Item 7. Management’s Discussion and Analysis
ITEM 7. 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. 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
consolidated financial statements and accompanying notes, which have been prepared in accordance with accounting principles
generally accepted in the United States.
Use
of Estimates
The preparation of the Company’s financial
statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Significant estimates and assumptions reflected in these financial statements include,
but are not limited to, assumptions used to calculate derivative liabilities, revenue recognition and impairment of long-lived assets.
The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it believes
to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates when there are changes in circumstances,
facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those
estimates.
Long-Lived Assets and Goodwill
The Company
accounts for long-lived assets in accordance with the provisions of ASC 360-10-35, Property, Plant and Equipment, Impairment or Disposal
of Long-lived Assets. This accounting standard requires that long-lived assets be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If the carrying
amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount
of the asset exceeds the fair value of the asset.
Indefinite-lived
intangible assets established in connection with business combinations consist of the tradename. The impairment test for identifiable
indefinite-lived intangible assets consists of a comparison of the estimated fair value of the intangible asset with its carrying value.
If the carrying value exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
37
The Company
accounts for goodwill and intangible assets in accordance with ASC 350, Intangibles – Goodwill and Other . Goodwill represents
the excess of the purchase price of an entity over the estimated fair value of the assets acquired and liabilities assumed. ASC 350 requires
that goodwill and other intangibles with indefinite lives be tested for impairment annually or on an interim basis if events or circumstances
indicate that the fair value of an asset has decreased below its carrying value. This guidance simplifies the accounting for goodwill
impairment by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. 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. It is our practice, at a minimum, to perform a qualitative or quantitative goodwill
impairment test in the fourth quarter every year. The Company has one reporting unit it evaluates during its impairment test.
In determining
the fair value of the reporting unit, management estimated the price that would be received to sell the reporting unit as a whole in
an orderly transaction between market participants at the measurement date. This includes reviewing market comparables such as revenue
multipliers and assigning certain assets and liabilities to the reporting units, such as the respective working capital deficits of each
entity and debt obligations that would need to be assumed by a market participant buyer in an orderly transaction. The Company calculated
the carrying amounts of the reporting unit by utilizing the entities’ assets and liabilities at December 31, 2022, including the
carrying value of the identifiable intangible assets and goodwill assigned to the respective reporting unit.
Revenue
Recognition
The Company’s
revenues are generated primarily from the sale of our services, which consist primarily of advanced technology solutions for integrated
communications and security systems, as well as habitat management. The Company’s sales of products are primarily generated from
our TJM subsidiaries. Sales of products and services are separate from one another. At contract inception, we assess the goods and services
promised in the contract with customers and identify a performance obligation for each. To determine the performance obligation, we consider
all products and services promised in the contract regardless of whether they are explicitly stated or implied by customary business practices.
The timing of satisfaction of the performance obligation is not subject to significant judgment. We measure revenue as the amount of consideration
expected to be received in exchange for transferring goods and services. We recognize service revenues as the performance obligations
are met, which is generally as milestones are satisfied over time. We generally recognize product revenues at the time of shipment, provided
that all other revenue recognition criteria have been met.
The Company
recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which
we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines
are within the scope of ASC 606, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the
performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance
obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. The five-step model is applied
to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services transferred
to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services
promised within each contract and determine those that are performance obligations and assess whether each promised good or service is
distinct. We then recognize revenue in the amount of the transaction price that is allocated to the respective performance obligation
when (or as) the performance obligation is satisfied.
The Company
considers each individual sale of service contract to be its own performance obligation. Services in the contract are highly interdependent
and interrelated, and the successful completion of each milestone is necessary for the overall success of the contract. Therefore, each
milestone is not separately identifiable from other promises in the contract, and not distinct and ultimately not individual performance
obligations.
The Company
records revenue over time using the output measure as it is the most faithful depiction of an entity’s performance because it directly
measures the value of the goods and services transferred to the customer. The Company utilizes the Right to Invoice for these contracts,
as the pricing structure is based on various milestones that are specified in the contract. These milestones include Construction Phase
Plan, Start of the construction phase, installation phase, site surveys, fiber splicing, recoveries, and closeouts. There are specified
payments associated with these milestones in the contract, and the value allocated is commensurate with work done. In the event that
there are advances such as upfront retainers and not based on the value, those are recorded as contract liabilities.
