Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

X		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended September 30, 2022

 

Or

 

☐		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the transition period from _______________________to___________________________

 

Commission File Number: 000-18730

 

DarkPulse, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware	87-0472109
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
815 Walker Street, Suite 1155, Houston, TX	77002
(Address of principal executive offices)	(Zip Code)

 

(800) 436-1436

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to section 12(b) of the Act:

 

Title of Each Class		Trading Symbol(s)		Name of each exchange on which registered
Not applicable		Not applicable		Not applicable

 

Indicate by check mark whether the registrant has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports).

Yes X No ☐

 

Indicate by check mark whether the registrant has been subject to such filing requirements for the past 90 days.

Yes X No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes X No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer,” "accelerated filer,” "smaller reporting company,” and "emerging growth company” in Rule 12b-2 of the Exchange Act.

 

	Large accelerated filer	☐	Accelerated filer	☐
	Non-accelerated filer	X	Smaller reporting company	X
			Emerging growth company	☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No X

 

The number of shares outstanding of the registrant’s common stock on November 4, 2022, was 6,176,390,489.

 

 

 

 

TABLE OF CONTENTS

 

 

PART I—FINANCIAL INFORMATION	3
Item 1. Financial Statements	3
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3. Quantitative and Qualitative Disclosures About Market Risk	33
Item 4. Controls and Procedures	33
PART II—OTHER INFORMATION	34
Item 1. Legal Proceedings	34
Item 1A. Risk Factors	35
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 6. Exhibits	36
SIGNATURES	37

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

DARKPULSE, INC.

Consolidated Balance Sheets

 

		September 30,
		2022 (unaudited)				December 31, 2021
ASSETS
CURRENT ASSETS:
Cash		$	5,967,984			$	3,658,846
Accounts receivable, net			3,531,244				4,223,990
Inventory			260,613				865,019
Unbilled revenue			319,025				497,773
Other current assets			868,597				181,000
TOTAL CURRENT ASSETS			10,947,463				9,426,628
NON-CURRENT ASSETS:
Property and equipment, net			1,712,950				1,787,824
Operating lease right-of-use assets			2,654,676				2,620,993
Patents, net			304,691				342,962
Intangible assets			3,098,379				3,886,588
Goodwill			15,286,010				17,088,501
Other assets, net			347,864				282,884
TOTAL NON-CURRENT ASSETS			23,404,570				26,009,752
TOTAL ASSETS		$	34,352,033			$	35,436,380
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities		$	4,048,227			$	7,844,271
Convertible notes, net			378,263				378,263
Notes payable			2,000,000				2,000,000
Customer deposits			1,907,404				2,802,809
Derivative liability			296,308				533,753
Contract liabilities			4,050,438				3,216,562
Operating lease liabilities - current			1,779,238				364,105
Other current liabilities			2,802,374				2,407,750
TOTAL CURRENT LIABILITIES			17,262,252				19,547,513
NON-CURRENT LIABILITIES:
Secured debenture			1,090,827				1,172,364
Operating lease liabilities – non-current			1,145,908				2,474,530
Other liabilities – non-current			582,240				676,331
TOTAL NON-CURRENT LIABILITIES			2,818,975				4,323,225
TOTAL LIABILITIES			20,081,227				23,870,738
Commitments and contingencies			–				–
STOCKHOLDERS’ EQUITY:
Preferred stock - Series A (par value $0.01; 100 shares authorized; 100 and 0 issued and outstanding at September 30, 2022 and December 31, 2021, respectively)			1				–
Convertible preferred stock - Series D (par value $0.01; 100,000 shares authorized; 88,235 issued and outstanding at September 30, 2022 and December 31, 2021, respectively)			883				883
Common stock (par value $0.0001), 20,000,000,000 shares authorized, 6,145,852,186 and 5,197,821,885 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively			614,586				519,782
Treasury stock, 100,000 shares at September 30, 2022 and December 31, 2021			(1,000	)			(1,000	)
Paid-in capital in excess of par value			44,148,174				20,248,703
Non-controlling interest in variable interest entity and subsidiary			2,358,227				2,358,227
Accumulated other comprehensive income			(3,198,065	)			(284,463	)
Accumulated deficit			(29,652,000	)			(11,276,490	)
TOTAL STOCKHOLDERS’ EQUITY			14,270,806				11,565,642
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	34,352,033			$	35,436,380

 

See accompanying notes to consolidated financial statements.

 

 

 

 

DARKPULSE, INC.

Consolidated Statements of Operations

(unaudited)

 

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2022				2021				2022				2021
REVENUE		$	1,431,104			$	3,500,970			$	7,884,480			$	3,500,970
COST OF GOODS SOLD			5,804,875				2,767,239				12,119,352				2,767,239
GROSS PROFIT			(4,373,771	)			733,731				(4,234,872	)			733,731
OPERATING EXPENSES:
Selling, general and administrative			1,498,717				406,940				3,579,326				531,793
Salaries, wages and payroll taxes			1,760,531				1,007,453				5,108,775				1,007,453
Professional fees			1,471,264				1,680,600				4,489,966				1,901,572
Depreciation and amortization			597,970				91,222				833,989				116,736
Debt transaction expenses			–				33,000				–				184,950
TOTAL OPERATING EXPENSES			5,328,482				3,219,215				14,012,056				3,742,504
NET OPERATING LOSS			(9,702,253	)			(2,485,484	)			(18,246,928	)			(3,008,773	)
OTHER INCOME (EXPENSE):
Interest income (expense)			168,846				(320,706	)			(349,758	)			(671,290	)
Gain on the forgiveness of debt			231,377				785,240				267,127				785,240
Restructuring costs			–				–				(501,431	)			–
Change in fair market of derivative liabilities			70,289				(251,133	)			237,445				76,363
Gain/(Loss) on convertible notes			–				432,893				–				741,789
Foreign currency exchange rate variance			426,073				152,361				218,039				152,360
TOTAL INCOME (EXPENSE)			896,585				798,655				(128,578	)			1,084,462
NET LOSS			(8,805,668	)			(1,686,829	)			(18,375,506	)			(1,924,311	)
Net loss attributable to noncontrolling interests in variable interest entity and subsidiary			92,571				15,838				(255,835	)			15,838
Net loss attributable to Company stockholders		$	(8,898,239	)		$	(1,702,667	)		$	(18,119,671	)		$	(1,940,149	)
LOSS PER SHARE:
Basic		$	(0.00	)		$	(0.00	)		$	(0.00	)		$	(0.00	)
Diluted		$	(0.00	)		$	(0.00	)		$	(0.00	)		$	(0.00	)
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic			5,840,449,453				4,835,935,495				5,539,124,247				4,679,197,410
Diluted			5,840,449,453				4,835,935,495				5,539,124,247				4,679,197,410

 

See accompanying notes to consolidated financial statements.

 

 

 

 

DARKPULSE, INC.

Consolidated Statements of Operations

(unaudited)

 

 

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2022				2021				2022				2021
NET LOSS		$	(8,805,668	)		$	(1,686,829	)		$	(18,375,506	)		$	(1,924,311	)
OTHER COMPREHENSIVE GAIN (LOSS)
Unrealized Gain (Loss) on Foreign Exchange			(1,956,159	)			26,539				(2,913,602	)			(7,524	)
COMPREHENSIVE LOSS		$	(10,761,827	)		$	(1,660,290	)		$	(21,289,108	)		$	(1,931,835	)

 

See accompanying notes to consolidated financial statements.

 

 

 

 

DARKPULSE, INC.

Consolidated Statement of Stockholders' Equity

For the Three Months Ended September 30, 2022 and 2021

(unaudited)

 

 

Preferred Stock, Series A

Preferred Stock, Series D

Common Stock

Treasury

Shares

Amount

Shares

Amount

Shares

Amount

Stock

Balance, December 31, 2021

–

$

–

88,235

$

883

–

–

5,197,821,885

$

519,782

$

(1,000

)

Common stock issued for cash

–

–

–

–

200,121,061

20,012

–

Foreign currency adjustment

–

–

–

–

–

–

–

Net loss

–

–

–

–

–

–

–

–

Balance, March 31, 2022

–

$

–

88,235

$

883

–

–

5,397,942,946

$

539,794

$

(1,000

)

Common stock issued for cash

–

–

–

–

192,488,404

19,250

–

Common stock issued for TerraData acquisition

–

–

–

–

3,725,386

373

–

Stock based compensation

100

1

–

–

–

–

–

Foreign currency adjustment

–

–

–

–

–

–

–

Net loss

–

–

–

–

–

–

–

–

Balance, June 30, 2022

100

$

1

88,235

$

883

–

–

5,594,156,736

$

559,417

$

(1,000

)

Common stock issued for cash

–

–

–

–

551,695,450

55,169

–

Foreign currency adjustment

–

–

–

–

–

–

–

Net loss

–

–

–

–

–

–

–

–

Balance, September 30, 2022

100

$

1

88,235

$

883

–

–

6,145,852,186

$

614,586

$

(1,000

)

 

 

		Paid in Capital in Excess of Par								Non- Controlling Interest in				Accumulated Other Comprehensive				Accumulated				Total Stockholders’
		Value								Subsidiary				Income				Deficit				Equity
Balance, December 31, 2021		$	20,248,703				–			$	2,358,227			$	(284,463	)		$	(11,276,490	)		$	11,565,642
Common stock issued for cash			7,679,988												–				–				7,700,000
Foreign currency adjustment			–				–				–				(219,569	)			–				(219,569	)
Net loss			–								–				–				(5,384,270	)			(5,384,270	)
Balance, March 31, 2022		$	27,928,691				–			$	2,358,227			$	(504,032	)		$	(16,660,760	)		$	13,661,803
Common stock issued for cash			4,696,625												–				–				4,715,875
Common stock issued for TerraData acquisition			199,627				–				–				–				–				200,000
Stock based compensation			(1	)							–				–				–				–
Foreign currency adjustment			–								–				(737,874	)			–				(737,874	)
Net loss			–								–				–				(4,185,572	)			(4,185,572	)
Balance, June 30, 2022		$	32,824,943				–			$	2,358,227			$	(1,241,906	)		$	(20,846,332	)		$	13,654,232
Common stock issued for cash			11,323,231												–				–				11,378,400
Foreign currency adjustment			–				–				–				(1,956,159	)			–				(1,956,159	)
Net loss			–								–				–				(8,805,668	)			(8,805,668	)
Balance, September 30, 2022		$	44,148,174				–			$	2,358,227			$	(3,198,065	)		$	(29,652,000	)		$	14,270,806

 

  

 

 

DARKPULSE, INC.

