Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis
of Financial Condition and Results of Operations contain certain forward-looking statements. Historical results may not indicate future
performance. Our forward-looking statements reflect our current views about future events; are based on assumptions and are subject to
known and unknown risks and uncertainties that could cause actual results to differ materially from those contemplated by these statements.
Factors that may cause differences between actual results and those contemplated by forward-looking statements include, but are not limited
to, those discussed in the “Risk Factors” section. We undertake no obligation to publicly update or revise any forward-looking
statements, including any changes that might result from any facts, events, or circumstances after the date hereof that may bear upon
forward-looking statements. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements
Critical Accounting Policies
The following discussions are based upon our consolidated
financial statements and accompanying notes, which have been prepared in accordance with accounting principles generally accepted in the
United States.
Use of Estimates
The preparation of the Company’s financial
statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of
revenues and expenses during the reporting period. Significant estimates and assumptions reflected in these financial statements include,
but are not limited to, assumptions used to calculate derivative liabilities, revenue recognition and impairment of long-lived assets.
The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it believes
to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates when there are changes in circumstances,
facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those
estimates.
Long-Lived Assets and Goodwill
The Company accounts for long-lived assets in
accordance with the provisions of ASC 360-10-35, Property, Plant and Equipment, Impairment or Disposal of Long-lived Assets. This
accounting standard requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that
the carrying amount may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount
of an asset to future undiscounted net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its
estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair
value of the asset.
38
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, 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;
(iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize
revenue when (or as) we satisfy a performance obligation. The five-step model is applied to contracts when it is probable that we will
collect the consideration we are entitled to in exchange for the goods or services transferred to the customer. At contract inception,
once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine
those that are performance obligations and assess whether each promised good or service is distinct. We then recognize revenue in the
amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is
satisfied.
39
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
inception; (4) provide a practical expedient that permits an entity to reflect the aggregate effect of all modifications that occur before
the beginning of the earliest period presented when identifying the satisfied and unsatisfied performance obligations, determining the
transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations; (5) clarify that a completed
contract for purposes of transition is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP
before the date of initial application, and (6) clarify that an entity that retrospectively applies the guidance in Topic 606 to each
prior reporting period is not required to disclose the effect of the accounting change for the period of adoption. The amendments of this
ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. There was no impact
as a result of adopting this ASU on the financial statements and related disclosures. Based on the terms and conditions of the product
arrangements, the Company believes that its products and services can be accounted for separately as its products and services have value
to the Company’s customers on a stand-alone basis. When a transaction involves more than one product or service, revenue is allocated
to each deliverable based on its relative fair value; otherwise, revenue is recognized as products are delivered or as services are provided
over the term of the customer contract.
Derivative Financial Instruments
The Company evaluates the embedded conversion
feature within its convertible debt instruments under ASC 815-15 and ASC 815-40 to determine if the conversion feature meets the definition
of a liability and, if so, whether to bifurcate the conversion feature and account for it as a separate derivative liability. For derivative
financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is
then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative
financial instruments, the Company uses a lattice model, in accordance with ASC 815-15 , Derivative and Hedging, to value the
derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether
such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument
liabilities are classified in the balance sheet as current or non-current based on whether net-cash settlement of the derivative instrument
could be required within 12 months after the balance sheet date.
40
Business Overview
DarkPulse, Inc., a Delaware corporation (the “ Company ”
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
technology company with presence through its subsidiaries in the United Kingdom, India, Dubai, Abu Dhabi, Turkey, Azerbaijan, United States
and Canada. In addition to the Company’s BOTDA systems, through a series of strategic acquisitions the Company offers the manufacture,
sale, installation, and monitoring of laser sensing systems, oil and gas pipeline leak detection, physical security services, telecommunications
and satellite communications services, artificial intelligence-based camera systems, railway monitoring services, drone and rover systems,
and Big Data as a Service (“ BDaaS ”). The Company is focused on expanding services through acquisitions and partnerships
to address global infrastructure and critical environmental resource challenges.
