What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-07-18 compared with 2022-11-04 · 363 added, 237 removed, 93 unchanged (87% of the section changed)

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

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, 2021.

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

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, 2022.

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.

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

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.

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.

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

Long-Lived Assets and Goodwill

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.

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.

recorded impairment expense of intangibles and goodwill of $12,222,598 upon its annual impairment test during the year ended December

In the three months ended March 31, 2023, the Company evaluated changes in circumstances as a result of the Optilan Liquidation

which indicated that the carrying amount of Optilan’s long-lived assets may not be recoverable.

As such, the Company recorded impairment

expense of intangibles of $356,260 and goodwill of $6,452,906.

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.

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

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.

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

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.

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

When a transaction involves more than one product or service, revenue is allocated to each deliverable based on its relative fair

otherwise, revenue is recognized as products are delivered or as services are provided over the term of the customer contract.

Business Overview

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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.

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, Iraq, Libya,

Egypt, Brazil, 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.

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

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providing comprehensive services for all our clients' needs.

Our Operating Units

The Company’s operating units 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

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;

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Recent Events

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

Liquidation/winding

up of Optilan (UK) Limited

2023, Eversheds Sutherland (International) LLP, a creditor of Optilan (UK) Limited, filed a petition to wind up (“Winding up Petition”)

Optilan (UK) Limited, a wholly owned subsidiary of the Company’s Subsidiary, Optilan HoldCo 3 Limited, and the matter was due to

be heard in the Portsmouth Combined Court Centre on June 28, 2023.

28, 2023, the High Court of Justice in the United Kingdom issued a winding-up order for the liquidation and winding up of the affairs

of Optilan (UK) Limited (“Optilan Liquidation”).

In conjunction with the order, the court appointed the Offical Receiver’s

Office (“OR”) to take the appointment as liquidator of Optilan (UK) Limited and take control of Optilan (UK) Limited’s

3, 2023, Optilan (UK) Limited received a letter from The Insolvency Service, an executive agency sponsored by the Department for Business

and Trade located in the U.K.

Pursuant to the letter of The Insolvency Services, the Company was required to provide information relating

to Optilan (UK) Limited to the Official Receiver’s Office (a government body of Plymouth, the United Kingdom) and attend an interview

with staff of the Official Receiver’s Office to review the prospect of recovering the assets of Optilan (UK) Limited for the benefit

of creditors.

The interview is scheduled for July 18, 2023.

confirming a plan of reorganization, arrangement or liquidation has been entered as of this filing.

The Company is an Unsecured creditor

of Optilan (UK) Limited and is at risk of losing any repayment of obligations due from Optilan (UK) Limited because there are several

intercompany relationships between the Company and Optilan (UK) Limited, the financial impact of any future claims and liabilities may

not be known for several months.

The Company has approximately $19.4 million intercompany payables due from Optilan (UK), which will increase

the Company liabilities for any obligations not repaid.

The Company expects the remaining assets held by Optilan (UK) Limited to be fully

impaired and reported as discontinued operations during the second quarter of 2023 as a result of the winding-up order for liquidation.

At the time of this filing the Company is still evaluating the full effects of the winding-up order for liquidation and the material adverse

effects it will have on the Company’s continued operations and ability to meet future obligations.

evaluated the events and circumstances of Optilan (UK) Limited liquidation and determined that conditions existed as of March 31, 2023

to indicate that the carrying value of the Company’s goodwill and intangible assets may not be recoverable.

Refer to Notes 2 and

7 for further detail on the impairment analysis.

The Company expects the remaining assets held by Optilan (UK) Limited to be fully impaired

during the second or third quarter of 2023 as a result of the winding-up order for liquidation.

Lasty, the Company performed an analysis of the

trade receivables related to Optilan (UK) Limited and determined that an additional $2,364,977 may not be collectible pursuant to the

Optilan Liquidation.

As of March 31, 2023, the Company recorded a bad debt provision for this amount.

(UK) Limited has the following assets as of March 31, 2023, including in the accompanying unaudited condensed consolidated balance sheet

are as follows:

Accounts receivable, net

Contract assets

Property and equipment, net

Operating lease right-of-use assets

2022 we entered an Equity Financing Agreement (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 of the underlying shares of Common Stock.