Consolidated Statement of Stockholders' Equity

For the Three Months Ended September 30, 2022 and 2021

(unaudited)

 

 

Preferred Stock

Common Stock

Treasury

Paid in Capital in Excess of Par

Shares

Amount

Shares

Amount

Stock

Value

Balance, December 31, 2020

–

–

–

–

88,235

$

883

4,088,762,156

$

408,876

$

(1,000

)

$

1,805,813

Conversion of convertible notes

–

–

600,999,995

60,100

–

189,839

Foreign currency adjustment

–

–

–

–

–

–

Net loss

–

–

–

–

–

–

–

–

Balance, March 31, 2021

–

–

–

–

88,235

$

883

4,689,762,151

$

468,976

$

(1,000

)

$

1,995,652

Conversion of convertible notes

–

–

20,565,040

2,057

–

124,863

Stock based loan acquisition cost

–

–

60,000,000

6,000

–

243,333

Foreign currency adjustment

–

–

–

–

–

–

Net loss

–

–

–

–

–

–

–

–

Balance, June 30, 2021

–

–

–

–

88,235

$

883

4,770,327,191

$

477,033

$

(1,000

)

$

2,363,848

Conversion of convertible notes

–

–

49,719,643

4,972

–

183,679

Issuance of common stock for public offering

–

–

84,727,527

8,473

–

7,991,527

Issuance of common stock for Wildlife Specialist acquisition

–

–

7,500,000

750

–

654,380

Issuance of common stock for Remote Intelligence acquisition

–

–

7,500,000

750

–

733,975

Share-based compensation

–

–

3,194,081

319

–

399,681

Distributions

–

–

–

–

–

–

Foreign currency adjustment - NCI

–

–

–

–

–

–

Foreign currency adjustment

–

–

–

–

–

–

Net loss

–

–

–

–

–

–

–

–

Balance, September 30, 2021

–

–

–

–

88,235

$

883

4,922,968,442

$

492,297

$

(1,000

)

$

12,327,090

 

  

						Non-Controlling Interest in				Accumulated Other Comprehensive				Accumulated				Total Stockholders’
		Distributions				Subsidiary				Income				Deficit				Deficit
Balance, December 31, 2020		$	–			$	(12,439	)		$	315,832			$	(6,450,170	)		$	(3,932,205	)
Conversion of convertible notes			–				–				–				–				249,939
Foreign currency adjustment			–				–				(17,909	)			–				(17,909	)
Net loss			–				–				–				(51,874	)			(51,874	)
Balance, March 31, 2021		$	–			$	(12,439	)		$	297,923			$	(6,502,044	)		$	(3,752,049	)
Conversion of convertible notes			–				–				–				–				126,920
Stock based loan acquisition cost			–				–				–				–				249,333
Foreign currency adjustment			–				–				(16,154	)			–				(16,154	)
Net loss			–				–				–				(185,607	)			(185,607	)
Balance, June 30, 2021		$	–			$	(12,439	)		$	281,769			$	(6,687,651	)		$	(3,577,557	)
Conversion of convertible notes			–				–				–				–				188,651
Issuance of common stock for public offering			–				–				–				–				8,000,000
Issuance of common stock for Wildlife Specialist acquisition			–				–				–				–				655,130
Issuance of common stock for Remote Intelligence acquisition			–				–				–				–				734,725
Share-based compensation			–				–				–				–				400,000
Distributions			(6,400	)			–				–				–				(6,400	)
Foreign currency adjustment - NCI			–				(21,674	)			–				–				(21,674	)
Foreign currency adjustment			–				–				(113,273	)			–				(113,273	)
Net loss			–				–				–				(1,686,829	)			(1,686,829	)
Balance, September 30, 2021		$	(6,400	)		$	(34,113	)		$	168,496			$	(8,374,480	)		$	4,572,773

 

 

See accompanying notes to consolidated financial statements. 

 

 

DARKPULSE, INC.

Consolidated Statements of Cash Flows

(unaudited)

		For the Nine Months Ended September 30,
		2022				2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(18,375,506	)		$	(1,924,311	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization			833,990				116,736
Amortization of loan acquisition costs			–				(480,450	)
Stock based loan acquisition costs			–				649,334
Gain on the extinguishment of debt			(267,127	)			(785,240	)
Restructuring costs			501,431				–
Operating lease expense			(33,683	)			(90,946	)
Amortization of debt discount			–				404,087
Derivative liability			(237,445	)			(741,789	)
Changes in operating assets and liabilities:
Accounts receivable			692,746				(893,366	)
Inventory			604,406				410,836
Unbilled revenue			178,748				(563,555	)
Contract liability			833,876				(1,439,504	)
Other current assets			(730,370	)			–
Customer deposits			(895,405	)			1,634,397
Accounts payable and accrued expenses			(2,949,406	)			(4,362,016	)
Operating lease liabilities			86,511				1,398,068
Other current liabilities			300,533				(778,874	)
Net cash used by operating activities			(19,456,701	)			(7,446,593	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment			(529,330	)			(78,662	)
Business acquisitions, net of cash received			–				(152,683	)
Deposits							(124,000	)
Investment in patents			(64,980	)			(191,420	)
Net cash used by investing activities			(594,310	)			(546,765	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock from offering			23,794,275				8,000,000
Proceeds from convertible notes payable			–				1,102,700
Payments on convertible notes							(384,600	)
Proceeds from notes payable			–				2,000,000
Net cash provided by financing activities			23,794,275				10,718,100
NET INCREASE (DECREASE) IN CASH			3,743,264				2,724,742
Effect of exchange rate on cash			(1,434,126	)			(160,587	)
CASH, beginning of period			3,658,846				337
CASH, end of period		$	5,967,984			$	2,564,492
Non-cash finance and investing activities for the nine months ended September 30:
Stock issued for acquisition of TerraData		$	200,000			$	–
Stock issued for convertible notes payable and accrued interest			–				181,560
Issuance of common stock for Wildlife Specialists							750
Issuance of common stock for Remote Intelligence							750
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the nine months ended September 30:
Interest		$	–			$	–
Income taxes		$	–			$	–

 

See accompanying notes to consolidated financial statements.

 

 

 

 

DARKPULSE, INC.

Notes to the Consolidated Financial Statements

(Unaudited)

 

NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

The accompanying unaudited condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial statements and do not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The information furnished reflects all adjustments, consisting only of normal recurring items which are, in the opinion of management, necessary in order to make the financial statements not misleading. The consolidated financial statements as of December 31, 2021 have been audited by an independent registered public accounting firm. The accounting policies and procedures employed in the preparation of these condensed consolidated financial statements have been derived from the audited financial statements of the Company for the year ended December 31, 2021, which are contained in Form 10-K as filed with the Securities and Exchange Commission on April 15, 2022. The consolidated balance sheet as of December 31, 2021 was derived from those financial statements. 

 

Basis of Presentation and Principles of Consolidation

 

The consolidated financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles of the United States of America ("U.S. GAAP”) and the rules and regulations of the U.S Securities and Exchange Commission for Interim Financial Information. The condensed consolidated financial statements of the Company include the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated. All adjustments (consisting of normal recurring items) necessary to present fairly the Company’s financial position as of September 30, 2022, and the results of operations for three and nine months and cash flows for the nine months ended September 30, 2022 have been included. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results to be expected for the full year.

 

Description of Business

 

DarkPulse, Inc. ("DPI” or "Company”) is a technology company incorporated in 1989 as Klever Marketing, Inc. ("Klever”). Its’ wholly-owned subsidiary, DarkPulse Technologies Inc. ("DPTI”), originally started as a technology spinout from the University of New Brunswick, Fredericton, Canada. The Company’s security and infrastructure monitoring systems have been installed into the Honcut Bridge in Marysville, California creating the first intelligent bridge. Additional applications of this technology will include border security, pipelines, the oil and gas industry, aviation & aerospace and mine safety. Current uses of fiber optic distributed sensor technology have been limited to quasi-static, long-term structural health monitoring due to the time required to obtain the data and its poor precision. The Company’s patented BOTDA dark-pulse sensor technology allows for the monitoring of highly dynamic environments due to its greater resolution and accuracy. 

 

The Company’s operating units consist of, Optilan HoldCo 3 Limited, a company headquartered in Coventry, United Kingdom ("Optilan”) whose focus is in telecommunications, energy, rail, critical network infrastructure, pipeline integrity systems, renewables and security; Remote Intelligence, Limited Liability Company, a company headquartered in Pennsylvania who provides unmanned aerial drone and unmanned ground crawler (UGC) services to a variety of clients from industrial mapping and ecosystem services, to search and rescue, to pipeline security; Wildlife Specialists, Limited Liability Company, a company headquartered in Pennsylvania who provides clients with comprehensive wildlife and environmental assessment, planning, and monitoring services; TerraData Unmanned, PLLC, a company headquartered in Florida who custom manufactures NDAA compliant drones and unmanned ground crawlers to meet the needs of its customers; and TJM Electronics West, Inc., a company headquartered in Arizona who is a U.S. manufacturer and tester of advanced electronics, cables and sub-assemblies specializing in advanced package and complex CCA and hardware.

 

 

 

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On April 27, 2018, Klever entered into an Agreement and Plan of Merger (the "Merger Agreement” or the "Merger”) involving Klever as the surviving parent corporation and acquiring a privately held New Brunswick corporation known as DarkPulse Technologies Inc. as its wholly owned subsidiary. On July 18, 2018, the parties closed the Merger Agreement, as amended on July 7, 2018, and the name of the Company was subsequently changed to DarkPulse, Inc. With the change of control of the Company, the Merger is being be accounted for as a recapitalization in a manner similar to a reverse acquisition.

 

On July 20, 2018, the Company filed a Certificate of Amendment to its Certificate of Incorporation with the State of Delaware, changing the name of the Company to DarkPulse, Inc. The Company filed a corporate action notification with the Financial Industry Regulatory Authority (FINRA), and the Company's ticker symbol was changed to DPLS.

  

Reclassifications

 

Certain amounts in the Company’s prior period consolidated financial statements have been reclassified to conform to the current period presentation. These reclassifications have not changed the results of operations of prior periods.