DarkPulse offers a full suite of engineering and
environmental solutions that provide safety and security infrastructure projects. The sensing and monitoring capabilities offered by DarkPulse
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. 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 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; Wildlife Specialists, Limited Liability Company, a company headquartered in Pennsylvania
who provides clients with comprehensive wildlife and environmental assessment, planning, and monitoring services; TerraData Unmanned,
PLLC, a company headquartered in Florida who custom manufactures NDAA compliant drones and unmanned ground crawlers to meet the needs
of its customers; 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.
41
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
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. To date the
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. 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 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. 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.
42
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.
Financings
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.
43
Below is a table of all puts made by the Company
under the 2022 EFA during 2023:
Date of Put
Number of Common Shares Issued
Total Proceeds, Net of Discounts
Effective Price per Share
Net Proceeds
1/12/2023
64,130,435
$ 400,000
$ 0.006237
$ 370,975
1/24/2023
77,733,861
400,000
$ 0.005146
370,975
2/3/2023
61,173,706
300,000
$ 0.004904
277,975
2/17/2023
75,447,571
300,000
$ 0.003976
277,975
3/1/2023
83,113,044
324,000
$ 0.003898
300,295
3/16/2023
93,165,852
254,232
$ 0.002729
235,410
3/30/2023
65,465,384
166,903
$ 0.002549
154,195
4/11/2023
67,462,162
203,554
$ 0.003017
188,279
587,692,015
$ 2,348,689
$ 2,176,079
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
Agreement; 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:
Date of Put
Number of Common Shares Issued
Total Proceeds, Net of Discounts
Effective Price per Share
Net Proceeds
4/28/2023
91,796,875
$ 235,000
$ 0.002560
$ 208,550
6/26/2023
44,583,334
214,000
$ 0.004800
141,020
7/3/2023
51,442,308
274,058
$ 0.004200
257,020
7/10/2023
28,593,750
91,500
$ 0.003200
85,094
11/14/2023
18,997,442
25,180
$ 0.001325
22,392
11/22/2023
29,685,620
34,717
$ 0.001169
31,262
12/1/2023
51,275,586
47,973
$ 0.000936
43,590
12/11/2023
87,136,216
108,019
$ 0.001240
99,433
12/27/2023
67,522,014
57,909
$ 0.000858
52,830
471,033,145
$ 1,088,356
$ 941,191
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.
44
Going Concern Uncertainty
As shown in the accompanying financial statements,
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
of cash. Lastly, the Optilan Liquidation no longer raises serious concerns about the viability of the Optilan (UK) Limited entities. Optilan
(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
sales. The accompanying financial statements do not include any adjustments that might be necessary should we be unable to continue as
a going concern. Management is actively pursuing additional sources of financing sufficient to generate enough cash flow to fund its operations;
however, management cannot make any assurances that such financing will be secured.
Foreign Currency Risk
In general, the Company is a net receiver of
currencies other than the U.S. dollar. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar,
will negatively affect the Company’s net sales and gross margins as expressed in U.S. dollars. There is a risk that the Company
will have to adjust local currency product pricing due to competitive pressures when there has been significant volatility in foreign
currency exchange rates.
Results of Operations
For the Years Ended December 31, 2023 and 2022
Revenues
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.
45
The Company’s future revenues will be derived
from the following, among other things.
·
promote adoption if our patented technology through agency and distribution agreements;
·
cross-selling existing customer with products from other subsidiaries;
·
provide a wide array of diverse services, including enhanced or additional services that may become available in the future due to, among other things, advances in technology or improvements in our infrastructure;
·
pursue acquisitions of additional assets, in each case if available at attractive prices; and
·
market our products and services to new customers.
While the Company recognizes revenue when its
customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange
for those goods or services, the Company also maintains multiple contracts for future material revenues, including part of framework contracts
that will be recognized during future reporting periods.