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.

Below is a table of all puts made by the Company

under the Equity Financing Agreement during 2022:

Number of Shares Sold

Total Proceeds, Net of Discounts

Effective Price per Share

On February 21, 2022, we sold 75,798,921 shares

of our Common Stock at $0.032982 per share for total consideration of $2,500,000.

On March 3, 2022, we sold 16,579,569 shares of

our Common Stock at $0.0301576 per share for total consideration of $500,000.

On March 14, 2022, we sold 5,617,347 shares of

our Common Stock at $0.071208 per share for total consideration of $400,000.

On May 27, we entered an Equity Financing Agreement

(the “ 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.

Below is a table of all puts made by the Company

under the EFA during 2022:

Number of Shares Sold

statement is filed with the SEC, but in no event more than 90 days after the registration statement is filed.

a table of all puts made by the Company under the 2022 EFA during 2023:

Number of Common Shares Issued

Total Proceeds, Net of Discounts

Effective Price per Share

Going Concern Uncertainty

As shown in the accompanying financial statements,

during the nine months ended September 30, 2022, the Company reported a net loss of $18,375,506.

As of September 30, 2022, the Company’s

current liabilities exceeded its current assets by $6,314,789.

As of September 30, 2022, the Company had $5,967,984 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

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;

17, 2023, we entered into a Stock Purchase Agreement with an investor for the purchase of 11,441,647 shares of Common Stock in exchange

for $100,000.

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.

Concern Uncertainty

in the accompanying financial statements, we generated net losses of $14,799,264 and $5,384,270 during the three months ended March 31,

2023 and 2022, respectively, and net cash used in operating activities of $2,323,783 and $6,288,501, respectively.

As of March 31, 2023,

our current liabilities exceeded its current assets by $ 15,955,423 and has an accumulated deficit of $60,574,902.

As of March 31, 2023,

we had $545,970 of cash.

Lastly, the Optilan Liquidation raises serious concerns about the viability of the Optilan (UK) Limited entity

and related operations of the Optilan subsidiaries.

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.

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.

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

During previous years, the Company experienced

no revenue as it developed its technology.

More recently, we have experienced revenue derived from the acquisitions of our subsidiaries

from the 3 rd quarter of 2021 to the present.

The Company’s new revenues are derived from the following, among other things:

Currency Risk

the Company is a net receiver of currencies other than the U.S.

Accordingly, changes in exchange rates, and in particular a strengthening

dollar, will negatively affect the Company’s net sales and gross margins as expressed in U.S.

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.

of Operations

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;

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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;

provide our premium services to a higher percentage of our customers;

pursue acquisitions of additional assets, in each case if available at attractive prices;

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.

For the three months ended September 30, 2022,

total revenues were $1,431,104 compared to $3,500,970 for the same period in 2021, a decrease of $2,069,866.

This decrease primarily consisted

of revenues of $841,876 from Optilan, $385,529 from Wildlife Specialists and $139,225 from TJM Electronics as well as $64,474 from the

remaining subsidiaries.

For the nine months ended September 30, 2022,

total revenues were $7,884,480 compared to $3,500,970 for the same period in 2021, an increase of $4,383,510.

This increase primarily

consisted of revenues of $6,760,818 from Optilan, $589,986 from Wildlife Specialists and $434,459 from TJM Electronics as well as $99,217

from the remaining subsidiaries.

Cost of Goods Sold and Gross Margin

For the three months ended September 30, 2022,

cost of goods sold were $5,804,875 compared to $2,767,239 for the same period in 2021, an increase of $3,037,636.

This increase primarily

consisted of $2,500,000 of additional cost of goods sold related to a contract with National Grid (which was entered into prior to the

Company’s acquisition of Optilan and valued at £25,411,720) that the Company’s subsidiary, Optilan, is in the final

stages of completing after more than five years.

The project took significantly longer to complete than originally quoted and unfortunately

there was very little foresight to the magnitude of the loss.

The Company believes that this is not a recurring issue with Optilan and/or

its business model, but more specifically related to the factors surrounding this project which included but not limited to initial issues

with the quote and the associated agreement, delays due to Covid-19 and current inflation rates.

The Company has taken internal procedures

during its bid process to assure that such practuces will not occur in the future.

