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Item 7. Management’s Discussion and Analysis

2024-07-15 compared with 2023-06-23 · 394 added, 345 removed, 137 unchanged (84% of the section changed)

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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.

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

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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 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.

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.

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.

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:

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, 2023, including the carrying value of the identifiable intangible

assets and goodwill assigned to the respective reporting unit.

Refer to Note 1 for impairment records in 2023

upon the Optilan UK Liquidation.

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;

(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.

In accordance

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

(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.

Financial Instruments

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

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.

(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

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.

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

(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.

or “ DarkPulse ”), is a technology 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.

Headquartered in Houston, DarkPulse is a globally-based

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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.

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.

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

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 dark-pulse based BOTDA 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.

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.

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.

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

Our subsidiaries consist of DarkPulse UK Ltd,,

a company headquartered in, United Kingdom whose focus is in engineering, 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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of its customers;

and TJM Electronics West, Inc., a company headquartered in Arizona who is a U.S.

manufacturer and tester of advanced

DarkPulse Electronics Manufacturing Inc., a company headquartered in Arizona who is a U.S.

manufacturer of advanced

electronics, cables and sub-assemblies specializing in advanced package and complex CCA and hardware.

Change in Ownership in Previously Consolidated Subsidiary Results

in Deconsolidation in the Current Period

On June 28, 2023, the county court at Portsmouth,

England made a winding up order raised by a (non-related party) creditor against the Company's subsidiary Optilan (UK) Limited.

The subsidiary

on that date ceased conducting further business and the director’s powers terminated.

The consolidation of subsidiaries owned by

Optilan (UK) Limited was no longer under its control as defined by ASC 810 (Consolidation).

This compulsory liquidation resulted in a

combined “Loss on Deconsolidation” of Optilan (UK) Limited and its subsidiaries in the amount of $1,642,795.

The subsidiaries of Optilan (UK) Limited are solvent

and continue to operate.

The Company will retain no measurable residual value nor direct or indirect investment in Optilan, its subsidiaries

or its assets.

The Company will have no continuing involvement with Optilan (UK) Limited, including its subsidiaries, and will not be

owned or controlled by any related party of the Company.

Recent Events

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

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

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

TerraData is now a subsidiary of the Company.

The shares were issued in 2022.

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

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.

Below is a table of all puts made by the Company under

the Equity Financing Agreement and 2022 EFA during 2022:

Number of Shares Sold

Total Proceeds,

Net of Discounts

Liquidation/winding up of Optilan (UK) Limited

On May 3, 2023, Eversheds Sutherland (International)

LLP, a creditor of Optilan (UK) Limited, filed a petition to wind up (the “ 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.

On June 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 (the “ Optilan

Liquidation ”).

In conjunction with the order, the court appointed the Offical Receiver’s Office (the “ OR ”)

to take the appointment as liquidator of Optilan (UK) Limited and take control of Optilan (UK) Limited’s assets.

At the same time the court appointed the OR to

take the appointment as liquidator of Optilan (UK) Limited.

The OR has taken control of Optilan (UK) Limited’s assets.

ORs Office has initiated contact with Optilan but we still wait to receive details of the individual who will be taking the role of OR.

On July 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.

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 was scheduled

for July 18, 2023.

On July 18, 2023, the interview was held between

the Official Receiver’s Office (“OR”) and the CEO at time of dissolution.

The OR office requested a list of assets,

bank account information and amounts along with any contracts held by Optilan (UK) Limited to begin the liquidation process.

On August 9, 2023, Evelyn Partners was appointed Joint Liquidator.

There are no new claims against Optilan (UK) Limited

and Evelyn Partners continue to liquidate the company’s assets.

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

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.

Year Ended December 31, 2023 Accounting Analysis

The Company performed an analysis of the trade

receivables related to Optilan (UK) Limited and determined that an additional $2,422,457 may not be collectible pursuant to Optilan Liquidation.

The Company recorded a bad debt provision for this amount.