 

Going Concern Uncertainty

 

As shown in the accompanying financial statements, during the nine months ended September 30, 2022, the Company reported a net loss of $18,375,506. As of September 30, 2022, the Company’s current liabilities exceeded its current assets by $6,314,789. As of September 30, 2022, the Company had $5,967,984 of cash.

 

The Company will require additional funding during the next twelve months to finance the growth of its current operations and achieve its strategic objectives. These factors, as well as the uncertain conditions that the Company faces relative to capital raising activities, create substantial doubt as to the Company’s ability to continue as a going concern. The Company is seeking to raise additional capital principally through private placement offerings and is targeting strategic partners in an effort to finalize the development of its products and generate revenues. The ability of the Company to continue as a going concern is dependent upon the success of future capital offerings or alternative financing arrangements or expansion of its operations. The accompanying financial statements do not include any adjustments that might be necessary should the Company 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 through calendar year 2022. However, management cannot make any assurances that such financing will be secured.

 

Use of Estimates

 

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statements of financial condition, and revenues and expenses for the years then ended. Actual results may differ significantly from those estimates. Significant estimates made by management include, but are not limited to, the assumptions used to calculate stock-based compensation, derivative liabilities, preferred deemed dividend and common stock issued for services.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with a maturity of three months or less when acquired to be cash equivalents. The Company places its cash with high credit quality financial institutions. The Company’s account at this institution is insured by the Federal Deposit Insurance Corporation ("FDIC”) up to $250,000. To reduce its risk associated with the failure of such financial institution, the Company evaluates at least annually the rating of the financial institution in which it holds deposits.

 

 

 

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Foreign Currency Translation

 

The Company’s reporting currency is US Dollars. The accounts of one of the Company’s subsidiaries is maintained using the appropriate local currency, British Pound ("GBP”) as the functional currency. The accounts of one of the Company’s subsidiaries is maintained using the appropriate local currency, Canadian Dollar ("CAD”) as the functional currency. All assets and liabilities are translated into U.S. Dollars at balance sheet date, shareholders' equity is translated at historical rates and revenue and expense accounts are translated at the average exchange rate for the year or the reporting period. The translation adjustments are reported as a separate component of stockholders’ equity, captioned as accumulated other comprehensive (loss) gain. Transaction gains and losses arising from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the statements of operations.

 

The relevant translation rates are as follows: for the periods ended September 30, 2022 closing rate at 1.113030 USD:GBP, average rate at 1.259161 USD:GBP and for the year ended December 31, 2021 closing rate at 1.353583 USD: GBP, average rate at 1.375671 USD:GBP.

 

The relevant translation rates are as follows: for the periods ended September 30, 2022 closing rate at 1.3751 CAD:USD, average rate at 1.3213 CAD:USD and for the year ended December 31, 2021 closing rate at 1.2794 CAD:USD, average rate at 1.2534 CAD:USD.

 

Long-Lived Assets and Goodwill

 

In accordance with ASC 350-30-65, "Intangibles - Goodwill and Others”, the Company assesses the impairment of identifiable intangibles whenever events or changes in circumstances indicate that the carrying value may not be recoverable.

 

Factors the Company considers to be important which could trigger an impairment review include the following:

 

·

Significant underperformance relative to expected historical or projected future operating results;

 

·

Significant changes in the manner of use of the acquired assets or the strategy for the overall business; and

 

·

Significant negative industry or economic trends.

 

When the Company determines that the carrying value of intangibles may not be recoverable based upon the existence of one or more of the above indicators of impairment and the carrying value of the asset cannot be recovered from projected undiscounted cash flows, the Company records an impairment charge. The Company measures any impairment based on a projected discounted cash flow method using a discount rate determined by management to be commensurate with the risk inherent in the current business model. Significant management judgment is required in determining whether an indicator of impairment exists and in projecting cash flows.

 

Property and Equipment

 

Property and equipment are carried at historical cost less accumulated depreciation. Depreciation is based on the estimated service lives of the depreciable assets and is calculated using the straight-line method. Expenditures that increase the value or productive capacity of assets are capitalized. Fully depreciated assets are retained in the property and equipment, and accumulated depreciation accounts until they are removed from service. When property and equipment are retired, sold or otherwise disposed of, the asset’s carrying amount and related accumulated depreciation are removed from the accounts and any gain or loss is included in operations. Repairs and maintenance are expensed as incurred.

 

 

 

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The estimated useful lives of property and equipment are generally as follows:

Schedule of estimated useful lives
		Years
Office furniture and fixtures			4
Plant and equipment			4-8
Leasehold Improvements			10
Motor Vehicles			3

  

Revenue Recognition

 

The Company’s revenues are generated primarily from the sale of our products, which consist primarily of advanced technology solutions for integrated communications and security systems. 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 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.

 

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.

 

Contract liabilities is shown separately in the unaudited consolidated balance sheets as current liabilities. At September 30, 2022 and December 31, 2021, we had contract liabilities of $4,050,438 and $3,216,562, respectively.

 

 

 

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Cost of Product Sales and Services

 

Cost of sales consists primarily of materials, airtime and overhead costs incurred internally and amounts incurred to contract manufacturers to produce our products, airtime and other implementation costs incurred to install our products and train customer personnel, and customer service and third-party original equipment manufacturer costs to provide continuing support to our customers. There are certain costs which are deferred and recorded as prepaids, until such revenue is recognized. Refer to revenue recognition above as to what constitutes deferred revenue.

  

Concentration of Credit Risk

 

The Company has no significant concentrations of credit risk.

 

Related Parties

 

The Company accounts for related party transactions in accordance with ASC 850 ("Related Party Disclosures”). A party is considered to be related to the Company if the party directly or indirectly or through one or more intermediaries, controls, is controlled by, or is under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. A party which can significantly influence the management or operating policies of the transacting parties or if it has an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests is also a related party.

 

Leases

 

Effective January 1, 2019, the Company accounts for its leases under ASC 842, Leases. Under this guidance, arrangements meeting the definition of a lease are classified as operating or financing leases, and are recorded on the consolidated balance sheet as both a right of use asset and lease liability, calculated by discounting fixed lease payments over the lease term at the rate implicit in the lease or the Company’s incremental borrowing rate. Lease liabilities are increased by interest and reduced by payments each period, and the right of use asset is amortized over the lease term. For operating leases, interest on the lease liability and the amortization of the right of use asset result in straight-line rent expense over the lease term. For finance leases, interest on the lease liability and the amortization of the right of use asset results in front-loaded expense over the lease term. Variable lease expenses are recorded when incurred.

 

In calculating the right of use asset and lease liability, the Company has elected to combine lease and non-lease components. The Company excludes short-term leases having initial terms of 12 months or less from the new guidance as an accounting policy election, and recognizes rent expense on a straight-line basis over the lease term.

 

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.

 

 

 

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Restructuring Costs

 

The Company accounts for settlement of employment contracts and one-time salary expenses, such as severance, as restructuring costs when incurred due to specific restructuring event. For the quarter ended September 30, 2022, the Company recognized $501,431 related to the settlement of employment contracts and severance due to employment changes in our subsidiary, Optilan.

 

Beneficial Conversion Features

 

The Company evaluates the conversion feature for whether it was beneficial as described in ASC 470-30. The intrinsic value of a beneficial conversion feature inherent to a convertible note payable, which is not bifurcated and accounted for separately from the convertible note payable and may not be settled in cash upon conversion, is treated as a discount to the convertible note payable. This discount is amortized over the period from the date of issuance to the date the note is due using the effective interest method. If the note payable is retired prior to the end of its contractual term, the unamortized discount is expensed in the period of retirement to interest expense. In general, the beneficial conversion feature is measured by comparing the effective conversion price, after considering the relative fair value of detachable instruments included in the financing transaction, if any, to the fair value of the shares of common stock at the commitment date to be received upon conversion.

 

Fair Value of Financial Instruments

 

The carrying amounts of the Company's financial assets and liabilities, such as cash, prepaid expenses, and accruals approximate their fair values because of the short maturity of these instruments. The Company believes the carrying value of its secured debenture payable approximates fair value because the terms were negotiated at arm’s length.

 

Stock-based Compensation

 

Stock-based compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition in the consolidated financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.

 

Pursuant to ASC Topic 718, for share-based payments to consultants and other third-parties, compensation expense is determined at the "measurement date.” The expense is recognized over the vesting period of the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. The Company initially records compensation expense based on the fair value of the award at the reporting date. Further, ASC Topic 718, provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718, such as the repricing of share options, which would revalue those options and the accounting for the cancellation of an equity award whether a replacement award or other valuable consideration is issued in conjunction with the cancellation. If not, the cancellation is viewed as a replacement and not a modification, with a repurchase price of $0.

 

Income (Loss) Per Common Share

 

The Company accounts for earnings per share pursuant to ASC 260, Earnings per Share, which requires disclosure on the financial statements of "basic" and "diluted" earnings (loss) per share. Basic earnings (loss) per share are computed by dividing net income (loss) by the weighted average number of common shares outstanding for the year. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding plus common stock equivalents (if dilutive) related to stock options and warrants for each year. In periods where the Company has a net loss, all dilutive securities are excluded.

 

For the nine months ended September 30, 2022, there were no stock options outstanding. For the nine months ended September 30, 2022, common stock equivalents related to convertible preferred stock and convertible debt have not been included in the calculation of diluted loss per common share because they are anti-dilutive. Therefore, basic loss per common share is the same as diluted loss per common share. There are 28,316,441 common shares reserved for the potential conversion of the Company's convertible debt.

 

 

 

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Recently Issued Accounting Pronouncements

 

The Company has reviewed the accounting pronouncements issued during the nine months ended September 30, 2022 and concluded they were either not applicable or not expected to have a material impact on the Company’s condensed consolidated financial statements.