For the nine months ended September 30, 2022,

cost of goods sold were $12,119,352 compared to $2,767,239 for the same period in 2021, an increase of $9,352,113.

This increase primarily

consisted of $2,500,000 of additional cost of goods sold related to a contract with National Grid (which was entered into prior to the

Company’s acquisition of Optilan and valued at £25,411,720) that the Company’s subsidiary, Optilan, is in the final

stages of completing after more than five years.

The project took significantly longer to complete than originally quoted and unfortunately

there was very little foresight to the magnitude of the loss.

The Company believes that this is not a recurring issue with Optilan and/or

its business model, but more specifically related to the factors surrounding this project which included but not limited to initial issues

with the quote and the associated agreement, delays due to Covid-19 and current inflation rates.

The Company has taken internal procedures

during its bid process to assure that such practuces will not occur in the future.

Gross margin for the three months ended September

30, 2022 was $(4,373,771) with a gross margin of (305.6)% compared to $733,731 for the same period in 2021 with a 21.0% gross margin.

Gross margin for the nine months ended September

30, 2022 was $(4,234,872) with a gross loss margin of (677.2)% compared to $733,731 for the same period in 2021 with a gross margin of

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.

three months ended March 31, 2023, total revenues were $1,537,833 compared to $2,018,333 for the three months ended March 31, 2022, a

decrease of $480,500.

The decrease was primarily due to lower revenues achieved by Wildlife and Optilan due to decreased operations given

capital and resources restraints.

The breakdown of revenues by entity for the three months ended March 31, 2023 and 2022 is as follows:

Three Months Ended

Remote Intelligence

Cost of Revenues and Gross Margin

For the three months ended March 31, 2023, cost of

revenues was $1,226,792 compared to $2,348,567 for the three months ended March 31, 2022, a decrease of $1,121,775.

Gross profit (loss) for the three months ended

March 31, 2023 was $311,041 with a gross margin of 20.2% compared to $(330,234) for the three months

ended March 31, 2022 with a (16.4)% gross margin.

During 2022, it was realized that certain fixed price quoted contracts, with design

and execution issues, prolonged the completion of the projects.

This resulted in significant excess costs related to labor, subcontractor,

and material costs.

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.

In 2023, gross profit increased due to more normalized costs related to revenue as Optilan performed new,

profitable projects.

Approximately $240,000 of the gross profit was due to the fiber business which generates higher gross profits than

other projects.

Operating Expenses

Selling, general and administrative expenses for

three months ended September 30, 2022 increased by $1,091,777, or 268,.3%, to $1,498,717 from $406,940 for the three months ended September

The increase primarily consisted of an increase to the operations from our various acquisitions.

Selling, general and administrative expenses for

nine months ended September 30, 2022 increased by $3,047,533, or 573.1%, to $3,579,326 from $531,793 for the nine months ended September

The increase primarily consisted of an increase to the operations from our various acquisitions.

Payroll related expenses for three months ended

September 30, 2022, increased to $1,760,531 from $1,007,453 for the three months ended September 30, 2021.

The increase primarily consisted

of an increase to the numbers of employees inherited from our various acquisitions.

Payroll related expenses for nine months ended

September 30, 2022, increased to $5,108,775 from $1,007,453 for the nine months ended September 30, 2021.

The increase primarily consisted

of an increase to the numbers of employees inherited from our various acquisitions.

Professional fees for the three months ended September

30, 2022, decreased by $209,636 to $1,471,264 from $1,680,600 for the three months ended September 30, 2021.

This decrease primarily consisted

of decreased legal expenditures associated with the current decrease in litigation activity.

Professional fees for the nine months ended September

30, 2022, increased by $2,588,394 to $4,489,966 from $1,901,572 for the nine months ended September 30, 2021.

This increase primarily

consisted of increased legal expenditures associated with the increase in litigation.

three months ended March 31, 2023 increased by $35,625 to $1,013,833 from $978,208 for the three months ended March 31, 2022.

primarily consisted of increase in advertising costs, insurance and information technology expenses.

Salaries, wages and payroll taxes for three months

ended March 31, 2023 decreased to $1,547,208 from $1,972,067 for the three months ended March 31, 2022.

The decrease primarily consisted

of reduced headcount at each subsidiary.

