your 100% verified product. Low Cost, High Reliability Manufacturing is the net result of quality
planning, optimizing automation technology, operational efficiency, and communication. High value, low-cost domestic solution to
replace offshore manufacturing. Protect your IP and keep direct line-of sight of manufacturing with products made in the USA. TJM
West Is your one stop shop.
Recent Events
Acquisitions
On August 9, 2021, we entered into a Share Purchase
Agreement with Optilan Guernsey Limited and Optilan Holdco 2 Limited (the “ Sellers ”), pursuant to which we purchased
from the Sellers all of the issued and outstanding equity interests of Optilan HoldCo 3 Limited, a private company incorporated in England
and Wales (“ Optilan ”) for £1.00 and also a commitment to enter into the Subscription (as defined below). Optilan
is now a wholly-owned subsidiary of the Company.
On August 9, 2021, we entered into a Subscription
Agreement with Optilan (the “ Subscription ”), pursuant to which we agreed to purchase an aggregate of 4,000,000 Ordinary
Shares of Optilan for an aggregate purchase price of £4,000,000.
On August 30, 2021, we closed two separate Membership
Interest Purchase Agreements (the “ MPAs ”) with Remote Intelligence, Limited Liability Company, a Pennsylvania limited
liability company (“ RI ”) and Wildlife Specialists, LLC, a Pennsylvania limited liability company (“ WS ”)
pursuant to which we agreed to pay to the majority shareholder of each of RI and WS an aggregate of 15,000,000 shares of our Common Stock,
$500,000 to be paid on the closing date, and an additional $500,000 to be paid 12 weeks from closing date in exchange for 60% ownership
of each of RI and WS. RI and WS are now subsidiaries of the Company.
29
On September 8, 2021,
we entered into and closed the Stock Purchase Agreement (the “ TJM SPA ”) with TJM Electronics West, Inc., an Arizona
corporation (“ TJM ”), and TJM’s shareholders, pursuant to which we agreed to purchase all of the equity interests
in TJM in exchange for $450,000, subject to adjustments as defined in the TJM SPA. TJM is now a wholly-owned subsidiary of the Company.
Effective October 1,
2021, we entered into and closed the Membership Purchase Agreement (the “ TerraData MPA ”) with TerraData Unmanned, PLLC,
a Florida limited liability company (“ TerraData ”), and Justin Dee, the sole shareholder of TerraData, pursuant to which
we agreed to purchase 60% of the equity interests in TerraData in exchange for 3,725,386 shares of our Common Stock and $400,000, subject
to adjustments as defined in the TerraData MPA, to be paid within 12 weeks of closing. TerraData is now a subsidiary of the Company.
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 our 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.
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, we 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 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 $50,000 net cash.
On April 26, 2021, we entered a Securities Purchase
Agreement (the “ FirstFire 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 SEC within 180 days after the date the Registration Statement is filed with the SEC.
30
On July 14, 2021, we entered a Securities Purchase
Agreement with GS Capital Partners, LLC (the “ GS ”), pursuant to which we issued to GS a 6% Redeemable Note in the principal
amount of $2,000,000 (the “ GS Note ”). The purchase price of the GS Note is $1,980,000. The GS Note matures on July
14, 2022 upon which time all accrued and unpaid interest will be due and payable. Interest accrues on the GS Note at 6% per annum until
the GS Note becomes due and payable. The GS Note is subject to various “Events of Default,” which are disclosed in the GS
Note. Upon the occurrence of an “Event of Default,” the interest rate on the GS Note will be 18%. The GS Note is not convertible
into shares of our Common Stock and is not dilutive to existing or future shareholders and we plan on using a portion of the proceeds
of the GS Note to retire existing convertible debt.
On August 19, 2021, we entered into the Purchase
Agreement with GHS, for the offering of up to $45,000,000 worth of Common Stock. Pursuant to the Purchase Agreement, on August 19, 2021,
we and GHS agreed that we would issue and sell to GHS, and GHS would purchase from the Company, 31,799,260 shares of Common Stock for
total proceeds to the Company, net of discounts, of $3,300,000, at an effective price of $0.1038 per share (the “ First Closing ”).
We received approximately $2,790,000 in net proceeds from the First Closing after deducting the fees and other estimated offering expenses
payable by us. We used the net proceeds from the First Closing for working capital and for general corporate purposes. The shares were
issued to GHS in a registered direct offering, pursuant to a prospectus supplement to our currently effective registration statement on
Form S-3 (File No. 333-257826), which was initially filed with the SEC on July 12, 2021, and was declared effective on August 18, 2021.
Pursuant to the Purchase Agreement, on August
31, 2021, we and GHS agreed that the Company would issue and sell to GHS, and GHS would purchase from us, 27,297,995
shares of Common Stock for total proceeds to us, net of discounts, of $3,300,000, at an effective price of $0. 120888 per
share (the “ Second Closing ”). We received approximately $2,885,000 in net proceeds from the Second Closing after deducting
the fees and other estimated offering expenses payable by us. We used the net proceeds from the Second Closing for working capital and
for general corporate purposes. The shares were issued to GHS in a registered direct offering, pursuant to a prospectus supplement to
our currently effective registration statement on Form S-3 (File No. 333-257826), which was initially filed with the SEC on July 12, 2021,
and was declared effective on August 18, 2021.