  

NOTE 2 – REVENUE

 

The following table is a summary of the Company’s timing of revenue recognition for the three and nine months ended September 30, 2022 and 2021:

Schedule of timing of revenue recognition
		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2022				2021				2022				2021
Timing of revenue recognition:
Services and products transferred at a point in time		$	1,431,104			$	3,500,970			$	7,884,480			$	3,500,970
Services and products transferred over time			–				–				–				–
Total revenue		$	1,431,104			$	3,500,970			$	7,884,480			$	3,500,970

 

The Company disaggregates revenue by source and geographic destination to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

 

Revenue by source consisted of the following for the three and nine months ended September 30, 2022 and 2021:

Schedule of revenue by source consisted
		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2022				2021				2022				2021
Revenue by products and services:
Products		$	154,534			$	1,533,377			$	1,246,610			$	1,533,377
Services			1,276,570				1,967,593				6,619,870				1,967,593
Total revenue		$	1,431,104			$	3,500,970			$	7,884,480			$	3,500,970

 

Revenue by geographic destination consisted of the following for the three and nine months ended September 30, 2022 and 2021:

Schedule of revenue by geographic destination
		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2022				2021				2022				2021
Revenue by geography:
North America		$	590,028			$	1,533,377			$	1,124,462			$	1,533,377
International			841,076				1,967,593				6,760,018				1,967,593
Total revenue		$	1,431,104			$	3,500,970			$	7,884,480			$	3,500,970

  

 

 

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Contract Balances

 

The Company records contract assets when it has a right to consideration and records accounts receivable when it has an unconditional right to consideration. Contract liabilities consist of cash payments received (or unconditional rights to receive cash) in advance of fulfilling performance obligations. As of September 30, 2022, the Company did not have a contract assets balance.

 

The following table is a summary of the Company’s opening and closing balances of contract liabilities related to contracts with customers.

Schedule of contract liabilities related to contracts with customers
		Total
Balance at December 31, 2021		$	3,216,562
Additions through advance billings to or payments from vendors			4,192,899
Revenue recognized from current period advance billings to or payments from vendors			(3,359,023	)
Balance at September 30, 2022		$	4,050,438

 

NOTE 3 – ACCOUNTS RECEIVABLE

 

Accounts receivable consisted of the following as of September 30, 2022 and December 31, 2021: 

Schedule of accounts receivable
		September 30,				December 31,
		2022				2021
Accounts receivable		$	3,531,244			$	4,223,990
Less: Allowance for doubtful accounts			–				–
Total accounts receivable		$	3,531,244			$	4,223,990

 

NOTE 4 – INVENTORY

 

Inventory consisted of the following as of September 30, 2022 and December 31, 2021: 

Schedule of inventory
		September 30,				December 31,
		2022				2021
Raw materials		$	162,835			$	416,180
Work in progress			54,182				436,891
Finished goods			43,596				11,948
Total inventory			260,613				865,019
Reserve			–				–
Total inventory, net		$	260,613			$	865,019

 

 

 

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NOTE 5 – PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following as of September 30, 2022 and December 31, 2021: 

Schedule of property, plant and equipment
		September 30,				December 31,
		2022				2021
Property and equipment		$	2,041,701			$	1,867,794
Leasehold improvements			46,934				42,396
			2,088,635				1,910,190
Less - accumulated depreciation			(375,685	)			(122,366	)
		$	1,712,950			$	1,787,824

 

NOTE 6 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consisted of the following as of September 30, 2022 and December 31, 2021:

Schedule of accounts payable and accrued liabilities
		September 30,				December 31,
		2022				2021
Accounts payable		$	3,288,094			$	7,209,945
Accrued liabilities			760,133				634,326
Total accounts payable and accrued expenses		$	4,048,227			$	7,844,271

 

NOTE 7 – LEASES

 

We adopted ASC 842 "Leases” using the modified retrospective approach, electing the practical expedient that allows us not to restate our comparative periods prior to the adoption of the standard on January 1, 2019. As such, the disclosures required under ASC 842 are not presented for periods before the date of adoption.

 

The following was included in our balance sheet as of September 30, 2022: 

Schedule of operating leases
Operating leases		September 30,  2022
Assets
ROU operating lease assets		$	2,654,676
Liabilities
Current portion of operating lease		$	1,779,238
Operating lease, net of current portion		$	1,145,908
Total operating lease liabilities		$	2,925,146

 

 

 

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The weighted average remaining lease term and weighted average discount rate at September 30, 2022 were as follows: 

Schedule of weighted average remaining lease term and weighted average discount rate
Weighted average remaining lease term (years)		September 30, 2022
Operating leases			7.53
Weighted average discount rate
Operating leases			6.00%

 

Operating Leases

 

On March 9, 2022, the Company entered into an operating lease agreement to rent office space in Houston, Texas. This ten-year agreement commenced March 9. 2022 with an annual rent of approximately $81,000 with the first twelve months rent free.

 

The following table reconciles future minimum operating lease payments to the discounted lease liability as of September 30, 2022: 

Schedule of future minimum operating lease payments
2022			122,777
2023			512,373
2024			497,411
2025			506,716
2026 and later			2,039,800
Total lease payments			3,679,077
Less imputed interest			(753,931	)
Total lease obligations			2,925,146
Less current obligations			(1,779,238	)
Long-term lease obligations		$	1,145,908

 

NOTE 8 – GOODWILL AND OTHER INTANGIBLE ASSETS

 

Goodwill

 

The following table sets forth the changes in the carrying amount of goodwill for the nine months ended September 30, 2022: 

Schedule of changes in carrying amount of goodwill
		Total
Balance at December 31, 2021		$	17,088,501
Exchange rate variation			(1,802,491	)
Balance at September 30, 2022		$	15,286,010

 

 

 

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Intangible Assets - Intrusion Detection Intellectual Property

 

The Company relies on patent laws and restrictions on disclosure to protect its intellectual property rights. As of September 30, 2022, the Company held three U.S. and foreign patents on its intrusion detection technology, which expire in calendar years 2025 through 2034 (depending on the payment of maintenance fees).

 

The DPTI issued patents cover a System and Method for Brillouin Analysis, a System and Method for Resolution Enhancement of a Distributed Sensor, and a Flexible Fiber Optic Deformation System Sensor and Method. Maintenance of intellectual property rights and the protection thereof is important to our business. Any patents that may be issued may not sufficiently protect the Company's intellectual property and third parties may challenge any issued patents. Other parties may independently develop similar or competing technology or design around any patents that may be issued to the Company. The Company cannot be certain that the steps it has taken will prevent the misappropriation of its intellectual property, particularly in foreign countries where the laws may not protect proprietary rights as fully as in the United States. Further, the Company may be required to enforce its intellectual property or other proprietary rights through litigation, which, regardless of success, could result in substantial costs and diversion of management's attention. Additionally, there may be existing patents of which the Company is unaware that could be pertinent to its business, and it is not possible to know whether there are patent applications pending that the Company's products might infringe upon, since these applications are often not publicly available until a patent is issued or published.

 

For the nine months ended September 30, 2022 and 2021, the Company amortized $38,271 and $38,271, respectively. Future amortization of intangible assets is as follows: 

Schedule of future amortization of intangible assets
2022		$	12,757
2023			51,028
2024			51,028
2025			51,028
2026			51,028
Thereafter			87,822
Total		$	304,691

 

NOTE 9 – DEBT AGREEMENTS

 

Secured Debenture

 

DPTI issued a convertible Debenture to the University in exchange for the Patents assigned to the Company, in the amount of Canadian $1,500,000, or US $1,491,923 on December 16, 2010, the date of the Debenture. On April 24, 2017 DPTI issued a replacement secured term Debenture in the same C$1,500,000 amount as the original Debenture. The interest rate is the Bank of Canada Prime overnight rate plus 1% per annum. The Debenture had an initial required payment of Canadian $42,000 (US$33,385) due on April 24, 2018 for reimbursement to the University of its research and development costs, and this has been paid. Interest-only maintenance payments are due annually starting after April 24, 2018. Payment of the principal begins on the earlier of (a) three years following two consecutive quarters of positive earnings before interest, taxes, depreciation and amortization, (b) six years from April 24, 2017, or (c) in the event DPTI fails to raise defined capital amounts or secure defined contract amounts by April 24 in the years 2018, 2019, and 2020. The Company has raised funds in excess of the amount required by April 24, 2018. The principal repayment amounts will be due yearly over a six-year period in the amount of Canadian Dollars $62,500. Based on the exchange rate between the Canadian Dollar and the U.S. Dollar on September 30, 2022, the quarterly principal repayment amounts will be US$49,750. The Debenture is secured by the Patents assigned by the University to DPTI by an Assignment Agreement on December 16, 2010. DPTI has pledged the Patents, and granted a lien on them pursuant to an Escrow Agreement dated April 24, 2017, between DPTI and the University.

 

 

 

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The Debenture was initially recorded at the $1,491,923 equivalent US Dollar amount of Canadian $1,500,000 as of December 16, 2010, the date of the original Debenture. The liability is being adjusted quarterly based on the current exchange value of the Canadian dollar to the US dollar at the end of each quarter. The adjustment is recorded as unrealized gain or loss in the change of the value of the two currencies during the quarter. The amounts recorded as an unrealized loss for the three months ended September 30, 2022 and 2021, were $74,538 and $26,539 respectively. These amounts are included in Accumulated Other Comprehensive Loss in the Equity section of the consolidated balance sheet, and as Unrealized Loss on Foreign Exchange on the consolidated statement of comprehensive loss. The Debenture also includes a provision requiring DPTI to pay the University a 2% royalty on sales of any and all products or services which incorporate the Patents for a period of five years from April 24, 2018.

 

For the nine months ended September 30, 2022, and 2021, the Company recorded interest expense of $36,307 and $39,001, respectively.

 

As of September 30, 2022 the debenture liability totaled $1,090,827, all of which was long term.

 

Future minimum required payments over the next 5 years and thereafter are as follows:

Schedule of future minimum debt payments
Period ending September 30,
2023		$	–
2024			–
2025			–
2026			–
2027 and after			1,090,827
Total		$	1,090,827

 

Convertible Debt Securities

 

The Company uses the Black-Scholes Model to calculate the derivative value of its convertible debt. The valuation result generated by this pricing model is necessarily driven by the value of the underlying common stock incorporated into the model. The values of the common stock used were based on the price at the date of issue of the debt security as of September 30, 2022. Management determined the expected volatility of 124.08%, a risk-free rate of interest of 4.05%, and contractual lives of the debt of three months. The table below details the Company's four outstanding convertible notes, with totals for the face amount, amortization of discount, initial loss, change in the fair market value, and the derivative liability.