The Company performed an analysis of the trade

receivables related to Optilan (UK) Limited and determined that an additional $2,364,977 may not be collectible pursuant to the Optilan

As of March 31, 2023, the Company recorded a bad debt provision for this amount.

Professional fees for the three months ended March

31, 2023 increased to $2,950,698 from $1,538,103 for the three months ended March 31, 2022.

This increase primarily consisted of $1,989,900

in non-cash expenses due to the issuance of common stock per the settlement of an litigation matter, partially offset by lower legal fees

incurred in 2023.

During the three months ended March 31, 2022,

the Company recorded a gain on forgiveness of payables of $35,750.

As a result of the Optilan Liquidation

as described in Note 1, management determined that certain events and circumstances occurred that indicated that the carrying amount of

the Company’s reporting unit may not be recoverable as of March 31, 2023.

The qualitative assessment was primarily due to the customer

contracts held by Optilan (UK) Limited at March 31, 2023 and the associated revenue projections by the UK subsidiary that is subject to

the potential winding up.

As such, the Company compared the fair value of the reporting unit to the carrying amounts and recorded an impairment

loss of $6,809,166 pertaining to impairment and goodwill in the consolidated statements of operations.

The Company recorded impairment

of the indefinite-lived intangible asset of $356,260, and impairment of goodwill of $6,452,906.

Depreciation and amortization for three months

ended September 30, 2022, increased by $506,748 to $597,970 from $91,222 for the three months ended September 30, 2021.

This increase

is primarily due to the increase in the depreciable assets we acquired from new acquisitions in other countries.

Depreciation and amortization for nine months

ended September 30, 2022, increased by $717,253 to $833,989 from $116,736 for the nine months ended September 30, 2021.

This increase

is primarily due to the increase in depreciable assets we acquired from new acquisitions.

ended March 31, 2023 and 2022 was $231,234 and $228,614, respectively.

Other Income (Expense)

For the three months ended September 30, 2022,

we had other expense of $896,585 compared to other expense of $798,655 for the same period in 2021, an increase in expense of $97,930.

This increase in other income primarily consisted of a $70,289 decrease in the fair value of the Company’s derivative instruments,

$426,073 of loss on foreign currency exchange rate variance, and a decrease in interest expense of $489,552 due to changes in borrowings

associated with acquisitions.

For the nine months ended September 30, 2022,

we had other income of $128,578 compared to other expense of $1,084,462 for the same period in 2021, a decrease in expense of $1,213,040.

This increase in other income primarily consisted of changes of $501,431 of restructuring costs, $237,445 increase in the fair value of

the Company’s derivative instruments, $218,039 of loss on foreign currency exchange rate variance, an decrease in interest expense

of $321,532 due to changes in borrowings associated with acquisitions.

As a result of the above, we reported a net loss

of $8,805,668 and $1,686,829 for the three months ended September 30, 2022 and 2021, respectively.

As a result of the above, we reported a net loss

of $18,375,506 and $1,924,311 for the nine months ended September 30, 2022 and 2021, respectively.

For the three months ended March 31, 2023, we

had other expenses of ($193,189) compared to other expenses of ($372,794) for the three months ended March 31, 2022.

The decrease in other

expenses was primarily due to lower interest expense in 2023.

of the above, we reported a net loss of $14,799,264 and $5,384,270 for the three months ended March 31, 2023 and 2022, respectively.

Liquidity and Capital Resources

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During the three months

ended September 30, 2022, we had $11,378,400 in new cash proceeds compared to the three months ended September 30, 2021, when we had no

new cash proceeds.

As of September 30, 2022, we had cash of $5,967,984,

compared to $2,564,492 as of September 30, 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 September 30, 2022, our current liabilities exceeded our current assets by $6,314,789.

ended March 31, 2023, we had $2,087,801 in cash proceeds from our equity financings compared to $7,700,000 in 2022.

31, 2023, we had cash of $545,970 compared to $2,060,332 as of December 31, 2022.

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

Currently, loans from banks or other lending sources for lines of credit or similar short-term borrowings are not available

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 March 31, 2023, our current liabilities exceeded our current assets by $15,955,423.

the Optilan Liquidation raises serious concerns about the viability of the Optilan (UK) Limited entity and related operations of the Optilan

subsidiaries.