Pursuant to the Purchase Agreement, on September
22, 2021, we and GHS agreed that we would issue and sell to GHS, and GHS would purchase from us, 25,630,272
shares of Common Stock for total proceeds to us, net of discounts, of $2,000,000, at an effective price of $ $0.085836 per share (the
“ Third Closing ”). We received approximately $1,915,000 in net proceeds from the Third Closing after deducting the fees
and other estimated offering expenses payable by us. We used the net proceeds from the Third Closing for working capital and for general
corporate purposes. The shares were issued to GHS in a registered direct offering, pursuant to a prospectus supplement to our currently
effective registration statement on Form S-3 (File No. 333-257826), which was initially filed with the SEC on July 12, 2021, and was declared
effective on August 18, 2021.
Pursuant to the Purchase Agreement, on October
1, 2021, we and GHS agreed that we would issue and sell to GHS, and GHS would purchase from us, 37,187,289
shares of Common Stock for total proceeds to us, net of discounts, of $3,000,000, at an effective price of $0.08874 per share (the “ Fourth
Closing ”). We received approximately $2,850,000 in net proceeds from the Fourth Closing after deducting the fees and other estimated
offering expenses payable by us. We used the net proceeds from the Fourth Closing for working capital and for general corporate purposes.
The shares were issued to GHS in a registered direct offering, pursuant to a prospectus supplement to our currently effective registration
statement on Form S-3 (File No. 333-257826), which was initially filed with the SEC on July 12, 2021, and was declared effective on August
18, 2021.
Pursuant to the Purchase Agreement, on October
14, 2021, we and GHS agreed that we would issue and sell to GHS, and GHS would purchase from us, 14,282,304
shares of Common Stock for total proceeds to us, net of discounts, of $1,055,000, at an effective price of $0.08125 per share (the “ Fifth
Closing ”). We received approximately $1,002,250 in net proceeds from the Fifth Closing after deducting the fees and other estimated
offering expenses payable by us. We used the net proceeds from the Fifth Closing for working capital and for general corporate purposes.
The shares were issued to GHS in a registered direct offering, pursuant to a prospectus supplement to our currently effective registration
statement on Form S-3 (File No. 333-257826), which was initially filed with the SEC on July 12, 2021, and was declared effective on August
18, 2021.
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.
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Other Events
On August 3, 2021, we entered into an Engagement
Agreement and Terms and Conditions (the “ EIAP Agreement ”) with Energy & Industrial Advisory Partners, LLC (“ EIAP ”).
Pursuant to the EIAP Agreement, we have engaged EIAP to serve as an advisor to us in the proposed transaction for agreed target company
or any of its subsidiaries and/or the whole or any part of its or their business or assets (the “ Transaction ”). EIAP
will receive a monthly retainer of $10,000 per month payable upon receipt of an invoice. EIAP will also receive a consulting bonus fee
of $350,000 payable upon completion of the Transaction. In the event of successful completion of the Transaction as a result of EIAP’s
involvement, EIAP agrees to deduct the total retainer fee from the consulting bonus fee. The EIAP Agreement may be terminated, with or
without cause, by either party upon ten days’ written prior notice thereof to the other party. If (a) during the term of the EIAP
Agreement, or (b) within two years following the date of the EIAP Agreement’s termination by us (provided that such two-year period
shall be extended by the same period of time that we take to settle in full all fees, expenses and/or outlays due or to become due to
EIAP as at the date of the EIAP Agreement’s termination), we complete a transaction with the target company or a similar transaction
to the Transaction, then we will pay the consulting bonus fee at the completion of the transaction.
Going Concern Uncertainty
As shown in the accompanying financial statements,
during the nine months ended September 30, 2021, the Company reported a net loss of $1,924,311. As of September 30, 2021, the Company’s
current liabilities exceeded its current assets by $12,139,502. As of September 30, 2021, the Company had $2,564,492 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
For the three months ended September 30, 2021,
total revenues were $3,500,970 compared to $0 for the same period in 2020, an increase of $3,500,970. This increase primarily consisted
of revenues of $3,380,633 from the acquisition of Optilan in August 2021and $97,283 from the acquisition of Wildlife Specialists in August
2021.
For the nine months ended September 30, 2021,
total revenues were $3,500,970 compared to $0 for the same period in 2020, an increase of $3,500,970. This increase primarily consisted
of revenues of $3,380,633 from the acquisition of Optilan in August 2021and $97,283 from the acquisition of Wildlife Specialists in August
2021.
Cost of Goods Sold and Gross Profit
For the three months ended September 30, 2021,
cost of goods sold were $2,767,229 compared to $0 for the same period in 2020, an increase of $2,767,229.
Gross profit for the three months ended September
30, 2021 was $733,731 with a gross profit margin of 21% compared to $0 for the same period in 2020 with no gross profit margin.
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For the nine months ended September 30, 2021,
cost of goods sold were $2,767,229 compared to $0 for the same period in 2020, an increase of $2,767,229.