Schedule of debt
		Face				Debt				Initial				Change				Derivative Balance
		Amount				Discount				Loss				in FMV				9/30/2022
		$	90,228			$	–			$	58,959			$	(16,827	)		$	68,965
			162,150				–				74,429				(30,240	)			123,938
			72,488				–				11,381				(13,519	)			55,405
			53,397				–				7,850				(9,706	)			48,000
Subtotal			378,263				–				152,619				(70,292	)			296,308
Transaction expense			–				–				–				–				–
		$	378,263			$	–			$	152,619			$	(70,292	)		$	296,308

 

As of September 30, 2022 and December 31, 2021 respectively, there was $378,263 and of convertible debt outstanding, net of debt discount of $0. As of September 30, 2022 and December 31, 2021 respectively, there was a derivative liability of $296,308 and $533,753 related to convertible debt securities.

 

 

 

20

 

 

NOTE 10 - STOCKHOLDERS' EQUITY

 

As of September 30, 2022, there were 6,145,852,186 shares of common stock and 88,335 shares of preferred stock issued and outstanding.

 

Preferred Stock

 

In accordance with the Company’s Certificate of Incorporation, the Company has authorized a total of 2,000,000 shares of preferred stock, par value $0.01 per share, for all classes. As of September 30, 2022, and December 31, 2021, there were 88,335 and 88,235, respectively total preferred shares issued and outstanding for all classes.

 

On June 22, 2022, the Board of Directors of the Company approved the filing of an amendment to the Company’s Certificate of Incorporation (the "Certificate of Incorporation”), in the form of a Certificate of Designation that authorized for issuance of up to 100 shares of a new series of Preferred Stock, par value $0.01 per share, of the Company designated "Series A Super Voting Preferred Stock” and established the rights, preferences and limitations thereof. The Board authorized the Series A Preferred Stock pursuant to the authority given to the Board under the Certificate of Incorporation, which authorizes the issuance of up to 2,000,000 shares of Preferred Stock, par value $0.01 per share, and authorizes the Board, by resolution, to establish any or all of the unissued shares of Preferred Stock, not then allocated to any series into one or more series and to fix and determine the designation of each such shares, the number of shares which shall constitute such series and certain preferences, limitations and relative rights of the shares of each series so established.

 

The holders of the Series A Preferred Stock shall be entitled to vote, on a pro-rata basis, on all matters subject to a vote or written consent of the holders of the Company’s Common Stock, and on all such matters, the shares of Series A Preferred Stock shall be entitled to that number of votes equal to the number of votes that all issued and outstanding shares of Common Stock and all other securities of the Company are entitled to, as of any such date of determination, on a fully diluted basis, plus one million (1,000,000) votes, it being the intention that the holders of the Series A Preferred Stock shall have effective voting control of the Company, on a fully diluted basis.

 

Unless approved by a majority vote of the holders of Common Stock, the Series A Super Voting Preferred Stock will terminate five years after the issuance date, which is June 24, 2027.

 

During the three months ended September 30, 2022, the Company issued 100 shares of Series A preferred stock.

 

Common Stock

 

In accordance with the Company’s bylaws, the Company has authorized a total of 20,000,000,000 shares of common stock, par value $0.0001 per share. As of September 30, 2022 and December 31, 2021, there were 6,145,852,186 and 5,197,821,885 common shares issued and outstanding.

 

During the three months ended September 30, 2022, the Company issued the following shares of common stock:

 

On July 1, 2022, the Company issued 33,525,465 shares of common stock for $556,750.

 

On July 11, 2022, the Company issued 32,756,532 shares of common stock for $556,750.

 

On July 20, 2022, the Company issued 29,386,519 shares of common stock for $556,750.

 

On July 28, 2022, the Company issued 35,884,040 shares of common stock for $556,750.

 

On August 10, 2022, the Company issued 44,505,857 shares of common stock for $680,110.

 

 

 

21

 

 

On August 18, 2022, the Company issued 54,574,909 shares of common stock for $948,863.

 

On August 25, 2022, the Company issued 105,255,759 shares of common stock for $2,264,961.

 

On August 30, 2022, the Company received 33,898,377 shares of common stock for cancellation from a previous note holder.

 

On September 2, 2022, the Company issued 140,073,757 shares of common stock for $3,000,000.

 

On September 14, 2022, the Company issued 79,092,686 shares of common stock for $1,757,466.

 

On September 30, 2022, the Company issued 30,538,303 shares of common stock for $500,000.

 

Stock Options

 

During the three months ended September 30, 2022, the Company did not issue any stock options and had no stock options outstanding at September 30, 2022.

 

Public Offerings

 

Financings

 

On November 9, 2021, we entered an Equity Financing Agreement (the "Equity Financing Agreement”) and Registration Rights Agreement (the "GHS Registration Rights Agreement”) with GHS, pursuant to which GHS agreed to purchase up to $30,000,000 in shares of our Common Stock, from time to time over the course of 24 months (the "Contract Period”) after effectiveness of a registration statement on Form S-1 (the "Registration Statement”) of the underlying shares of Common Stock.

 

The GHS Registration Rights Agreement provides that we shall (i) use our best efforts to file with the SEC a Registration Statement within 45 days of the date of the GHS Registration Rights Agreement; and (ii) have the Registration Statement declared effective by the SEC within 30 days after the date the GHS Registration Statement is filed with the SEC, but in no event more than 90 days after the GHS Registration Statement is filed.

 

Below is a table of all puts made by the Company under the Equity Financing Agreement during 2022: 

Schedule of equity financing agreement
Date of Put	Number of Shares Sold	Total Proceeds, Net of Discounts	Effective Price per Share	Net Proceeds
1/12/22	23,372,430	$1,150,000	$0.054124	$1,033,975
1/21/22	33,454,988	$1,150,000	$0.037812	$1,033,975
2/7/22	16,040,411	$500,000	$0.0342884	$448,975
3/23/22	29,257,395	$1,500,000	$0.056396	$1,348,975
4/11/22	23,746,816	$1,000,000	$0.04211091	$898,975
5/3/22	29,522,276	$1,000,000	$0.03387273	$898,975
5/13/22	26,100,979	$556,750	$0.0213306	$500,050
5/23/22	25,025,540	$556,750	$0.0222473	$500,050
6/1/22	25,901,921	$556,750	$0.02149454	$500,050
6/16/22	23,799,766	$402,086	$0.018584	$360,852

 

 

 

22

 

 

On February 21, 2022, we sold 75,798,921 shares of our Common Stock at $0.032982 per share for total consideration of $2,500,000.

 

On March 3, 2022, we sold 16,579,569 shares of our Common Stock at $0.0301576 per share for total consideration of $500,000.

 

On March 14, 2022, we sold 5,617,347 shares of our Common Stock at $0.071208 per share for total consideration of $400,000.

 

On May 27, we entered an Equity Financing Agreement (the "EFA”) and Registration Rights Agreement (the "RRA”) with GHS, pursuant to which GHS agreed to purchase up to $70,000,000 in shares of our Common Stock, from time to time over the course of 24 months after effectiveness of a registration statement on Form S-1 (the "Registration Statement”) of the underlying shares of Common Stock.

 

The RRA provides that we shall (i) use our best efforts to file with the SEC a Registration Statement within 45 days of the date of the GHS Registration Rights Agreement; and (ii) have the Registration Statement declared effective by the SEC within 30 days after the date the GHS Registration Statement is filed with the SEC, but in no event more than 90 days after the GHS Registration Statement is filed.

 

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

 

Date of Put	Number of Shares Sold	Total Proceeds, Net of Discounts	Effective Price per Share	Net Proceeds
6/24/22	38,391,106	$643,539	$0.01978	$578,160
7/1/22	33,525,465	$556,750	$0.019596	$500,050
7/11/22	32,756,532	$556,750	$0.01699661	$550,050
7/20/22	29,386,519	$556,750	$0.01894558	$550,050
7/28/22	35,884,040	$556,750	$0.018308	$500,050
8/10/22	44,505,857	$680,109	$0.015281	$611,073
8/18/22	54,574,909	$948,863	$0.017386441	$852,952
8/25/22	105,255,759	$2,264,961	$0.021518644	$2,128,038
9/2/22	140,073,757	$3,000,000	$0.021417288	$2,788,975
9/14/22	79,092,686	$1,757,466	$0.022220339	$1,757,466
9/30/22	30,538,303	$500,000	$0.0163729	$463,975

 

NOTE 11 – RELATED PARTY TRANSACTIONS

 

The Company follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions. Pursuant to Section 850-10-20 the related parties include a) affiliates of the Company; b) Entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825-10-15, to be accounted for by the equity method by the investing entity; c) trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; d) principal owners of the Company; e) management of the Company; f) other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and g) Other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests. The financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall include: a) the nature of the relationship(s) involved; b) a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; c) the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and d) amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.

 

During the nine months ended September 30, 2022 and 2021, certain executives of the Company received $270,000 in Directors fees from Optilan for being members of Optilan’s Board of Directors with an additional $90,000 accrued but unpaid.

 

 

 

23

 

 

NOTE 12 - COMMITMENTS & CONTINGENCIES

 

Potential Royalty Payments

 

The Company, in consideration of the terms of the debenture to the University of New Brunswick, shall pay to the University a two percent royalty on sales of any and all products or services which incorporate the Company's patents for a period of five years from April 24, 2018.

 

Legal Matters

  

DarkPulse, Inc. v. Twitter, Inc.

 

As disclosed in greater detail in the Company’s Form 10-K, filed April 15, 2022, the Company’s investigation of the Investor News matter remains ongoing.

 

On October 21, 2022, the Company filed a petition against Twitter, Inc. in the Supreme Court of the State of New York County of New York to compel disclosure of the owner(s) and operator(s) of two certain Twitter accounts: "Mike Wood” (@MIKEWOOD) and "Bull Meechum” (@BullMeechum3). The petition seeks disclosure of the owner(s) and operator(s) of the aforementioned accounts so the Company can commence an action against such individuals for damages arising from false, misleading, and untrue statements made by the same.

 

On October 25, 2022, the court signed an order to show cause directing Twitter to show cause on or before November 4, 2022 as to why an order compelling disclosure of the identities of the owner(s) / operator(s) of the @MIKEWOOD and @BullMeechum3 Twitter accounts should not be made.

 

Carebourn Capital, L.P. v. DarkPulse, Inc.