38
In accordance
with ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedient ,
which is to (1) clarify the objective of the collectability criterion for applying paragraph 606-10-25-7; (2) permit an entity to exclude
amounts collected from customers for all sales (and other similar) taxes from the transaction price; (3) specify that the measurement
date for noncash consideration is contract inception; (4) provide a practical expedient that permits an entity to reflect the aggregate
effect of all modifications that occur before the beginning of the earliest period presented when identifying the satisfied and unsatisfied
performance obligations, determining the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance
obligations; (5) clarify that a completed contract for purposes of transition is a contract for which all (or substantially all) of the
revenue was recognized under legacy GAAP before the date of initial application, and (6) clarify that an entity that retrospectively
applies the guidance in Topic 606 to each prior reporting period is not required to disclose the effect of the accounting change for
the period of adoption. The amendments of this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods
within those fiscal years. There was no impact as a result of adopting this ASU on the financial statements and related disclosures.
Based on the terms and conditions of the product arrangements, the Company believes that its products and services can be accounted for
separately as its products and services have value to the Company’s customers on a stand-alone basis. When a transaction involves
more than one product or service, revenue is allocated to each deliverable based on its relative fair value; otherwise, revenue is recognized
as products are delivered or as services are provided over the term of the customer contract.
Derivative
Financial Instruments
The Company
evaluates the embedded conversion feature within its convertible debt instruments under ASC 815-15 and ASC 815-40 to determine if the
conversion feature meets the definition of a liability and, if so, whether to bifurcate the conversion feature and account for it as a
separate derivative liability. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is
initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements
of operations. For stock-based derivative financial instruments, the Company uses a lattice model, in accordance with ASC 815-15 , Derivative
and Hedging, to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative
instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting
period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether net-cash settlement
of the derivative instrument could be required within 12 months after the balance sheet date.
Business Overview
DarkPulse, Inc., a Delaware corporation (the “ Company ”
or “ DarkPulse ”), is a technology and research and development 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 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 Houston, DarkPulse is a globally-based
technology company with presence through its subsidiaries in the United Kingdom, India, Dubai, Abu Dhabi, Turkey, Azerbaijan, 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, oil and gas pipeline leak detection, physical security services, telecommunications
and satellite communications services, artificial intelligence-based camera systems, railway monitoring services, drone and rover systems,
and Big Data as a Service (“BDaaS”). 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 eight 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 and
movement of personnel and 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.
39
Our Subsidiaries
Our subsidiaries consist of, Optilan, a company
headquartered in Coventry, United Kingdom whose focus is in telecommunications, energy, rail, critical network infrastructure, pipeline
integrity systems, renewables and security; Remote Intelligence, Limited Liability Company, a company headquartered in Pennsylvania who
provides unmanned aerial drone and unmanned ground crawler (UGC) services to a variety of clients from industrial mapping and ecosystem
services, to search and rescue, to pipeline security; Wildlife Specialists, Limited Liability Company, a company headquartered in Pennsylvania
who provides clients with comprehensive wildlife and environmental assessment, planning, and monitoring services; TerraData Unmanned,
PLLC, a company headquartered in Florida who custom manufactures NDAA compliant drones and unmanned ground crawlers to meet the needs
of its customers; and TJM Electronics West, Inc., a company headquartered in Arizona who is a U.S. manufacturer and tester of advanced
electronics, cables and sub-assemblies specializing in advanced package and complex CCA and hardware.
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 for £1.00. Optilan is now a wholly-owned subsidiary
of the Company.
On August 30, 2021, we closed two separate Membership
Interest Purchase Agreements (the “ MPAs ”) with RI and 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.
On September 8, 2021,
we entered into and closed the Stock Purchase Agreement (the “ TJM SPA ”) with 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 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. The shares were issued in 2022.
Financings
On November 9, 2021, we entered an Equity Financing
Agreement (the “ Equity Financing Agreement ”) and Registration Rights Agreement (the “ GHS Registration Rights
Agreement ”) with GHS, pursuant to which GHS agreed to purchase up to $30,000,000 in shares of our Common Stock, from time to
time over the course of 24 months (the “ Contract Period ”) after effectiveness of a registration statement on Form S-1
(the “ Registration Statement ”) of the underlying shares of Common Stock.
The GHS Registration Rights Agreement provides that
we shall (i) use our best efforts to file with the SEC a Registration Statement within 45 days of the date of the GHS Registration Rights
Agreement; and (ii) have the Registration Statement declared effective by the SEC within 30 days after the date the GHS Registration Statement
is filed with the SEC, but in no event more than 90 days after the GHS Registration Statement is filed.