As a result of 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.

The qualitative assessment was primarily due to the customer contracts held by Optilan (UK) Limited 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 $ 2,037,670 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 $ 1,681,410.

The Company has one reporting unit which was evaluated in the impairment test noted above.

As a result of

the impairment, the Company had a carrying value of $0 pertaining to goodwill and intangible assets as of December 31, 2023.

Optilan (UK) Limited became subject to the control

of a government and was appointed an administrator.

In this situation, when the parent ceases to have a financial interest in a subsidiary

and does not retain an investment in that subsidiary, the parent should deconsolidate the subsidiary and recognize a gain or loss on deconsolidation

in accordance with ASC 810-10-40-5.

In addition, ASC 810-10-40-3A states when a parent

deconsolidates a subsidiary or derecognizes a group of assets, the parent no longer controls the subsidiary's assets and liabilities or

the group of assets.

The parent therefore shall derecognize the assets, liabilities, and equity components related to that subsidiary

or group of assets.

The equity components will include any noncontrolling interest as well as amounts previously recognized in accumulated

other comprehensive income.

If the subsidiary or group of assets being deconsolidated or derecognized is a foreign entity (or represents

the complete or substantially complete liquidation of the foreign entity in which it resides), then the amount of accumulated other comprehensive

income that is reclassified and included in the calculation of gain or loss shall include any foreign currency translation adjustment

related to that foreign entity.

Upon the liquidation, on June 28, 2023, the Company

derecognized Optilan UK’s assets and liabilities and recorded a loss on consolidation of $1,624,795, which was recognized in other

income (expenses) in the consolidated statements of operations.

Included in the loss on consolidation of $1,642,795

are the gains on intercompany receivables and payables and currency translation adjustment $12,721,532 and $1,545,008 respectively, offset

by the net loss on impairment of investments of $12,623.

In addition, the allowance of $2,422,457 was recorded

against receivables that have been deemed uncollectible.

On May 27, 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.

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 registration statement is filed.

Below is 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

1,259,746,466

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.

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 ”).

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

On January 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.

On April 28, 2023 we entered an Equity Financing

Agreement, which was superseded by the Amended Equity Financing Agreement dated June 13, 2023, which was then superseded by the Second

Amended Equity Financing Agreement dated July 10, 2023, as amended (the “ EFA ”), and Registration Rights Agreement (the

“ 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 after effectiveness of a registration statement on Form S-1 of the underlying

shares of Common Stock.

The Registration Rights Agreement provides that

we shall (i) use our best efforts to file with the SEC a registration statement within 15 days of the date of the Registration Rights

and (ii) have the registration statement declared effective by the SEC within 30 days after the date the registration statement

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

Below is a table of all puts made by the Company

under the EFA during 2023:

Number of Common Shares Issued

Total Proceeds, Net of Discounts

Effective Price per Share

Prior to the sales being made, GHS agreed to purchase

the shares without an effective registration statement in place, and, as such, the shares were restricted.

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;

we generated net losses of $21,723,043 and $35,517,505 during the years ended December 31, 2023 and 2022, respectively, and net cash used

in operating activities of $(5,653,215) and $(21,738,542), respectively.

As of December 31, 2023, the Company’s current liabilities

exceeded its current assets by $18,126,281 and has an accumulated deficit of $67,376,221.

As of December 31, 2023, the Company had $11,912

Lastly, the Optilan Liquidation no longer raises serious concerns about the viability of the Optilan (UK) Limited entities.

(UK) Limited and its subsidiaries have been deconsolidated and are no longer under the control of DarkPulse, Inc.

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

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.

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.

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

Since 2021, we have recognized revenue derived

from the acquisitions of our subsidiaries consummated during the periods ended September 30, 2021 through present.

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.

For the Years Ended December 31, 2023 and 2022

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

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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

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 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:

For the year ended December 31, 2023, total

revenues were $2,020,971 compared to $9,100,255 for the year ended December 31, 2022, a decrease of $7,079,284.

was primarily due to lower revenues achieved by Optilan, Wildlife, Remote and TJM Electronics West, Inc given capital and resources

The breakdown of revenues by entity for the years ended December 31, 2023 and 2022 is as follows:

Remote Intelligence

Cost of Revenues and Gross Margin

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

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.

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.

For the year ended December 31, 2023, cost of

revenues was $2,446,756 compared to $14,543,529 for the year ended December 31, 2022, a decrease of $12,096,773.

The decrease was attributable

to lower revenues from Optilan, Remote Intelligence, Wildlife Specialists, and TJM Electronics West, Inc.

Gross (loss) profit for the year ended December

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.

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.

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.

31, 2023 was $(425,785) with a gross profit of (21)% compared to $(5,443,274) for the year ended December 31, 2022 with a (60)% gross

Operating Expenses

Selling, general and administrative expenses for year

ended December 31, 2023 decreased by $2,932,841, or 59%, to $2,033,861 from $4,966,702 for the year ended December 31, 2022.

primarily consisted of decreases in advertising costs, insurance and information technology expenses of operations that have been shuttered.

Salaries, wages and payroll taxes for year ended December

31, 2023 decreased by $4,827,266, or 65%, to $2,630,225 from $7,457,491 for the year ended December 31, 2022.

The decrease primarily consisted

of reduced headcount at each subsidiary.

Furthermore, the Company reduced accrued payroll which it was determined was no longer payable.

Professional fees for the year ended December 31,

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.

2023 decreased by $608,454, or 16%, to $3,109,717 from $3,718,171 for the year ended December 31, 2022 due to decreased audit and legal

fees in 2023.

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.

31, 2023 decreased by $1,045,258, or 67%, to $523,147 from $1,568,405 for the year ended December 31, 2022.

This decrease is primarily

due to the sale of some subsidiary property, plant and equipment.

During the year ended December 31, 2023 and 2022,

the Company recorded $6,948,350 and $12,222,598, respectively, in impairment on the Company’s goodwill and intangible assets.

During the year ended December 31, 2023 and 2022,

the Company recorded $5,248,218 and $0, respectively, in bad debt expense.

year ended December 31, 2022, the Company recorded a gain on forgiveness of payables of ($312,685).

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.

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.

For the year ended December 31, 2023, we had other

expense of ($803,740) compared to other expense of ($453,549) in 2022.

The increase is due to the loss on deconsolidation of ($1,642,146)

partially offset by a $1,484,799 gain on forgiveness of debt.

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

of $21,723,043 and $35,517,505 for the years ended December 31, 2023 and 2022, respectively.

Liquidity and Capital Resources

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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.

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

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, 2023, our current liabilities exceeded our current assets by $18,126,281.

11 unchanged sentences

During the year ended December 31, 2023, 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.

used in operating activities was $5,653,214 resulting from our net loss of $21,723,043, partially offset by non-cash charges of $15,517,077

primarily driven by our bad debt expense and goodwill impairment.

In 2022, we had cash used in operating activities of $21,738,542 resulting

from our net loss of $35,517,505, partially offset by non-cash charges of $13,307,813, including our goodwill impairment.

Cash Flows from Investing Activities

During the year ended December 31, 2023, we had

net cash used in investing activities of $215,475, including a joint venture investment of $113,125, and purchase of property and equipment

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

1 unchanged sentence

provided by financing activities was $3,632,387 which was primarily comprised of proceeds from the sale of common stock of $3,502,272

net of costs of $1,934,200, less net repayments of loans of $110,507.

and proceeds from convertible notes of $145,000 less net repayments of loans of $14,885.

During the year ended December 31, 2022, 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.

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.

Factors That May Affect Future Results

21 unchanged sentences

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.

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

consolidated financial statements upon the adoption of this ASU.

In August 2020, the FASB issued ASU 2020-06, which

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Not applicable.

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.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

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-K

Item 7. Management’s Discussion and Analysis