 

As disclosed in greater detail in the Company’s Form 10-Q, filed August 10, 2022, the Company remains in active litigation with Carebourn Capital, L.P. ("Carebourn”) in Minnesota State Court. There are no material updates to this litigation.

 

The Company remains committed to actively litigating its affirmative defenses and claims for relief under the Securities Exchange Act of 1934.

 

More Capital, LLC v. DarkPulse, Inc. et al

 

As disclosed in greater detail in the Company’s Form 10-Q, filed August 10, 2022, the Company remains in active litigation with More Capital, LLC ("More”) in Minnesota State Court. There are no material updates to this litigation.

 

The Company remains committed to actively litigating its affirmative defenses and claims for relief under the Securities Exchange Act of 1934.

 

Goodman et al. v. DarkPulse, Inc.

 

As disclosed in greater detail in the Company’s Form 10-Q, filed November 15, 2021, on September 10, 2021, Stephen Goodman, Mark Banash, and David Singer ("Former Officers”) commenced suit against the Company in Arizona Superior Court, Maricopa County.

 

As of the date hereof, the Company is engaged in settlement negotiations with the Former Officers.

 

 

 

24

 

 

DarkPulse, Inc. v. FirstFire Global Opportunities Fund, LLC, and Eli Fireman

 

As disclosed in greater detail in the Company’s Form 10-Q, filed August 10, 2022, the Company remains in active litigation with FirstFire Global Opportunities Fund, LLC ("FirstFire”), and Eli Fireman ("Fireman”) (FirstFire and Fireman together, the "FirstFire Parties”).

 

As previously disclosed therein, the FirstFire Parties’ motion to dismiss the Company’s first amended complaint has been fully submitted to the Court. On May 26, 2022, the FirstFire Parties requested oral arguments on their motion to dismiss. As of the date hereof, oral arguments have not been scheduled and, further, no decision has been rendered on the FirstFire Parties’ motion to dismiss.

 

The Company remains committed to actively litigating its claims for relief under the Securities Exchange Act of 1934.

 

DarkPulse, Inc. v. EMA Financial, LLC et al

 

As disclosed in greater detail in the Company’s Form 10-Q, filed August 10, 2022, the Company remains in active litigation with EMA Financial, LLC ("EMA”), EMA Group, Inc. ("EMA Group”), and Felicia Preston ("Preston”) (EMA, EMA Group, and Preston together, the "EMA Parties”).

 

As of July 22, 2022, the EMA Parties’ motion to dismiss the Company’s first amended complaint is fully submitted. As of the date hereof, no decision has been rendered on the EMA Parties’ motion to dismiss.

 

The Company remains committed to actively litigating its claims for relief under the Securities Exchange Act of 1934 and Racketeer Influenced and Corrupt Organizations Act.

 

From time to time, we may become involved in litigation relating to claims arising out of our operations in the normal course of business. We are not currently involved in any pending legal proceeding or litigation and, to the best of our knowledge, no governmental authority is contemplating any proceeding to which we are a party or to which any of our properties is subject, which would reasonably be likely to have a material adverse effect on our business, financial condition and operating results.

 

NOTE 13 – SUBSEQUENT EVENTS

 

On October 12, 2022 the Company entered into and closed the Purchase Agreement pursuant to which the Company purchased 2,623,120 shares of Class B Common Stock and 4,298,496 Private Placement Warrants, each of which is exercisable to purchase one share of Class A Common Stock of Gladstone Acquisition Corp., a Delaware corporation (NASDAQ: GLEE) (the "SPAC"), from Gladstone Sponsor, LLC ("Original Sponsor") for $1,500,000 (the "Purchase Price”).

 

In addition to the payment of the Purchase Price, the Company also assumed the following obligations: (i) responsibility for all of SPAC’s public company reporting obligations, (ii) the right to provide an extension payment and extend the deadline of the SPAC to complete an initial business combination from 15 months from August 9, 2021 to 18 months for an additional $1,150,000, and (iii) all other obligations and liabilities of the Original Sponsor related to the SPAC.

 

On October 14, 2022, the Company and GHS agreed that the Company would issue and sell to GHS, and GHS would purchase from the Company, 30,538,303 shares of Common Stock for total proceeds to the Company, net of discounts, of $500,000, at an effective price of $0.0140339 per share (the "Closing”). The Company received approximately $463,975 in net proceeds from the Closing after deducting the fees and other estimated offering expenses payable by the Company. The Company used the net proceeds from the Closing for working capital and for general corporate purposes.

 

 

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations contain certain forward-looking statements. Historical results may not indicate future performance. Our forward-looking statements reflect our current views about future events; are based on assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those contemplated by these statements. Factors that may cause differences between actual results and those contemplated by forward-looking statements include, but are not limited to, those discussed in the "Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2021. We undertake no obligation to publicly update or revise any forward-looking statements, including any changes that might result from any facts, events, or circumstances after the date hereof that may bear upon forward-looking statements. Furthermore, we cannot guarantee future results, events, levels of activity, performance, or achievements

 

Critical Accounting Policies

 

The following discussions are based upon our financial statements and accompanying notes, which have been prepared in accordance with accounting principles generally accepted in the United States.

 

The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingencies. We continually evaluate the accounting policies and estimates used to prepare the financial statements. We base our estimates on historical experiences and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by management.

 

Business Overview

 

DarkPulse, Inc., a Delaware corporation (the "Company” 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 dark-pulse technology (the "DarkPulse Technology”), DarkPulse provides its customers a comprehensive data stream of critical metrics for assessing the health and security of their infrastructure. Our systems provide rapid, precise analysis and responsive activities predetermined by the end-user customer. The Company’s activities since inception have consisted of developing various solutions, obtaining patents and trademarks related to its technology, raising capital, acquisition of companies deemed to expand global operations and/or capabilities, creating key partnerships to expand our suite of products and services. Our activities have evolved to a sales-focused mission since the successful completion of our BOTDA system in December 2020.

 

Headquartered in Houston, DarkPulse is a globally-based technology company with presence through its subsidiaries in the United Kingdom, India, Dubai, Abu Dhabi, Turkey, Azerbaijan, Iraq, Libya, Egypt, Brazil, United States and Canada. In addition to the Company’s BOTDA systems, through a series of strategic acquisitions the Company offers the manufacture, sale, installation, and monitoring of laser sensing systems, oil and gas pipeline leak detection, physical security services, telecommunications and satellite communications services, artificial intelligence-based camera systems, railway monitoring services, drone and rover systems, and Big Data as a Service ("BDaaS”). The Company is focused on expanding services through acquisitions and partnerships to address global infrastructure and critical environmental resource challenges.

 

 

 

 

DarkPulse offers a full suite of engineering and environmental solutions that provide safety and security infrastructure projects. The sensing and monitoring capabilities offered by DarkPulse and our subsidiary companies operate in the air, land, sea. Our patented technology provides rapid, precise analysis to protect and safeguard oil and gas pipelines above or below ground, physical security countermeasures, mining operations, and other critical infrastructure/key resources subject to vulnerability or risk. Our patented brillouin scattering distributed fiber sensing system is best in class. The Company is able to monitor areas in around critical infrastructure buried or above ground including pipelines 100km or more in length and/ or localized pipes as small as eight CM DIA, detecting internal anomalies before catastrophic failure. We are developing an intelligent rock bolt to prevent causalities and fatalities in mining operations and include a real time sensor system that can detect the location and movement of personnel and equipment throughout a mining operation. We monitor airflow, air quality, temperature, seismic events, etc. Our sensors cover extended areas, protecting an area from intrusion by detecting events at any location along the sensing cable. Working safely every day is our first core value and employees at DarkPulse and our subsidiary companies are recognized experts in their fields, providing comprehensive services for all our clients' needs.

 

Our Operating Units

 

The Company’s operating units consist of, Optilan, a company headquartered in Coventry, United Kingdom whose focus is in telecommunications, energy, rail, critical network infrastructure, pipeline integrity systems, renewables and security; Remote Intelligence, Limited Liability Company, a company headquartered in Pennsylvania who provides unmanned aerial drone and unmanned ground crawler (UGC) services to a variety of clients from industrial mapping and ecosystem services, to search and rescue, to pipeline security; Wildlife Specialists, Limited Liability Company, a company headquartered in Pennsylvania who provides clients with comprehensive wildlife and environmental assessment, planning, and monitoring services; TerraData Unmanned, PLLC, a company headquartered in Florida who custom manufactures NDAA compliant drones and unmanned ground crawlers to meet the needs of its customers; and TJM Electronics West, Inc., a company headquartered in Arizona who is a U.S. manufacturer and tester of advanced electronics, cables and sub-assemblies specializing in advanced package and complex CCA and hardware.

 

Recent Events

 

Financings

 

On November 9, 2021, we entered an Equity Financing Agreement (the "Equity Financing Agreement”) and Registration Rights Agreement (the "GHS Registration Rights Agreement”) with GHS, pursuant to which GHS agreed to purchase up to $30,000,000 in shares of our Common Stock, from time to time over the course of 24 months (the "Contract Period”) after effectiveness of a registration statement on Form S-1 (the "Registration Statement”) of the underlying shares of Common Stock.

 

The GHS Registration Rights Agreement provides that we shall (i) use our best efforts to file with the SEC a Registration Statement within 45 days of the date of the GHS Registration Rights Agreement; and (ii) have the Registration Statement declared effective by the SEC within 30 days after the date the GHS Registration Statement is filed with the SEC, but in no event more than 90 days after the GHS Registration Statement is filed.

 

Below is a table of all puts made by the Company under the Equity Financing Agreement during 2022:

 

Date of Put	Number of Shares Sold	Total Proceeds, Net of Discounts	Effective Price per Share	Net Proceeds
1/12/22	23,372,430	$1,150,000	$0.054124	$1,033,975
1/21/22	33,454,988	$1,150,000	$0.037812	$1,033,975
2/7/22	16,040,411	$500,000	$0.0342884	$448,975
3/23/22	29,257,395	$1,500,000	$0.056396	$1,348,975
4/11/22	23,746,816	$1,000,000	$0.04211091	$898,975
5/3/22	29,522,276	$1,000,000	$0.03387273	$898,975
5/13/22	26,100,979	$556,750	$0.0213306	$500,050
5/23/22	25,025,540	$556,750	$0.0222473	$500,050
6/1/22	25,901,921	$556,750	$0.02149454	$500,050
6/16/22	23,799,766	$402,086	$0.018584	$360,852

 

 

 

 

On February 21, 2022, we sold 75,798,921 shares of our Common Stock at $0.032982 per share for total consideration of $2,500,000.