On May 27, 2022, we entered the 2022 EFA and Registration
Rights Agreement (the “ RRA ”) with GHS, pursuant to which GHS agreed to purchase up to $70,000,000 in shares of our
Common Stock, from time to time over the course of 24 months after effectiveness of a registration statement on Form S-1 (the “ Registration
Statement ”) of the underlying shares of Common Stock.
The RRA provides that we shall (i) use our best efforts
to file with the SEC a Registration Statement within 45 days of the date of the GHS Registration Rights Agreement; and (ii) have the Registration
Statement declared effective by the SEC within 30 days after the date the GHS Registration Statement is filed with the SEC, but in no
event more than 90 days after the GHS Registration Statement is filed.
40
Below is a table of all puts made by the Company under
the Equity Financing Agreement and 2022 EFA during 2022:
Date of Put
Number of Shares Sold
Total Proceeds,
Net of Discounts
Effective Price per Share
Net Proceeds
1/12/2022
23,372,430
1,150,000
$ 0.054124
$ 1,033,975
1/21/2022
33,454,988
1,150,000
$ 0.037812
1,033,975
2/7/2022
16,040,411
500,000
$ 0.034288
448,975
2/23/2022
75,798,921
2,500,000
$ 0.032982
2,500,000
3/14/2022
16,579,569
500,000
$ 0.030158
500,000
3/14/2022
5,617,347
400,000
$ 0.071208
400,000
3/23/2022
29,257,395
1,500,000
$ 0.056396
1,348,975
4/11/2022
23,746,816
1,000,000
$ 0.042111
898,975
5/3/2022
29,522,276
1,000,000
$ 0.033873
898,975
5/13/2022
26,100,979
556,750
$ 0.021331
500,050
5/23/2022
25,025,540
556,750
$ 0.022247
500,050
6/1/2022
25,901,921
556,750
$ 0.021495
500,050
6/16/2022
23,799,766
402,086
$ 0.016895
360,852
6/24/2022
38,391,106
643,539
$ 0.016763
578,160
7/1/2022
33,525,465
556,750
$ 0.016607
500,050
7/11/2022
32,756,532
556,750
$ 0.016997
550,050
7/20/2022
29,386,519
556,750
$ 0.018946
553,765
7/28/2022
35,884,040
556,750
$ 0.015515
500,050
8/10/2022
44,505,857
680,109
$ 0.015281
611,073
8/18/2022
54,574,909
948,863
$ 0.017386
852,952
8/25/2022
105,255,759
2,264,961
$ 0.021519
2,128,038
9/2/2022
140,073,757
3,000,000
$ 0.021417
2,788,975
9/14/2022
79,092,686
1,757,466
$ 0.022220
1,633,418
9/30/2022
30,538,303
500,000
$ 0.016373
463,975
10/14/2022
35,628,020
500,000
$ 0.014034
463,975
11/7/2022
22,022,709
326,235
$ 0.014814
302,373
11/18/2022
39,699,793
325,000
$ 0.008186
301,225
12/2/2022
42,148,416
325,000
$ 0.007711
301,225
12/20/2022
78,705,534
540,000
$ 0.006861
501,175
12/30/2022
63,338,702
400,000
$ 0.006315
370,975
1,259,746,466
26,210,509
$ 24,276,308
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.
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. To date, the Transaction has not yet
occurred.
41
Going Concern Uncertainty
As shown in the accompanying financial statements,
the Company generated net losses of $35,517,505 and $4,826,320 during the years ended December
31, 2022 and 2021, respectively. As of December 31, 2022, the Company’s current liabilities exceeded its current assets by $11,562,784
and an accumulated deficit of $46,555,334. As of December 31, 2022, the Company had $2,060,332 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 substantial 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.
Foreign Currency Risk
In general, the Company is a net receiver of currencies
other than the U.S. dollar. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, will negatively
affect the Company’s net sales and gross margins as expressed in U.S. dollars. There is a risk that the Company will have to adjust
local currency product pricing due to competitive pressures when there has been significant volatility in foreign currency exchange rates.
Results of Operations
Revenues
Since 2021, we have recognized revenue derived
from the acquisitions of our subsidiaries consummated during the periods ended September 30, 2021 through present.
The
Company’s revenues are generated primarily from the sale of our services, which consist primarily of advanced technology solutions
for integrated communications and security systems, as well as habitat management. The Company’s sales of products are primarily
generated from our TJM subsidiaries.
The Company’s future revenues will be derived
from the following, among other things.
·
promote adoption if our patented technology through agency and distribution agreements;
·
cross-selling existing customer with products from other subsidiaries;
·
provide a wide array of diverse services, including enhanced or additional services that may become available in the future due to, among other things, advances in technology or improvements in our infrastructure;
·
pursue acquisitions of additional assets, in each case if available at attractive prices; and
·
market our products and services to new customers.
While the Company recognizes revenue when its customer
obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for
those goods or services, the Company also maintains multiple contracts for future material revenues, including part of framework contracts
that will be recognized during future reporting periods.
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For the year ended
December 31, 2022, total revenues were $9,100,255 compared to $7,783,340 for the year ended December 31, 2021, an increase of $1,316,915.
The increase was primarily due to a full year of revenue generated from the Company’s subsidiaries acquired in 2021. The breakdown
of revenues by entity for the years ended December 31, 2022 and 2021 is as follows:
Years Ended
December 31,
2022
2021
Optilan
$ 7,514,687
$ 7,232,210
Wildlife
842,811
306,548
TJM
560,406
174,266
Remote Intelligence
140,490
24,816
TerraData
41,861
45,500
$ 9,100,255
$ 7,783,340
Cost of Revenues and Gross Margin
For the
year ended December 31, 2022, cost of revenues was $14,543,529 compared to $6,685,210 for the year ended December 31, 2021, an increase
of $7,858,319. The increase was primarily due to a full year of cost of revenue incurred from the Company’s subsidiaries acquired
in 2021. The Optilan cost of revenue in 2022 of $13,069,792 increased $6,699,322 over 2021. During 2022, it was realized that certain
Fixed Price quoted contracts, with design and execution issues, prolonged the completion of the projects. These delays resulted in significant
excess costs of approximately $6,061,790. These costs were related to labor, subcontractor, and material costs, along with Covid-19 and
current inflation rates. The remaining $637,532 increase is related to warranty and other work associated with different projects. The
company has adequately reserved for these costs through completion of the projects in the third quarter of 2023. Unfortunately, there
was very little foresight into the magnitude of the loss. The Company believes that this is not a recurring issue with Optilan and/or
its business model. The Company has undertaken internal procedures during its bid process to assure that such practices will not occur
in the future.
Gross (loss) profit for the year ended December 31,
2022 was ($5,443,275) with a gross loss of (60)% compared to $1,098,130 for the year ended December 31, 2021 with a 14% gross margin.
Operating
Expenses
Selling, general and administrative expenses for
year ended December 31, 2022 increased by $1,047,735, or 27%, to $4,966,702 from $3,918,967 for the year ended December 31, 2021. The
increase primarily consisted of an increase to the operations from our various acquisitions, including higher travel, advertising costs,
insurance and information technology expenses.
Salaries, wages and payroll taxes for year ended
December 31, 2022 increased to $7,457,491 from $2,653,683 for the year ended December 31, 2021. The increase primarily consisted of an
increase in the numbers of employees inherited from our various acquisitions, and a full year of personnel costs from these entities.
Salaries, wages and payroll taxes was primarily driven by $4,601,840 incurred at the Optilan subsidiary.
Professional fees for the year ended December
31, 2022, increased to $3,718,171 from $2,930,245 for the year ended December 31, 2021. This increase primarily consisted of legal expenditures
incurred by DarkPulse for corporate matters, including the Company’s SPAC transaction, as well as a full year of professional fees
incurred by Optilan.
Depreciation and amortization for year ended December
31, 2022, increased to $1,568,405 from $258,306 for the year ended December 31, 2021. This increase is primarily due to the increase in
the depreciable assets we acquired from new acquisitions, primarily Optilan’s property and equipment as well as amortization of its intangible asset.
During the year ended December 31, 2022, the Company recorded a gain
on forgiveness of payables of $312,685.
During the year ended December 31, 2022, the Company
recorded $12,222,598 in impairment on the Company’s goodwill and intangible assets.
43
Other Income (Expense)
For the year ended December 31, 2022, we had
other expense of ($453,549) compared to other income of $4,021,700 for the year ended December 31, 2021. The decrease in other
income was primarily due to higher interest expense in 2022, a gain on forgiveness of liabilities of $3,488,860 in 2021, as well as
a lower gain on the change in fair value of derivative liabilities.
Net Loss
As a result of the above, we reported a net loss of
$35,517,505 and $4,826,320 for the years ended December 31, 2022 and 2021, respectively.
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 year ended December
31, 2022, we had $24,276,308 in cash proceeds from our equity financings compared to $14,593,327 in 2021.
As of December 31, 2022, we had cash of $2,060,332
compared to $3,658,846 as of December 31, 2021. We currently do not have sufficient cash to fund our operations for the next 12 months
and we will require working capital to complete development, testing and marketing of our products and to pay for ongoing operating expenses.
We anticipate adding consultants for technology development and the corresponding operations of the Company, but this will not occur
prior to obtaining additional capital. Management is currently in the process of looking for additional investors. Currently, loans from
banks or other lending sources for lines of credit or similar short-term borrowings are not available to us. We have been able to raise
working capital to fund operations through the issuances of convertible notes or obtained through the issuance of our restricted common
stock. As of December 31, 2022, our current liabilities exceeded our current assets by $11,562,784.
Several of our significant operating subsidiaries
have borrowed funds from DarkPulse. The terms of the instruments governing the indebtedness of these borrowers or borrowing groups may
restrict our ability to access their accumulated cash. In addition, our ability to access the liquidity of these and other subsidiaries
may be limited by tax, legal and other considerations.
Our executive officers and our Board of Directors
review our sources and potential uses of cash in connection with our annual budgeting process and whenever circumstances warrant. Generally
speaking, our principal funding source is cash from financing activities, and our principal cash requirements include loans to our operating
subsidiaries, operating expenses, and capital expenditures,
Cash Flows From Operating Activities
During the year ended December 31, 2022, net cash
used by operating activities was $21,738,542 resulting from our net loss of $35,517,505, partially offset by non-cash charges of $13,307,813
primarily driven by our goodwill impairment. In 2022, we had cash provided by our operating assets and liabilities of $471,149 primarily
driven by decreases in accounts receivable and increases in accounts payable partially offset by decreases in other liabilities.
During the year ended December 31, 2021, net cash used by operating activities
was $11,363,470, resulting from our net loss of $4,826,320, non-cash gains of $3,279,403 and cash used in our operating assets and liabilities
of $3,257,746.
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Cash Flows From Investing Activities
During the year ended December 31, 2022, we had
net cash used in investing activities of $5,045,405, including the issuance of our note receivable and investment with the SPAC totaling
$2,549,248, joint venture investment of $103,505 and purchase of property and equipment of $2,074,627.
During the year ended December 31, 2021, we had
net cash used in investing activities of $1,689,153, primarily due from the purchase of property and equipment and net cash used in business
acquisitions.
Cash Flows From Financing Activities
During the year ended December 31, 2022, net cash
provided by financing activities was $24,165,801 which was primarily comprised of proceeds from the sale of common stock of $24,276,308,
net of costs of $1,934,200, less net repayments of loans of $110,507.
During the year ended December 31, 2021, net cash
provided by financing activities was $17,311,427, comprised of proceeds from the sale of common stock from offering of $14,593,327, 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.
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
In November 2021, the FASB issued ASU No.
2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with
Customers , issued by the Financial Accounting Standards Board. This ASU requires entities to recognize and measure contract
assets and contract liabilities acquired in a business combination in accordance with ASU 2014-09, Revenue from Contracts with
Customers (Topic 606). The update will generally result in the recognition of contract assets and contract liabilities at amounts
consistent with those recorded by the acquiree immediately before the acquisition date
rather than at fair value. The Company expects that there would be no material impact on the Company’s condensed consolidated
financial statements upon the adoption of this ASU.
In August 2020, the FASB issued ASU 2020-06, which
simplifies the guidance on the issuer’s accounting for convertible debt instruments by removing the separation models for convertible
debt with a cash conversion feature and convertible instruments with a beneficial conversion feature. As a result, entities will not separately
present in equity an embedded conversion feature in such debt and will account for a convertible debt instrument wholly as debt, unless
certain other conditions are met. The elimination of these models will reduce reported interest expense and increase reported net income
for entities that have issued a convertible instrument that is within the scope of ASU 2020-06. ASU 2020-06 is applicable for fiscal years
beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. The Company
adopted ASU 2020-06 on January 1, 2022 and the adoption of this ASU did not have a material impact on the Company’s consolidated
financial statements and related disclosures.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company are included
beginning on page F-1 immediately following the signature page to this Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.