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. The decrease
was primarily due to lower revenues achieved by Optilan, Wildlife, Remote and TJM Electronics West, Inc given capital and resources
restraints. The breakdown of revenues by entity for the years ended December 31, 2023 and 2022 is as follows:
Years Ended
2023
2022
Optilan
$ 1,583,435
$ 7,514,687
Wildlife
–
842,811
TJM
329,400
560,406
Remote Intelligence
–
140,490
TerraData
82,639
41,861
DarkPulse
25,497
–
$ 2,020,971
$ 9,100,255
Cost of Revenues and Gross Margin
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
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
margin.
46
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. The decrease
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,
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, 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.
During the
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, 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.
Net Loss
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
We require working capital to fund the continued
development and commercialization of our proprietary fiber optic sensing devices, and for operating expenses. During the year ended December
31, 2023, we had $ 3,297,272 in cash proceeds from our equity financings compared to $24,276,308 in 2022.
As of December 31, 2023, we had cash of $11,912
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 investors. Currently, loans from banks
or other lending sources for lines of credit or similar short-term borrowings are not available to us. We have been able to raise working
capital to fund operations through the issuances of convertible notes or obtained through the issuance of our restricted common stock.
As of December 31, 2023, our current liabilities exceeded our current assets by $18,126,281.
47
Several of our significant operating subsidiaries
have borrowed funds from DarkPulse. The terms of the instruments governing the indebtedness of these borrowers or borrowing groups may
restrict our ability to access their accumulated cash. In addition, our ability to access the liquidity of these and other subsidiaries
may be limited by tax, legal and other considerations.
Our executive officers and our Board of Directors
review our sources and potential uses of cash in connection with our annual budgeting process and whenever circumstances warrant. Generally
speaking, our principal funding source is cash from financing activities, and our principal cash requirements include loans to our operating
subsidiaries, operating expenses, and capital expenditures,
Cash Flows from Operating Activities
During the year ended December 31, 2023, net cash
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
of $102,350.
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.
Cash Flows from Financing Activities
During the year ended December 31, 2023, net cash
provided by financing activities was $3,632,387 which was primarily comprised of proceeds from the sale of common stock of $3,502,272
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 $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
Management’s Discussion and Analysis contains
information based on management’s beliefs and forward-looking statements that involve a number of risks, uncertainties, and assumptions.
There can be no assurance that actual results will not differ materially from the forward-looking statements as a result of various factors,
including but not limited to, our ability to obtain the equity funding or borrowings necessary to market and launch our products, our
ability to successfully serially produce and market our products; our success establishing and maintaining collaborative licensing and
supplier arrangements; the acceptance of our products by customers; our continued ability to pay operating costs; our ability to meet
demand for our products; the amount and nature of competition from our competitors; the effects of technological changes on products and
product demand; and our ability to successfully adapt to market forces and technological demands of our customers.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements
that have or are reasonably likely to have a current or future material effect on our consolidated financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity capital expenditures or capital resources.
48
Recent Accounting Pronouncements
In November 2021, the FASB issued ASU No. 2021-08,
Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers , issued
by the Financial Accounting Standards Board. This ASU requires entities to recognize and measure contract assets and contract liabilities
acquired in a business combination in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The update will
generally result in the recognition of contract assets and contract liabilities at amounts consistent with those recorded by the acquiree
immediately before the acquisition date rather than at fair value. The Company expects that there would be no material impact on the Company’s
consolidated financial statements upon the adoption of this ASU.
In August 2020, the FASB issued ASU 2020-06, which
simplifies the guidance on the issuer’s accounting for convertible debt instruments by removing the separation models for convertible
debt with a cash conversion feature and convertible instruments with a beneficial conversion feature. As a result, entities will not separately
present in equity an embedded conversion feature in such debt and will account for a convertible debt instrument wholly as debt, unless
certain other conditions are met. The elimination of these models will reduce reported interest expense and increase reported net income
for entities that have issued a convertible instrument that is within the scope of ASU 2020-06. ASU 2020-06 is applicable for fiscal years
beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. The Company
adopted ASU 2020-06 on January 1, 2022 and the adoption of this ASU did not have a material impact on the Company’s consolidated
financial statements and related disclosures.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.