Gross profit for the nine months ended September
30, 2021 was $733,731 with a gross profit margin of 21% compared to $0 for the same period in 2020 with no gross profit margin.
Operating Expenses
Selling, general and administrative expenses for
three months ended September 30, 2021 increased by $372,158 to $406,940 from $34,782 of 1,070% for the three months ended September 30,
2020.
General and administrative expenses for nine months
ended September 30, 2021 increased by $410,927 to $531,793 from $120,866 or 340% for the nine months ended September 30, 2020.
Payroll related expenses for three months ended
September 30, 2021, increased by $1,007,453 to $1,007,453 from $0 for the three months ended September 30, 2020. The increase primarily
consisted of an increase to the numbers of employees inherited from our various acquisitions.
Payroll related for nine months ended September
30, 2021, increased by $1,007,266 to $1,007,453 from $187 for the nine months ended September 30, 2020. The increase primarily consisted
of an increase to the numbers of employees inherited from our various acquisitions in the most recent three months period.
Professional fees for three months ended September
30, 2021, increased by $1,680,600 to $1,680,600 from $0 for the three months ended September 30, 2020. This increase primarily consisted
of increased legal expenditures associated with the increase in litigation.
Professional fees for nine months ended September
30, 2021, increased by $1,853,275 to $1,901,572 from $48,297 for the nine months ended September 30, 2020. This increase primarily consisted
of increased legal expenditures associated with the increase in litigation.
Depreciation and amortization for three months
ended September 30, 2021, increased by $78,465 to $91,222 from $12,757 for the three months ended September 30, 2020. This increase is
primarily due to the increase in depreciable assets we acquired from new acquisitions.
Depreciation and amortization for nine months
ended September 30, 2021, increased by $78,465 to $116,736 from $38,271 for the three months ended September 30, 2020. This increase is
primarily due to the increase in depreciable assets we acquired from new acquisitions.
Other Income (Expense)
For the three months ended September 30, 2021,
other income $798,654 compared to other expense of $126,483 for the same period in 2020, an increase in income of $925,137. This increase
primarily consisted of $785,240 of gain related to the extinguishment of debt, $434,206 of gain on convertible notes, $153,360 of gain
on foreign currency exchange rate variance offset by an increase in interest expense of $283,388 due to increased borrowings and $163,281
increase in the fair value of the Company’s derivative instruments.
For the nine months ended September 30, 2021,
other income $1,084,462 compared to other expense of $180,940 for the same period in 2020, an increase in income of $1,265,402. This increase
primarily consisted of $785,240 of gain related to the extinguishment of debt, $781,203 of gain on convertible notes, $153,360 of gain
on foreign currency exchange rate variance offset by an increase in interest expense of $573,448 due to increased borrowings and $121,047
increase in the fair value of the Company’s derivative instruments.
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Net Income (Loss)
As a result of the above, we reported a net loss
of $1,686,830 for the three months ended September 30, 2021 compared to a net loss of $174,022 for the three months ended September 30,
2020.
Additionally, as a result of the above, we reported
a net loss of $1,924,311 for the nine months ended September 30, 2021 compared to a net loss of $388,561 for the nine months ended September
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 September 30, 2021, we had $11,102,700 in new cash proceeds compared to the three months ended September 30, 2020, when we had
no new cash proceeds.
As of September 30, 2021, we had cash of $2,564,492,
compared to $337 as of December 31, 2020. As of September 30, 2021, our current liabilities exceeded our current assets by $12,139,503.
Cash Flows from Operating Activities
During the nine months ended September 30, 2021,
net cash used by operating activities was $7,446,593, resulting from our net loss of $1,924,311 and an increase in expenses related to
our convertible notes payables, including amortization of debt discount of $404,087 and loan acquisition costs of $480,450, increase
in stock based compensation of $649,334, increase in inventory of $410,836 and operating lease liabilities of $1,398,068. These increases
were offset by a decrease in derivative liability of $741,789, increase in accounts payable and accrued expenses of $4,362,016 and an
increase from the gain on the extinguishment of debt of $785,240, increase in accounts receivable of $893,366, unbilled revenue of $563,555
and increase in contract liability of $1,439,504.
By comparison, during the nine months ended September
30, 2020, net cash provided by operating activities was $4,278, resulting from our net loss of $388,561 and an increase in expenses related
to our convertible notes payables, including amortization of debt discount of $39,414, increase in derivative liability of $44,684, increase
in accounts payable and accrued expenses of $280,370.
Cash Flows from Investing Activities
During the nine months ended September 30, 2021,
we had net cash used in investing activities of $546,765. During the nine months ended September 30, 2020, we had net cash used in investing
activities of $4,969.
Cash Flows from Financing Activities
During the nine months ended September 30, 2021,
net cash provided by financing activities was $10,718,100, comprised of proceeds from the sale of common stock from offering of $8,000,000,
the issuance of convertible debt in the amount of $1,102,700, the issuance of notes payable of $2,000,000 offset by payments on convertible
debt of $384,600. During the nine months ended September 30, 2020, we had no net cash provided by or used in financing activities.
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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.