 

On March 3, 2022, we sold 16,579,569 shares of our Common Stock at $0.0301576 per share for total consideration of $500,000.

 

On March 14, 2022, we sold 5,617,347 shares of our Common Stock at $0.071208 per share for total consideration of $400,000.

 

On May 27, we entered an Equity Financing Agreement (the "EFA”) and Registration Rights Agreement (the "RRA”) with GHS, pursuant to which GHS agreed to purchase up to $70,000,000 in shares of our Common Stock, from time to time over the course of 24 months after effectiveness of a registration statement on Form S-1 (the "Registration Statement”) of the underlying shares of Common Stock.

 

The RRA provides that we shall (i) use our best efforts to file with the SEC a Registration Statement within 45 days of the date of the GHS Registration Rights Agreement; and (ii) have the Registration Statement declared effective by the SEC within 30 days after the date the GHS Registration Statement is filed with the SEC, but in no event more than 90 days after the GHS Registration Statement is filed.

 

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

 

Date of Put	Number of Shares Sold	Total Proceeds, Net of Discounts	Effective Price per Share	Net Proceeds
6/24/22	38,391,106	$643,539	$0.01978	$578,160
7/1/22	33,525,465	$556,750	$0.019596	$500,050
7/11/22	32,756,532	$556,750	$0.01699661	$550,050
7/20/22	29,386,519	$556,750	$0.01894558	$550,050
7/28/22	35,884,040	$556,750	$0.018308	$500,050
8/10/22	44,505,857	$680,109	$0.015281	$611,073
8/18/22	54,574,909	$948,863	$0.017386441	$852,952
8/25/22	105,255,759	$2,264,961	$0.021518644	$2,128,038
9/2/22	140,073,757	$3,000,000	$0.021417288	$2,788,975
9/14/22	79,092,686	$1,757,466	$0.022220339	$1,757,466
9/30/22	30,538,303	$500,000	$0.0163729	$463,975

 

Going Concern Uncertainty

 

As shown in the accompanying financial statements, during the nine months ended September 30, 2022, the Company reported a net loss of $18,375,506. As of September 30, 2022, the Company’s current liabilities exceeded its current assets by $6,314,789. As of September 30, 2022, the Company had $5,967,984 of cash.

 

We will require additional funding to finance the growth of our operations and achieve our strategic objectives. These factors, as relative to capital raising activities, create doubt as to our ability to continue as a going concern. We are seeking to raise additional capital and are targeting strategic partners in an effort to accelerate the sales and marketing of our products and begin generating revenues. Our ability to continue as a going concern is dependent upon the success of future capital offerings or alternative financing arrangements, expansion of our operations and generating sales. The accompanying financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern. Management is actively pursuing additional sources of financing sufficient to generate enough cash flow to fund its operations; however, management cannot make any assurances that such financing will be secured.

 

 

 

 

Foreign Currency Risk

 

In general, the Company is a net receiver of currencies other than the U.S. dollar. Accordingly, changes in exchange rates, and in particular a strengthening of the U.S. dollar, will negatively affect the Company’s net sales and gross margins as expressed in U.S. dollars. There is a risk that the Company will have to adjust local currency product pricing due to competitive pressures when there has been significant volatility in foreign currency exchange rates.

 

Results of Operations

 

Revenues

 

During previous years, the Company experienced no revenue as it developed its technology. More recently, we have experienced revenue derived from the acquisitions of our subsidiaries from the 3^rd quarter of 2021 to the present. The Company’s new revenues are derived from the following, among other things:

 

·

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;

 

·

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

 

·

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 three months ended September 30, 2022, total revenues were $1,431,104 compared to $3,500,970 for the same period in 2021, a decrease of $2,069,866. This decrease primarily consisted of revenues of $841,876 from Optilan, $385,529 from Wildlife Specialists and $139,225 from TJM Electronics as well as $64,474 from the remaining subsidiaries.

 

For the nine months ended September 30, 2022, total revenues were $7,884,480 compared to $3,500,970 for the same period in 2021, an increase of $4,383,510. This increase primarily consisted of revenues of $6,760,818 from Optilan, $589,986 from Wildlife Specialists and $434,459 from TJM Electronics as well as $99,217 from the remaining subsidiaries.

 

 

 

 

Cost of Goods Sold and Gross Margin

 

For the three months ended September 30, 2022, cost of goods sold were $5,804,875 compared to $2,767,239 for the same period in 2021, an increase of $3,037,636. This increase primarily consisted of $2,500,000 of additional cost of goods sold related to a contract with National Grid (which was entered into prior to the Company’s acquisition of Optilan and valued at £25,411,720) that the Company’s subsidiary, Optilan, is in the final stages of completing after more than five years. The project took significantly longer to complete than originally quoted and unfortunately there was very little foresight to the magnitude of the loss. The Company believes that this is not a recurring issue with Optilan and/or its business model, but more specifically related to the factors surrounding this project which included but not limited to initial issues with the quote and the associated agreement, delays due to Covid-19 and current inflation rates. The Company has taken internal procedures during its bid process to assure that such practuces will not occur in the future.

 

For the nine months ended September 30, 2022, cost of goods sold were $12,119,352 compared to $2,767,239 for the same period in 2021, an increase of $9,352,113. This increase primarily consisted of $2,500,000 of additional cost of goods sold related to a contract with National Grid (which was entered into prior to the Company’s acquisition of Optilan and valued at £25,411,720) that the Company’s subsidiary, Optilan, is in the final stages of completing after more than five years. The project took significantly longer to complete than originally quoted and unfortunately there was very little foresight to the magnitude of the loss. The Company believes that this is not a recurring issue with Optilan and/or its business model, but more specifically related to the factors surrounding this project which included but not limited to initial issues with the quote and the associated agreement, delays due to Covid-19 and current inflation rates. The Company has taken internal procedures during its bid process to assure that such practuces will not occur in the future.

 

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

 

Gross margin for the nine months ended September 30, 2022 was $(4,234,872) with a gross loss margin of (677.2)% compared to $733,731 for the same period in 2021 with a gross margin of 21.0%.

 

Operating Expenses

 

Selling, general and administrative expenses for three months ended September 30, 2022 increased by $1,091,777, or 268,.3%, to $1,498,717 from $406,940 for the three months ended September 30, 2021. The increase primarily consisted of an increase to the operations from our various acquisitions.

 

Selling, general and administrative expenses for nine months ended September 30, 2022 increased by $3,047,533, or 573.1%, to $3,579,326 from $531,793 for the nine months ended September 30, 2021. The increase primarily consisted of an increase to the operations from our various acquisitions.

 

Payroll related expenses for three months ended September 30, 2022, increased to $1,760,531 from $1,007,453 for the three months ended September 30, 2021. The increase primarily consisted of an increase to the numbers of employees inherited from our various acquisitions.

 

Payroll related expenses for nine months ended September 30, 2022, increased to $5,108,775 from $1,007,453 for the nine months ended September 30, 2021. The increase primarily consisted of an increase to the numbers of employees inherited from our various acquisitions.

 

Professional fees for the three months ended September 30, 2022, decreased by $209,636 to $1,471,264 from $1,680,600 for the three months ended September 30, 2021. This decrease primarily consisted of decreased legal expenditures associated with the current decrease in litigation activity.

 

Professional fees for the nine months ended September 30, 2022, increased by $2,588,394 to $4,489,966 from $1,901,572 for the nine months ended September 30, 2021. This increase primarily consisted of increased legal expenditures associated with the increase in litigation.

 

 

 

 

Depreciation and amortization for three months ended September 30, 2022, increased by $506,748 to $597,970 from $91,222 for the three months ended September 30, 2021. This increase is primarily due to the increase in the depreciable assets we acquired from new acquisitions in other countries.

 

Depreciation and amortization for nine months ended September 30, 2022, increased by $717,253 to $833,989 from $116,736 for the nine months ended September 30, 2021. This increase is primarily due to the increase in depreciable assets we acquired from new acquisitions.

 

Other Income (Expense)

 

For the three months ended September 30, 2022, we had other expense of $896,585 compared to other expense of $798,655 for the same period in 2021, an increase in expense of $97,930. This increase in other income primarily consisted of a $70,289 decrease in the fair value of the Company’s derivative instruments, $426,073 of loss on foreign currency exchange rate variance, and a decrease in interest expense of $489,552 due to changes in borrowings associated with acquisitions.

 

For the nine months ended September 30, 2022, we had other income of $128,578 compared to other expense of $1,084,462 for the same period in 2021, a decrease in expense of $1,213,040. This increase in other income primarily consisted of changes of $501,431 of restructuring costs, $237,445 increase in the fair value of the Company’s derivative instruments, $218,039 of loss on foreign currency exchange rate variance, an decrease in interest expense of $321,532 due to changes in borrowings associated with acquisitions.

 

Net Loss

 

As a result of the above, we reported a net loss of $8,805,668 and $1,686,829 for the three months ended September 30, 2022 and 2021, respectively.

 

As a result of the above, we reported a net loss of $18,375,506 and $1,924,311 for the nine months ended September 30, 2022 and 2021, respectively.

 

Liquidity and Capital Resources

 

We require working capital to fund the continued development and commercialization of our proprietary fiber optic sensing devices, and for operating expenses. During the three months ended September 30, 2022, we had $11,378,400 in new cash proceeds compared to the three months ended September 30, 2021, when we had no new cash proceeds.

 

As of September 30, 2022, we had cash of $5,967,984, compared to $2,564,492 as of September 30, 2021. We currently do not have sufficient cash to fund our operations for the next 12 months and we will require working capital to complete development, testing and marketing of our products and to pay for ongoing operating expenses. We anticipate adding consultants for technology development and the corresponding operations of the Company, but this will not occur prior to obtaining additional capital. Management is currently in the process of looking for additional investors. Currently, loans from banks or other lending sources for lines of credit or similar short-term borrowings are not available to us. We have been able to raise working capital to fund operations through the issuances of convertible notes or obtained through the issuance of our restricted common stock. As of September 30, 2022, our current liabilities exceeded our current assets by $6,314,789.

 

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,

 

For the remaining 12 month period ending September 30, 2023, we project that our subsidiaries will begin to operate with their own operating activities and reduce their dependency on the financing activities of DarkPulse.

 

For additional information, see "Risk Factors—Financial Risks" in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2021.

 

Cash Flows From Operating Activities

 

During the nine months ended September 30, 2022, net cash used by operating activities was $19,456,701, resulting from our net loss of $18,375,506 and an increase in expenses related to our inventory of $604,406 and operating lease liabilities of $86,511. These increases were offset by a decrease in derivative liability of $237,445, increase in accounts payable and accrued expenses of $2,949,406 and an increase from restructuring costs of $501,431, decrease in accounts receivable of $692,746, decrease in unbilled revenue of $178,748 and decrease in contract liability of $833,876.

 

By comparison, during the nine months ended September 30, 2021, net cash used by operating activities was $7,446,593, resulting from our net loss of $1,924,311 partially offset by an increase in non-cash expenses of stock based loan acquisition costs of $649,334 and the amortization of debt discount of $404,087 offset by gain on the extinguishment of debt of $785,240 and increases in accounts payable and accrued liabilities of $4,362,016 and contract liability of $1,439,504

 

Cash Flows From Investing Activities

 

During the nine months ended September 30, 2022, we had net cash used in investing activities of $594,310. During the nine months ended September 30, 2021, net cash used by investing activities was $546,765.

 

Cash Flows From Financing Activities

 

During the nine months ended September 30, 2022, net cash provided by financing activities was $23,794,275 which was comprised of proceeds from the sale of common stock from offering of $23,794,275. During the nine months ended September 30, 2021, net cash used by financing activities was $10,718,100, which was comprised of proceeds from the sale of common stock from offering of $8,000,000, proceeds from issuance of convertible notes payable of $1,102,700 and proceeds from notes payable of $2,000,000 less repayment of notes payable of $384,600.

 

Factors That May Affect Future Results

 

Management’s Discussion and Analysis contains information based on management’s beliefs and forward-looking statements that involve a number of risks, uncertainties, and assumptions. There can be no assurance that actual results will not differ materially from the forward-looking statements as a result of various factors, including but not limited to, our ability to obtain the equity funding or borrowings necessary to market and launch our products, our ability to successfully serially produce and market our products; our success establishing and maintaining collaborative licensing and supplier arrangements; the acceptance of our products by customers; our continued ability to pay operating costs; our ability to meet demand for our products; the amount and nature of competition from our competitors; the effects of technological changes on products and product demand; and our ability to successfully adapt to market forces and technological demands of our customers.

 

 

 

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our consolidated financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity capital expenditures or capital resources.

 

Recent Accounting Pronouncements

 

We have provided a discussion of recent accounting pronouncements in Note 1 to the Condensed Financial Statements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

As a smaller reporting company, the Company has elected not to provide the disclosure required by this item.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

We have established disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports filed or submitted under the Securities Exchange Act of 1934, as amended (the "Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and, as such, is accumulated and communicated to our Chief Executive Officer, Dennis O’Leary, who serves as our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Mr. O’Leary, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act, as of September 30, 2022. Based on his evaluation, Mr. O’Leary concluded that the Company’s disclosure controls and procedures were not effective as of September 30, 2022.

 

Changes in Internal Control Over Financial Reporting

 

There has been no change in the Company’s internal control over financial reporting, as defined in Rules 13a-15(f) of the Exchange Act, during our quarter ended September 30, 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

 

PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings 

 

DarkPulse, Inc. v. Twitter, Inc.

 

As disclosed in greater detail in the Company’s Form 10-K, filed April 15, 2022, the Company’s investigation of the Investor News matter remains ongoing.

 

On October 21, 2022, the Company filed a petition against Twitter, Inc. in the Supreme Court of the State of New York County of New York to compel disclosure of the owner(s) and operator(s) of two certain Twitter accounts: "Mike Wood” (@MIKEWOOD) and "Bull Meechum” (@BullMeechum3). The petition seeks disclosure of the owner(s) and operator(s) of the aforementioned accounts so the Company can commence an action against such individuals for damages arising from false, misleading, and untrue statements made by the same.

 

On October 25, 2022, the court signed an order to show cause directing Twitter to show cause on or before November 4, 2022 as to why an order compelling disclosure of the identities of the owner(s) / operator(s) of the @MIKEWOOD and @BullMeechum3 Twitter accounts should not be made.

 

Carebourn Capital, L.P. v. DarkPulse, Inc.

 

As disclosed in greater detail in the Company’s Form 10-Q, filed August 10, 2022, the Company remains in active litigation with Carebourn Capital, L.P. ("Carebourn”) in Minnesota State Court. There are no material updates to this litigation.

 

The Company remains committed to actively litigating its affirmative defenses and claims for relief under the Securities Exchange Act of 1934.

 

More Capital, LLC v. DarkPulse, Inc. et al

 

As disclosed in greater detail in the Company’s Form 10-Q, filed August 10, 2022, the Company remains in active litigation with More Capital, LLC ("More”) in Minnesota State Court. There are no material updates to this litigation.

 

The Company remains committed to actively litigating its affirmative defenses and claims for relief under the Securities Exchange Act of 1934.

 

Goodman et al. v. DarkPulse, Inc.

 

As disclosed in greater detail in the Company’s Form 10-Q, filed November 15, 2021, on September 10, 2021, Stephen Goodman, Mark Banash, and David Singer ("Former Officers”) commenced suit against the Company in Arizona Superior Court, Maricopa County.

 

As of the date hereof, the Company is engaged in settlement negotiations with the Former Officers.

 

 

 

 

DarkPulse, Inc. v. FirstFire Global Opportunities Fund, LLC, and Eli Fireman

 

As disclosed in greater detail in the Company’s Form 10-Q, filed August 10, 2022, the Company remains in active litigation with FirstFire Global Opportunities Fund, LLC ("FirstFire”), and Eli Fireman ("Fireman”) (FirstFire and Fireman together, the "FirstFire Parties”).

 

As previously disclosed therein, the FirstFire Parties’ motion to dismiss the Company’s first amended complaint has been fully submitted to the Court. On May 26, 2022, the FirstFire Parties requested oral arguments on their motion to dismiss. As of the date hereof, oral arguments have not been scheduled and, further, no decision has been rendered on the FirstFire Parties’ motion to dismiss.

 

The Company remains committed to actively litigating its claims for relief under the Securities Exchange Act of 1934.

 

DarkPulse, Inc. v. EMA Financial, LLC et al

 

As disclosed in greater detail in the Company’s Form 10-Q, filed August 10, 2022, the Company remains in active litigation with EMA Financial, LLC ("EMA”), EMA Group, Inc. ("EMA Group”), and Felicia Preston ("Preston”) (EMA, EMA Group, and Preston together, the "EMA Parties”).

 

As of July 22, 2022, the EMA Parties’ motion to dismiss the Company’s first amended complaint is fully submitted. As of the date hereof, no decision has been rendered on the EMA Parties’ motion to dismiss.

 

The Company remains committed to actively litigating its claims for relief under the Securities Exchange Act of 1934 and Racketeer Influenced and Corrupt Organizations Act.

 

Item 1A. Risk Factors

 

Foreign Currency Risk

 

Optilan, our wholly-owned subsidiary which is responsible for a large portion of our revenues is located in the United Kingdom. Foreign sales of products and services are primarily denominated in the British pound sterling, which is subject to fluctuations due to changes in foreign currency exchange rates. Accordingly, we are subject to exposure from changes in the exchange rates of local currencies. Consequently, changes in the exchange rates of the currencies may impact the translation of the foreign subsidiaries’ statements of operations into U.S. dollars, which may in turn affect our consolidated statement of operations.

 

We have not entered into any financial derivative instruments that expose us to material market risk, including any instruments designed to hedge the impact of foreign currency exposures. We may, however, hedge such exposure to foreign currency exchange rate fluctuations in the future.

 

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Below is a table of all puts made by the Company under the EFA during the quarter ended September 30, 2022:

 

Date of Put	Number of Shares Sold	Total Proceeds, Net of Discounts	Effective Price per Share	Net Proceeds
7/1/22	33,525,465	$556,750	$0.019596	$500,050
7/11/22	32,756,532	$556,750	$0.01699661	$550,050
7/20/22	29,386,519	$556,750	$0.01894558	$550,050
7/28/22	35,884,040	$556,750	$0.018308	$500,050
8/10/22	44,505,857	$680,109	$0.015281	$611,073
8/18/22	54,574,909	$948,863	$0.017386441	$852,952
8/25/22	105,255,759	$2,264,961	$0.021518644	$2,128,038
9/2/22	140,073,757	$3,000,000	$0.021417288	$2,788,975
9/14/22	79,092,686	$1,757,466	$0.022220339	$1,757,466
9/30/22	30,538,303	$500,000	$0.0163729	$463,975

 

The shares issued in reliance upon the exemption from securities registration afforded by Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D under the Securities Act, based in part on the representations of the investor. There were $889,517 in sales commissions paid to J.H. Darbie & Co., Inc. ("J.H. Darbie”) pursuant to these transactions.

 

Item 6. Exhibits

 

SEC Ref. No.	Title of Document
10.1*	Exclusive Commercial Agency Agreement dated July 27, 2022 with Gulf Automation Services & Oilfield Supplies Company [Gasos] LLC
10.2*	Membership Purchase Agreement dated August 24, 2022 with Remote Intelligence, Limited Liability Company Wildlife Specialists, LLC
10.3*	Membership Purchase Agreement dated August 24, 2022 with Wildlife Specialists, LLC
31.1*	Rule 13a-14(a) Certification by Principal Executive and Financial Officer
32.1**	Section 1350 Certification of Principal Executive and Financial Officer
101.INS*	XBRL Instance Document
101.SCH*	XBRL Taxonomy Extension Schema Document
101.CAL*	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*	XBRL Taxonomy Extension Label Linkbase Document
101.PRE*	XBRL Taxonomy Extension Presentation Linkbase Document
104*	Cover Page Interactive Data File (formatted in Inline XBRL, and included in exhibit 101).

 

*Filed with this Report.

**Furnished with this Report.

 

 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	DarkPulse, Inc.
Date: November 4, 2022	By	/s/ Dennis O’Leary
		Dennis O’Leary, Chairman, Chief Executive Officer, President, Chief Financial Officer
		(Principal Executive Officer and Principal Financial Officer)