Several of our significant operating subsidiaries

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subsidiaries, operating expenses, and capital expenditures,

For the remaining 12 month period ending September

30, 2023, we project that our subsidiaries will begin to operate with their own operating activities and reduce their dependency on the

financing activities of DarkPulse.

For additional information, see "Risk Factors—Financial

Risks" in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2021.

Cash Flows From Operating Activities

During the nine months ended September 30, 2022,

net cash used by operating activities was $19,456,701, resulting from our net loss of $18,375,506 and an increase in expenses related

to our inventory of $604,406 and operating lease liabilities of $86,511.

These increases were offset by a decrease in derivative liability

of $237,445, increase in accounts payable and accrued expenses of $2,949,406 and an increase from restructuring costs of $501,431, decrease

in accounts receivable of $692,746, decrease in unbilled revenue of $178,748 and decrease in contract liability of $833,876.

By comparison, 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 partially offset

by an increase in non-cash expenses of stock based loan acquisition costs of $649,334 and the amortization of debt discount of

$404,087 offset by gain on the extinguishment of debt of $785,240 and increases in accounts payable and accrued liabilities of

$4,362,016 and contract liability of $1,439,504

three months ended March 31, 2023, net cash used by operating activities was $2,323,783 resulting from our net loss of $14,799,264 partially

offset by non-cash charges of $11,491,421 primarily driven by impairment charges, bad debt expense and the issuance of common stock for

a legal settlement.

In 2023, we had cash provided by our operating assets and liabilities of $984,059 primarily driven by increases in

accounts payable and contract liabilities.

During the three months

ended March 31, 2022, net cash used by operating activities was $6,288,501, resulting from our net loss of $5,384,270, partially offset

by non-cash gains of $372,413.

In 2022, we had cash used in our operating assets and liabilities of $531,817 primarily due to increases

in accounts receivable and contract assets partially offset by increases in accounts payable and contract liabilities.

Cash Flows From Investing Activities

During the nine months ended September 30, 2022,

we had net cash used in investing activities of $594,310.

During the nine months ended September 30, 2021, net cash used by investing

activities was $546,765.

During the three months ended March 31, 2023,

we had net cash used in investing activities of $817,749, including $167,894 in notes and $449,110 in advances to GSD, as well as our

joint venture investment of $98,125 and purchase of property and equipment of $102,350.

During the three months ended March 31, 2022,

we had net cash used in investing activities of $64,980 due to deposits.

Cash Flows From Financing Activities

During the nine months ended September 30, 2022,

net cash provided by financing activities was $23,794,275 which was comprised of proceeds from the sale of common stock from offering

of $23,794,275.

During the nine months ended September 30, 2021, net cash used by financing activities was $10,718,100, which was comprised

of proceeds from the sale of common stock from offering of $8,000,000, proceeds from issuance of convertible notes payable of $1,102,700

and proceeds from notes payable of $2,000,000 less repayment of notes payable of $384,600.

During the three months ended March 31, 2023,

net cash provided by financing activities was $2,061,762 which was primarily comprised of proceeds from the sale of common stock of $2,087,801,

less net repayments of loans of $26,039.

During the three months ended March 31, 2022,

net cash provided by financing activities was $7,700,000, comprised of proceeds from the sale of common stock from offering of $7,700,000.

Factors That May Affect Future Results

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Recent Accounting Pronouncements

We have provided a discussion of recent accounting

pronouncements in Note 1 to the Condensed Financial Statements.

In April 2019, the FASB issued ASU 2019-04, Codification

Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging , and Topic 825, Financial

Instruments, which amends and clarifies several provisions of Topic 326.

In May 2019, the FASB issued ASU 2019-05, Financial Instruments-Credit

Losses (Topic 326):

Targeted Transition Relief , which amends Topic 326 to allow the fair value option to be elected for certain financial

instruments upon adoption.

ASU 2019-10 extended the effective date of ASU 2016-13 until December 15, 2022.

The Company adopted this new

guidance, including the subsequent updates to Topic 326, on January 1, 2023 and the adoption did not have a material impact on the Company’s

condensed consolidated financial statements and related disclosures.

Quantitative and Qualitative Disclosures

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis