UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||
| For the quarterly period ended |
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:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| (Address of principal executive offices) | (Zip Code) |
(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).
Indicate by check mark whether the registrant has been subject to such filing requirements for the past 90 days.
Yes ☒ 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).
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 | ☐ | |
| ☐ | Smaller reporting company | |||
| 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 ☐
The number of shares outstanding of the registrant’s common stock on August 5, 2022, was .
TABLE OF CONTENTS
| 2 |
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
DARKPULSE, INC.
Consolidated Balance Sheets
| June 30, | December 31, | |||||||
2022 (unaudited) | 2021 | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory | ||||||||
| Unbilled revenue | ||||||||
| Other current assets | ||||||||
| TOTAL CURRENT ASSETS | ||||||||
| NON-CURRENT ASSETS: | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Patents, net | ||||||||
| Intangible assets | ||||||||
| Goodwill | ||||||||
| Other assets, net | ||||||||
| TOTAL NON-CURRENT ASSETS | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable and accrued liabilities | $ | $ | ||||||
| Convertible notes, net | ||||||||
| Notes payable | ||||||||
| Customer deposits | ||||||||
| Derivative liability | ||||||||
| Contract liabilities | ||||||||
| Operating lease liabilities - current | ||||||||
| Other current liabilities | ||||||||
| TOTAL CURRENT LIABILITIES | ||||||||
| NON-CURRENT LIABILITIES: | ||||||||
| Secured debenture | ||||||||
| Operating lease liabilities – non-current | ||||||||
| Other liabilities – non-current | ||||||||
| TOTAL NON-CURRENT LIABILITIES | ||||||||
| TOTAL LIABILITIES | ||||||||
| Commitments and contingencies | ||||||||
| STOCKHOLDERS’ EQUITY: | ||||||||
| Preferred stock - Series A (par value $; shares authorized; and issued and outstanding at June 30, 2022 and December 31, 2021, respectively) | ||||||||
| Convertible preferred stock - Series D (par value $; shares authorized; issued and outstanding at June 30, 2022 and December 31, 2021, respectively) | ||||||||
| Common stock (par value $), shares authorized, and shares issued and outstanding at June 30, 2022 and December 31, 2021, respectively | ||||||||
| Treasury stock, shares at June 30, 2022 and December 31, 2021 | ( | ) | ( | ) | ||||
| Paid-in capital in excess of par value | ||||||||
| Non-controlling interest in variable interest entity and subsidiary | ||||||||
| Accumulated other comprehensive income | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| TOTAL STOCKHOLDERS’ EQUITY | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | $ | $ | ||||||
See accompanying notes to consolidated financial statements.
| 3 |
DARKPULSE, INC.
Consolidated Statements of Operations
(unaudited)
| For the Three Months | For the Six Months | |||||||||||||||
| Ended June 30, | Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| REVENUE | $ | $ | $ | $ | ||||||||||||
| COST OF GOODS SOLD | ||||||||||||||||
| GROSS PROFIT | ||||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Salaries, wages and payroll taxes | ||||||||||||||||
| Professional fees | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| TOTAL OPERATING EXPENSES | ||||||||||||||||
| NET OPERATING LOSS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER INCOME (EXPENSE): | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Gain on the forgiveness of debt | ||||||||||||||||
| Restructuring costs | ( | ) | ( | ) | ||||||||||||
| Change in fair market of derivative liabilities | ||||||||||||||||
| Gain/(Loss) on convertible notes | ||||||||||||||||
| Foreign currency exchange rate variance | ( | ) | ( | ) | ||||||||||||
| TOTAL INCOME (EXPENSE) | ( | ) | ( | ) | ||||||||||||
| NET LOSS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to noncontrolling interests in variable interest entity and subsidiary | ||||||||||||||||
| Net loss attributable to Company stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| LOSS PER SHARE: | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| WEIGHTED AVERAGE SHARES OUTSTANDING: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
See accompanying notes to consolidated financial statements.
| 4 |
DARKPULSE, INC.
Consolidated Statements of Operations
(unaudited)
| For the Three Months | For the Six Months | |||||||||||||||
| Ended June 30, | Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| NET LOSS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| OTHER COMPREHENSIVE GAIN (LOSS) | ||||||||||||||||
| Unrealized Gain (Loss) on Foreign Exchange | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| COMPREHENSIVE LOSS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
See accompanying notes to consolidated financial statements.
| 5 |
DARKPULSE, INC.
Consolidated Statement of Stockholders' Equity
For the Three Months Ended June 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 | $ | $ | $ | $ | ( | ) | ||||||||||||||||||||||
| Common stock issued for cash | – | – | ||||||||||||||||||||||||||
| Foreign currency adjustment | – | – | – | |||||||||||||||||||||||||
| Net loss | – | – | – | |||||||||||||||||||||||||
| Balance, March 31, 2022 | $ | $ | $ | $ | ( | ) | ||||||||||||||||||||||
| Common stock issued for cash | – | – | ||||||||||||||||||||||||||
| Common stock issued for TerraData acquisition | – | – | ||||||||||||||||||||||||||
| Stock based compensation | – | – | ||||||||||||||||||||||||||
| Foreign currency adjustment | – | – | – | |||||||||||||||||||||||||
| Net loss | – | – | – | |||||||||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | $ | ( | ) | ||||||||||||||||||||||
| 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 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
| Common stock issued for cash | ||||||||||||||||||||
| Foreign currency adjustment | ( | ) | ( | ) | ||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||
| Balance, March 31, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
| Common stock issued for cash | ||||||||||||||||||||
| Common stock issued for TerraData acquisition | ||||||||||||||||||||
| Stock based compensation | ( | ) | ||||||||||||||||||
| Foreign currency adjustment | ( | ) | ( | ) | ||||||||||||||||
| Net loss | ( | ) | ( | ) | ||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||
Preferred Stock Series D | Common Stock | Treasury | Paid in Capital in Excess of Par | Non- Controlling Interest in | Accumulated Other Comprehensive | Accumulated | Total Stockholders’ | |||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Stock | Value | Subsidiary | Income | Deficit | Equity | |||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||
| Conversion of convertible notes | – | |||||||||||||||||||||||||||||||||||||||
| Foreign currency adjustment | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Net loss | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Balance, March 31, 2021 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||
| Conversion of convertible notes | – | |||||||||||||||||||||||||||||||||||||||
| Stock based loan acquisition cost | – | |||||||||||||||||||||||||||||||||||||||
| Foreign currency adjustment | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Net loss | – | – | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
| 6 |
DARKPULSE, INC.
Consolidated Statements of Cash Flows
(unaudited)
For the Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used by operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of loan acquisition costs | ( | ) | ||||||
| Stock based loan acquisition costs | ||||||||
| Gain on the extinguishment of debt | ( | ) | ||||||
| Restructuring costs | ||||||||
| Operating lease expense | ( | ) | ||||||
| Amortization of debt discount | ||||||||
| Derivative liability | ( | ) | ( | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ||||||||
| Inventory | ( | ) | ||||||
| Unbilled revenue | ( | ) | ||||||
| Contract liability | ||||||||
| Other current assets | ( | ) | ||||||
| Customer deposits | ( | ) | ||||||
| Accounts payable and accrued expenses | ( | ) | ( | ) | ||||
| Operating lease liabilities | ||||||||
| Other current liabilities | ( | ) | ||||||
| Net cash used by operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchases of property and equipment | ( | ) | ||||||
| Investment in demo box | ( | ) | ||||||
| Deposits | ( | ) | ( | ) | ||||
| Net cash used by investing activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Proceeds from sale of common stock | ||||||||
| Proceeds from convertible debentures | ||||||||
| Payments on notes payable | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| NET INCREASE (DECREASE) IN CASH | ( | ) | ||||||
| Effect of exchange rate on cash | ( | ) | ||||||
| CASH, beginning of period | ||||||||
| CASH, end of period | $ | $ | ||||||
| Non-cash finance and investing activities for the six months ended June 30: | ||||||||
| Stock issued for acquisition of TerraData | $ | $ | ||||||
| Stock issued for convertible notes payable and accrued interest | ||||||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid during the six months ended June 30: | ||||||||
| Interest | $ | $ | ||||||
| Income taxes | $ | $ | ||||||
See accompanying notes to consolidated financial statements.
| 7 |
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 June 30, 2022, and the results of operations for three and six months and cash flows for the six months ended June 30, 2022 have been included. The results of operations for the three and six months ended June 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.
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.
| 8 |
Going Concern Uncertainty
As shown in the accompanying financial statements,
during the six months ended June 30, 2022, the Company reported a net loss of $
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.
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 June 30, 2022 closing rate at
The relevant translation rates are as follows:
for the periods ended June 30, 2022 closing rate at
| 9 |
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.
The estimated useful lives of property and equipment are generally as follows:
| Years | ||||
| Office furniture and fixtures | ||||
| Plant and equipment | ||||
| Leasehold Improvements | ||||
| Motor Vehicles | ||||
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.
| 10 |
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 June 30, 2022 and December 31, 2021, we had contract liabilities of $
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.
| 11 |
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.
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 June 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.
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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.
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 six months ended June 30, 2022, there were no stock options outstanding. For the six months ended June 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 common shares reserved for the potential conversion of the Company's convertible debt.
Recently Issued Accounting Pronouncements
The Company has reviewed the accounting pronouncements issued during the six months ended June 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 six months ended June 30, 2022 and 2021:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Timing of revenue recognition: | ||||||||||||||||
| Services and products transferred at a point in time | $ | $ | $ | $ | ||||||||||||
| Services and products transferred over time | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
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.
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Revenue by source consisted of the following for the three and six months ended June 30, 2022 and 2021:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue by products and services: | ||||||||||||||||
| Products | $ | $ | $ | $ | ||||||||||||
| Services | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
Revenue by geographic destination consisted of the following for the three and six months ended June 30, 2022 and 2021:
| Three Months Ended | Six Months Ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Revenue by geography: | ||||||||||||||||
| North America | $ | $ | $ | $ | ||||||||||||
| International | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
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 June 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.
| Total | ||||
| Balance at December 31, 2021 | $ | |||
| Additions through advance billings to or payments from vendors | ||||
| Revenue recognized from current period advance billings to or payments from vendors | ( | ) | ||
| Balance at June 30, 2022 | $ | |||
NOTE 3 – ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following as of June 30, 2022 and December 31, 2021:
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Accounts receivable | $ | $ | ||||||
| Less: Allowance for doubtful accounts | ||||||||
| Total accounts receivable | $ | $ | ||||||
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NOTE 4 – INVENTORY
Inventory consisted of the following as of June 30, 2022 and December 31, 2021:
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Raw materials | $ | $ | ||||||
| Work in progress | ||||||||
| Finished goods | ||||||||
| Total inventory | ||||||||
| Reserve | ||||||||
| Total inventory, net | $ | $ | ||||||
NOTE 5 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of June 30, 2022 and December 31, 2021:
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Property and equipment | $ | $ | ||||||
| Leasehold improvements | ||||||||
| Less - accumulated depreciation | ( | ) | ( | ) | ||||
| $ | $ | |||||||
NOTE 6 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following as of June 30, 2022 and December 31, 2021:
| June 30, | December 31, | |||||||
| 2022 | 2021 | |||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Total accounts payable and accrued expenses | $ | $ | ||||||
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.
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The following was included in our balance sheet as of June 30, 2022:
| Operating leases | June 30, 2022 | |||
| Assets | ||||
| ROU operating lease assets | $ | |||
| Liabilities | ||||
| Current portion of operating lease | $ | |||
| Operating lease, net of current portion | $ | |||
| Total operating lease liabilities | $ | |||
The weighted average remaining lease term and weighted average discount rate at June 30, 2022 were as follows:
| Weighted average remaining lease term (years) | June 30, 2022 | |||
| Operating leases | ||||
| Weighted average discount rate | ||||
| Operating leases | ||||
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 $
The following table reconciles future minimum operating lease payments to the discounted lease liability as of June 30, 2022:
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 and later | ||||
| Total lease payments | ||||
| Less imputed interest | ( | ) | ||
| Total lease obligations | ||||
| Less current obligations | ( | ) | ||
| Long-term lease obligations | $ | |||
NOTE 8 – GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The following table sets forth the changes in the carrying amount of goodwill for the six months ended June 30, 2022:
| Total | ||||
| Balance at December 31, 2021 | $ | |||
| Exchange rate variation | ( | ) | ||
| Balance at June 30, 2022 | $ | |||
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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 June 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 six months ended June 30, 2022 and 2021,
the Company amortized $
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| Thereafter | ||||
| Total | $ | |||
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 June 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 June 30, 2022 and 2021, were $
For the six months ended June 30, 2022, and 2021,
the Company recorded interest expense of $
As of June 30, 2022 the debenture liability totaled
$
Future minimum required payments over the next 5 years and thereafter are as follows:
| Period ending June 30, | ||||
| 2023 | $ | |||
| 2024 | ||||
| 2025 | ||||
| 2026 | ||||
| 2027 and after | ||||
| Total | $ |
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 June 30, 2022. Management determined the expected volatility of 155.72%, a risk-free rate of interest of 2.8%, and contractual lives of the debt of six 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.
| Face | Debt | Initial | Change | Derivative Balance | ||||||||||||||||
| Amount | Discount | Loss | in FMV | 6/30/2022 | ||||||||||||||||
| $ | $ | $ | $ | ( | ) | $ | ||||||||||||||
| ( | ) | |||||||||||||||||||
| ( | ) | |||||||||||||||||||
| Subtotal | ( | ) | ||||||||||||||||||
| Transaction expense | ||||||||||||||||||||
| $ | $ | $ | $ | ( | ) | $ | ||||||||||||||
As of June 30, 2022 and December 31, 2021 respectively,
there was $
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NOTE 10 - STOCKHOLDERS' EQUITY
As of June 30, 2022, there were 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 shares of preferred stock, par value $ per share, for all classes. As of June 30, 2022, and December 31, 2021, there were and , 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 $ 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 shares of Preferred Stock, par value $ 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 June 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 shares of common stock, par value $ per share. As of June 30, 2022 and December 31, 2021, there were and common shares issued and outstanding.
During the three months ended June 30, 2022, the Company issued the following shares of common stock:
On January 12, 2022, the Company issued
shares of common stock for $
On January 21, 2022, the Company issued
shares of common stock for $
On February 7, 2022, the Company issued
shares of common stock for $
On March 3, 2022, the Company issued
shares of common stock for $
On March 7, 2022, the Company issued
shares of common stock for $
On March 14, 2022, the Company issued
shares of common stock for $
On March 23, 2022, the Company issued
shares of common stock for $
On April 1, 2022, the Company issued
shares of common stock valued at $
On April 8, 2022, the Company issued
shares of common stock for $
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On May 3, 2022, the Company issued
shares of common stock for $
On May 13, 2022, the Company issued
shares of common stock for $
On May 23, 2022, the Company issued
shares of common stock for $
On June 1, 2022, the Company issued
shares of common stock for $
On June 16, 2022, the Company issued
shares of common stock for $
On June 24, 2022, the Company issued
shares of common stock for $
Stock Options
During the three months ended June 30, 2022, the Company did not issue any stock options and had stock options outstanding at June 30, 2022.
Public Offerings
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 $
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.
Pursuant to the Equity Financing Agreement, on
January 12, 2022, we and GHS agreed that the Company would issue and sell to GHS, and GHS would purchase from us, shares of
Common Stock for total proceeds to us, net of discounts, of $
Pursuant to the Equity Financing Agreement, on
January 21, 2022, we and GHS agreed that the Company would issue and sell to GHS, and GHS would purchase from us, shares of
Common Stock for total proceeds to us, net of discounts, of $
Pursuant to the Equity Financing Agreement, on
February 7, 2022, we and GHS agreed that the Company would issue and sell to GHS, and GHS would purchase from us, shares of
Common Stock for total proceeds to us, net of discounts, of $
On February 21, 2022, we sold shares
of our Common Stock at $0.032982 per share for total consideration of $
On March 3, 2022, we sold shares of
our Common Stock at $0.0301576 per share for total consideration of $
On March 14, 2022, we sold shares of
our Common Stock at $0.071208 per share for total consideration of $
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Pursuant to the Equity Financing Agreement, on
March 23, 2022, we and GHS agreed that the Company would issue and sell to GHS, and GHS would purchase from us, shares of Common
Stock for total proceeds to us, net of discounts, of $
Pursuant to the Equity Financing Agreement, on
April 11, 2022, we and GHS agreed that the Company would issue and sell to GHS, and GHS would purchase from us, shares of Common
Stock for total proceeds to us, net of discounts, of $
Pursuant to the Equity Financing Agreement, on
May 3, 2022, we and GHS agreed that the Company would issue and sell to GHS, and GHS would purchase from us, shares of Common
Stock for total proceeds to us, net of discounts, of $
Pursuant to the Equity Financing Agreement, on
May 13, 2022, we and GHS agreed that the Company would issue and sell to GHS, and GHS would purchase from us, shares of Common
Stock for total proceeds to us, net of discounts, of $
Pursuant to the Equity Financing Agreement, on
May 23, 2022, we and GHS agreed that the Company would issue and sell to GHS, and GHS would purchase from us, shares of Common
Stock for total proceeds to us, net of discounts, of $
Pursuant to the Equity Financing Agreement, on
June 1, 2022, we and GHS agreed that the Company would issue and sell to GHS, and GHS would purchase from us, shares of Common
Stock for total proceeds to us, net of discounts, of $
Pursuant to the Equity Financing Agreement, on
June 16, 2022, we and GHS agreed that the Company would issue and sell to GHS, and GHS would purchase from us, shares of Common
Stock for total proceeds to us, net of discounts, of $
On May 27, 2022, 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 $
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.
Pursuant to the EFA, on June 24, 2022, we and
GHS agreed that the Company would issue and sell to GHS, and GHS would purchase from us, shares of Common Stock for total proceeds
to us, net of discounts, of $
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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.
On June 22, 2022, the Board of Directors of the
Company, with Dennis O’Leary abstaining, approved the Employment Agreement dated effective April 1, 2022 (the “Effective
Date”) with Mr. O’Leary, the Company’s Chief Executive Officer (the “Agreement”). The term of the Agreement
is three years from the Effective Date, subject to termination. The Agreement may be terminated upon the death or disability of Mr. O’Leary
or for “Cause,” as defined in the Agreement. Pursuant to the Agreement, Mr. O’Leary is entitled to an annual salary
of $
During the six months ended June 30, 2022 and
2021, the Company’s Chief Executive Officer advanced personal funds in the amount of $
During the six months ended June 30, 2022
and 2021, certain executives of the Company received $
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
Carebourn Capital, L.P. v. DarkPulse, Inc.
As disclosed in greater detail in the Company’s Form 10-Q, filed May 16, 2022, the Company remains in active litigation with Carebourn Capital, L.P. (“Carebourn”). Thus, the remainder of this communication will address all material updates since the aforementioned Form 10-Q.
On July 11, 2022, the Court denied Carebourn’s motion to compel DPLS to produce a privilege log.
On July 15, 2022, the Court denied Carebourn’s motion to disqualify or, in the alternative, seek limited discovery of DPLS’ legal counsel, consisting of the Taft Stettinius Hollister LLP and The Basile Law Firm P.C.
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On July 27, 2022, Carebourn paid $18,858.18 for attorneys’ fees awarded pursuant to the Court’s April 14, 2022 decision on the Company’s motion to compel Carebourn.
The Company remains committed to actively litigating its 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 May 16, 2022, the Company remains in active litigation with More Capital, LLC (“More”). Thus, the remainder of this communication will address all material updates since the aforementioned Form 10-Q.
On July 11, 2022, the Court denied More’s motion for summary judgment against the Company and granted DarkPulse’s motion to compel More. The Court directed More to produce all responsive documents to certain requests for production served by DarkPulse within seven days thereof.
The Company remains committed to actively litigating its 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 May 16, 2022, the Company remains in active litigation with Stephen Goodman (“Goodman”), Mark Banash (“Banash”), and David Singer (“Singer”) (Goodman, Banash, and Singer, together, the “Series D Plaintiffs”). Thus, the remainder of this communication will address all material updates since the aforementioned Form 10-Q.
As of the date hereof, there are no material updates to this litigation.
The Company remains committed to actively litigating its claims and defenses against the Series D Plaintiffs.
DarkPulse, Inc. v. FirstFire Global Opportunities Fund, LLC, and Eli Fireman (SDNY)
As disclosed in greater detail in the Company’s Form 10-Q, filed May 16, 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”). Thus, the remainder of this communication will address all material updates since the aforementioned Form 10-Q.
On May 26, 2022, the FirstFire Parties filed their motion to dismiss the Company’s first amended complaint, filed on May 5, 2022, and opening memorandum of law in support thereof.
On June 16, 2022, the Company filed its memorandum of law in opposition to the FirstFire Parties’ motion to dismiss, and on June 30, 2022, the FirstFire Parties filed their memorandum of law in reply and further support of their motion to dismiss.
As of the date hereof, the FirstFire Parties’ motion to dismiss is 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 May 16, 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”). Thus, the remainder of this communication will address all material updates since the aforementioned Form 10-Q.
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On June 22, 2022, the EMA Parties filed their motion to dismiss the Company’s first amended complaint, filed on March 28, 2022, and opening memorandum of law in support thereof.
On July 13, 2022, the Company filed its memorandum of law in opposition to the EMA Parties’ motion to dismiss, and on July 22, 2022, the EMA Parties filed their memorandum of law in reply and further support of their motion to dismiss.
As of the date hereof, no decision has been 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 the Racketeer Influenced and Corrupt Organizations Act.
Carebourn Capital et al v. Standard Registrar and Transfer et al
On May 20, 2022, Carebourn Capital, L.P. (“Carebourn”) and More Capital, LLC (“More”) (Carebourn and More, together, the “MN Noteholders”) commenced an action in the United States District Court for the District of Utah against (i) Standard Registrar and Transfer Co., Inc. (“Standard”), (ii) Amy Merrill (“Merrill”) (Standard and Merrill, together, the “TA Defendants”), (iii) DarkPulse, Inc., (iv) Dennis O’Leary (“O’Leary”), (v) Thomas Seifert (“Seifert”), (vi) Carl Eckel (“Eckel”), (vii) Anthony Brown (“Brown”), and (viii) Faisal Farooqui (“Farooqui”) (DarkPulse, O’Leary, Seifert, Eckel, Brown, and Farooqui, collectively, the “DPLS Defendants”).
The MN Noteholders’ complaint alleges, among other things, that the TA Defendants and DPLS Defendants conspired together and acted in unison to preclude the MN Noteholders’ from receiving the benefits of the convertible note transactions between Carebourn, More, and DarkPulse.
On July 5, 2022, the TA Defendants filed their motion to dismiss the MN Noteholders’ complaint. Pursuant to the local rules of the U.S. Dist. Court for the District of Utah, the MN Noteholders must reply to the TA Defendants’ motion to dismiss on or before August 2, 2022.
As of the date hereof, the DPLS Defendants have not been served and, thus, no deadline exists by which the DPLS Defendants must answer or otherwise respond to the MN Noteholders’ complaint.
The Company intends to vigorously defend itself against the MN Noteholders’ lawsuit.
DarkPulse, Inc. v. Brunson Chandler Jones et al
On July 8, 2022, the Company commenced an action against the law firm of Brunson Chandler Jones, PLLC and Lance B. Brunson (“Chandler Defendants”) in the United States District Court for the District of Utah.
The Company’s claims, consisting of professional negligence/malpractice and breach of contract, arise from the legal services and relationship between DarkPulse and the Chandler Defendants and in connection with the merger between DarkPulse, DarkPulse Technologies Inc., and Klever Marketing, Inc.
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.
Bayliss Settlement Agreement
The CEO, William Bayliss, of the Company’s subsidiary, Optilan, was terminated effective April 30, 2022. Optilan entered into a settlement agreement with Mr. Bayliss in which he received £125,000 in lieu of the six months’ salary provided for in Mr. Bayliss’s employment agreement.
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O’Leary Employment Agreement
On June 22, 2022, the Board of Directors of the
“Company, with Dennis O’Leary abstaining, approved the Employment Agreement dated effective April 1, 2022 (the “Effective
Date”) with Mr. O’Leary, the Company’s Chief Executive Officer (the “Agreement”). The term of the Agreement
is three years from the Effective Date, subject to termination. The Agreement may be terminated upon the death or disability of Mr. O’Leary
or for “Cause,” as defined in the Agreement. Pursuant to the Agreement, Mr. O’Leary is entitled to an annual salary
of $
NOTE 13 – SUBSEQUENT EVENTS
Pursuant to the EFA, on July 1, 2022, the Company and GHS agreed that the Company would issue and sell to GHS, and GHS would purchase from the Company, 33,525,465 shares of Common Stock for total proceeds to the Company, net of discounts, of $556,750, at an effective price of $0.019596 per share (the “2nd EFA Closing”). The Company received approximately $500,050 in net proceeds from the 2nd EFA Closing after deducting the fees and other estimated offering expenses payable by the Company. The Company used the net proceeds from the 2nd EFA Closing for working capital and for general corporate purposes.
On July 5, 2022, the Company entered into a Joint Cooperation Contract with Salman International Company, headquartered at 98 Banks Division Al-Waha District, Nasr City, Egypt (the “Salman”). The purpose of the agreement is for the parties to cooperate jointly, where the Company sells its products through Salman, which is an authorized distributor of Siemens products.
Pursuant to the agreement, Salman agrees to appoint the Company as the sole integration provider for MoonLand Resort, located in Hurghada, Egypt, at reasonable market prices. The Company and Salman agree to jointly market the Company’s and Seimens’ products. Subject to the early termination provisions in the agreement, the term of the agreement is for five years; provided that the agreement is implemented within three months from the date of execution.
Pursuant to the EFA, on July 11, 2022, the Company and GHS agreed that the Company would issue and sell to GHS, and GHS would purchase from the Company, 32,756,532 shares of Common Stock for total proceeds to the Company, net of discounts, of $556,750, at an effective price of $0.01699661 per share (the “3rd EFA Closing”). The Company received approximately $550,050 in net proceeds from the 3rd EFA Closing after deducting the fees and other estimated offering expenses payable by the Company. The Company used the net proceeds from the 3rd EFA Closing for working capital and for general corporate purposes.
On July 13, 2022, the Company issued a press release which announced it has signed an LOI for the acquisition of Om Optel Industries Pvt. Ltd., a fiber optic cable and HDPE pipe manufacturer based in India.
Pursuant to the EFA, on July 20, 2022, the Company and GHS agreed that the Company would issue and sell to GHS, and GHS would purchase from the Company, 29,386,519 shares of Common Stock for total proceeds to the Company, net of discounts, of $556,750, at an effective price of $0.01894558 per share (the “4th EFA Closing”). The Company received approximately $550,050 in net proceeds from the 4th EFA Closing after deducting the fees and other estimated offering expenses payable by the Company. The Company used the net proceeds from the 4th EFA Closing for working capital and for general corporate purposes.
Pursuant to the EFA, on July 28, 2022, the Company and GHS agreed that the Company would issue and sell to GHS, and GHS would purchase from the Company, 35,884,040 shares of Common Stock for total proceeds to the Company, net of discounts, of $556,750, at an effective price of $0.018308 per share (the “5th EFA Closing”). The Company received approximately $500,050 in net proceeds from the 5th EFA Closing after deducting the fees and other estimated offering expenses payable by the Company. the Company used the net proceeds from the 5th EFA Closing for working capital and for general corporate purposes.
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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 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.
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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.
Pursuant to the Equity Financing Agreement, on January 12, 2022, we and GHS agreed that the Company would issue and sell to GHS, and GHS would purchase from us, 23,372,430 shares of Common Stock for total proceeds to us, net of discounts, of $1,150,000, at an effective price of $0.054124 per share (the “Second EFA Closing”). We received approximately $1,033,975 in net proceeds from the Second EFA Closing after deducting the fees and other estimated offering expenses payable by us. We used the net proceeds from the Second EFA Closing for working capital and for general corporate purposes.
Pursuant to the Equity Financing Agreement, on January 21, 2022, we and GHS agreed that the Company would issue and sell to GHS, and GHS would purchase from us, 33,454,988 shares of Common Stock for total proceeds to us, net of discounts, of $1,150,000, at an effective price of $0.037812 per share (the “Third EFA Closing”). We received approximately $1,033,975 in net proceeds from the Third EFA Closing after deducting the fees and other estimated offering expenses payable by us. We used the net proceeds from the Third EFA Closing for working capital and for general corporate purposes.
Pursuant to the Equity Financing Agreement, on February 7, 2022, we and GHS agreed that the Company would issue and sell to GHS, and GHS would purchase from us, 16,040,411 shares of Common Stock for total proceeds to us, net of discounts, of $500,000, at an effective price of $0.0342884 per share (the “Fourth EFA Closing”). We received approximately $448,975 in net proceeds from the Fourth EFA Closing after deducting the fees and other estimated offering expenses payable by us. We used the net proceeds from the Fourth EFA Closing for working capital and for general corporate purposes.
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.
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Pursuant to the Equity Financing Agreement, on March 23, 2022, we and GHS agreed that the Company would issue and sell to GHS, and GHS would purchase from us, 29,257,395 shares of Common Stock for total proceeds to us, net of discounts, of $1,500,000, at an effective price of $0.056396 per share (the “Fifth EFA Closing”). We received approximately $1,348,975 in net proceeds from the Fifth EFA Closing after deducting the fees and other estimated offering expenses payable by us. We used the net proceeds from the Fifth EFA Closing for working capital and for general corporate purposes.
Pursuant to the Equity Financing Agreement, on April 11, 2022, we and GHS agreed that the Company would issue and sell to GHS, and GHS would purchase from us, 23,746,816 shares of Common Stock for total proceeds to us, net of discounts, of $1,000,000, at an effective price of $0.04211091 per share (the “Sixth EFA Closing”). We received approximately $898,975 in net proceeds from the Sixth EFA Closing after deducting the fees and other estimated offering expenses payable by us. We used the net proceeds from the Sixth EFA Closing for working capital and for general corporate purposes.
Pursuant to the Equity Financing Agreement, on May 3, 2022, we and GHS agreed that the Company would issue and sell to GHS, and GHS would purchase from us, 29,522,276 shares of Common Stock for total proceeds to us, net of discounts, of $1,000,000, at an effective price of $0.03387273 per share (the “Seventh EFA Closing”). We received approximately $898,975 in net proceeds from the Seventh EFA Closing after deducting the fees and other estimated offering expenses payable by us. We used the net proceeds from the Seventh EFA Closing for working capital and for general corporate purposes.
Pursuant to the Equity Financing Agreement, on May 13, 2022, we and GHS agreed that the Company would issue and sell to GHS, and GHS would purchase from us, 26,100,979 shares of Common Stock for total proceeds to us, net of discounts, of $556,750, at an effective price of $0.0213306 per share (the “Eighth EFA Closing”). We received approximately $500,050 in net proceeds from the Eighth EFA Closing after deducting the fees and other estimated offering expenses payable by us. We used the net proceeds from the Eighth EFA Closing for working capital and for general corporate purposes.
Pursuant to the Equity Financing Agreement, on May 23, 2022, we and GHS agreed that the Company would issue and sell to GHS, and GHS would purchase from us, 25,025,540 shares of Common Stock for total proceeds to us, net of discounts, of $556,750, at an effective price of $0.0222473 per share (the “Ninth EFA Closing”). We received approximately $500,050 in net proceeds from the Ninth EFA Closing after deducting the fees and other estimated offering expenses payable by us. We used the net proceeds from the Ninth EFA Closing for working capital and for general corporate purposes.
Pursuant to the Equity Financing Agreement, on June 1, 2022, we and GHS agreed that the Company would issue and sell to GHS, and GHS would purchase from us, 25,901,921 shares of Common Stock for total proceeds to us, net of discounts, of $556,750, at an effective price of $0.02149454 per share (the “Tenth EFA Closing”). We received approximately $500,050 in net proceeds from the Tenth EFA Closing after deducting the fees and other estimated offering expenses payable by us. We used the net proceeds from the Tenth EFA Closing for working capital and for general corporate purposes.
Pursuant to the Equity Financing Agreement, on June 16, 2022, we and GHS agreed that the Company would issue and sell to GHS, and GHS would purchase from us, 23,799,766 shares of Common Stock for total proceeds to us, net of discounts, of $402,086, at an effective price of $0.018584 per share (the “Eleventh EFA Closing”). We received approximately $360,852 in net proceeds from the Eleventh EFA Closing after deducting the fees and other estimated offering expenses payable by us. We used the net proceeds from the Eleventh EFA Closing for working capital and for general corporate purposes.
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.
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Pursuant to the EFA, on June 24, 2022, we and GHS agreed that the Company would issue and sell to GHS, and GHS would purchase from us, 38,391,106 shares of Common Stock for total proceeds to us, net of discounts, of $643,539, at an effective price of $0.01978 per share (the “1st EFA Closing”). We received approximately $578,160 in net proceeds from the 1st EFA Closing after deducting the fees and other estimated offering expenses payable by us. We used the net proceeds from the 1st EFA Closing for working capital and for general corporate purposes.
Pursuant to the EFA, on July 1, 2022, we and GHS agreed that the Company would issue and sell to GHS, and GHS would purchase from us, 33,525,465 shares of Common Stock for total proceeds to us, net of discounts, of $556,750, at an effective price of $0.019596 per share (the “2nd EFA Closing”). We received approximately $500,050 in net proceeds from the 2nd EFA Closing after deducting the fees and other estimated offering expenses payable by us. We used the net proceeds from the 2nd EFA Closing for working capital and for general corporate purposes.
Pursuant to the EFA, on July 11, 2022, we and GHS agreed that the Company would issue and sell to GHS, and GHS would purchase from us, 32,756,532 shares of Common Stock for total proceeds to us, net of discounts, of $556,750, at an effective price of $0.01699661 per share (the “3rd EFA Closing”). We received approximately $550,050 in net proceeds from the 3rd EFA Closing after deducting the fees and other estimated offering expenses payable by us. We used the net proceeds from the 3rd EFA Closing for working capital and for general corporate purposes.
Pursuant to the EFA, on July 20, 2022, we and GHS agreed that the Company would issue and sell to GHS, and GHS would purchase from us, 29,386,519 shares of Common Stock for total proceeds to us, net of discounts, of $556,750, at an effective price of $0.01894558 per share (the “4th EFA Closing”). We received approximately $550,050 in net proceeds from the 4th EFA Closing after deducting the fees and other estimated offering expenses payable by us. We used the net proceeds from the 4th EFA Closing for working capital and for general corporate purposes.
Pursuant to the EFA, on July 28, 2022, we and GHS agreed that the Company would issue and sell to GHS, and GHS would purchase from us, 35,884,040 shares of Common Stock for total proceeds to us, net of discounts, of $556,750, at an effective price of $0.018308 per share (the “5th EFA Closing”). We received approximately $500,050 in net proceeds from the 5th EFA Closing after deducting the fees and other estimated offering expenses payable by us. We used the net proceeds from the 5th EFA Closing for working capital and for general corporate purposes.
Going Concern Uncertainty
As shown in the accompanying financial statements, during the six months ended June 30, 2022, the Company reported a net loss of $9,569,843. As of June 30, 2022, the Company’s current liabilities exceeded its current assets by $8,585,281. As of June 30, 2022, the Company had $2,512,668 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.
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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 3rd 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 June 30, 2022, total revenues were $4,435,043 compared to $0 for the same period in 2021, an increase of $4,435,043. This increase primarily consisted of revenues of $4,061,981 from Optilan, $170,363 from Wildlife Specialists and $176,308 from TJM Electronics as well as $26,391 from the remaining subsidiaries.
For the six months ended June 30, 2022, total revenues were $6,453,376 compared to $0 for the same period in 2021, an increase of $6,453,376. This increase primarily consisted of revenues of $5,918,942 from Optilan, $204,457 from Wildlife Specialists and $295,234 from TJM Electronics as well as $34,743 from the remaining subsidiaries.
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Cost of Goods Sold and Gross Loss
For the three months ended June 30, 2022, cost of goods sold were $3,965,910 compared to $0 for the same period in 2021, an increase of $3,965,910.
For the six months ended June 30, 2022, cost of goods sold were $6,314,477 compared to $0 for the same period in 2021, an increase of $6,314,477.
Gross profit for the three months ended June 30, 2022 was $469,133 with a gross profit margin of 10.58% compared to $0 for the same period in 2021 with no gross profit margin.
Gross loss for the six months ended June 30, 2022 was $138,899 with a gross profit margin of 2.15% compared to $0 for the same period in 2021 with no gross profit margin.
Operating Expenses
Selling, general and administrative expenses for three months ended June 30, 2022 increased by $1,007,239, or 1,058%, to $1,102,404 from $95,165 for the three months ended June 30, 2021. The increase primarily consisted of an increase to the operations from our various acquisitions.
Selling, general and administrative expenses for six months ended June 30, 2022 increased by $1,955,760, or 1,566%, to $2,080,613 from $124,853 for the six months ended June 30, 2021. The increase primarily consisted of an increase to the operations from our various acquisitions.
Payroll related expenses for three months ended June 30, 2022, increased to $1,376,176 from $0 for the three months ended June 30, 2021. The increase primarily consisted of an increase to the numbers of employees inherited from our various acquisitions.
Payroll related expenses for six months ended June 30, 2022, increased to $3,348,244 from $0 for the six months ended June 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 June 30, 2022, increased by $1,333,980 to $1,480,599 from $146,619 for the three months ended June 30, 2021. This increase primarily consisted of increased legal expenditures associated with the increase in litigation.
Professional fees for the six months ended June 30, 2022, increased by $2,797,730 to $3,018,702 from $220,972 for the six months ended June 30, 2021. This increase primarily consisted of increased legal expenditures associated with the increase in litigation.
Depreciation and amortization for three months ended June 30, 2022, decreased by $5,352 to $7,405 from $12,757 for the three months ended June 30, 2021. This decrease is primarily due to the change in the exchange rate used to calculate the depreciable assets we acquired from new acquisitions in other countries.
Depreciation and amortization for six months ended June 30, 2022, increased by $210,505 to $236,019 from $25,514 for the six months ended June 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 June 30, 2022, we had other expense of $688,121 compared to other income of $178,134 for the same period in 2021, an increase in expense of $866,255. This increase in other income primarily consisted of changes of $501,431 of restructuring costs, $316,391 decrease in the fair value of the Company’s derivative instruments, $227,887 of loss on foreign currency exchange rate variance, and a decrease in interest expense of $318,069 due to changes in borrowings associated with acquisitions.
For the six months ended June 30, 2022, we had other expense of $1,025,164 compared to other income of $285,808 for the same period in 2021, an increase in expense of $1,310,972. This increase in other income primarily consisted of changes of $501,431 of restructuring costs, $160,340 decrease in the fair value of the Company’s derivative instruments, $208,033 of loss on foreign currency exchange rate variance, an increase in interest expense of $132,272 due to changes in borrowings associated with acquisitions.
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Net Loss
As a result of the above, we reported a net loss of $4,185,572 and $185,607 for the three months ended June 30, 2022 and 2021, respectively.
As a result of the above, we reported a net loss of $9,569,843 and $237,481 for the six months ended June 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 June 30, 2022, we had $12,415,875 in new cash proceeds compared to the three months ended June 30, 2021, when we had $1,102,700 in new cash proceeds.
As of June 30, 2022, we had cash of $2,512,668, compared to $148,562 as of June 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 June 30, 2022, our current liabilities exceeded our current assets by $8,585,281.
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 June 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 six months ended June 30, 2022, net cash used by operating activities was $12,565,057, resulting from our net loss of $9,569,843 and an increase in expenses related to our convertible notes payables, including increase in inventory of $805,960 and operating lease liabilities of $315,285. These increases were offset by a decrease in derivative liability of $167,156, decrease in accounts payable and accrued expenses of $3,120,422 and an increase from restructuring costs of $465,681, decrease in accounts receivable of $550,803, increase in unbilled revenue of $218,371 and increase in contract liability of $1,264,350.
By comparison, during the six months ended June 30, 2021, net cash used by operating activities was $712,611, resulting from our net loss of $237,481 partially offset by non-cash expenses totaling $361,545 and decreases in accounts payable and accrued liabilities of $113,585.
Cash Flows From Investing Activities
During the six months ended June 30, 2022, we had net cash used in investing activities of $503,409. During the six months ended June 30, 2021, net cash used by investing activities was $91,864.
Cash Flows From Financing Activities
During the six months ended June 30, 2022, net cash provided by financing activities was $12,415,875 which was comprised of proceeds from the sale of common stock from offering of $12,415,875. During the six months ended June 30, 2021, net cash used by financing activities was $952,700, which was comprised of proceeds from issuance of convertible notes payable of $1,102,700 less repayment of notes payable of $150,000.
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.
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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 June 30, 2022. Based on his evaluation, Mr. O’Leary concluded that the Company’s disclosure controls and procedures were not effective as of June 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 June 30, 2022, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings
Carebourn Capital, L.P. v. DarkPulse, Inc.
On July 11, 2022, the Court denied Carebourn’s motion to compel DPLS to produce a privilege log. On July 15, 2022, the Court denied Carebourn’s motion to disqualify or, in the alternative, seek limited discovery of DPLS’ legal counsel, consisting of the Taft Stettinius Hollister LLP and The Basile Law Firm P.C. On July 27, 2022, Carebourn paid $18,858.18 for attorneys’ fees awarded pursuant to the Court’s April 14, 2022 decision on the Company’s motion to compel Carebourn.
The Company remains committed to actively litigating its claims for relief under the Securities Exchange Act of 1934.
More Capital, LLC v. DarkPulse, Inc. et al
On July 11, 2022, the Court denied More’s motion for summary judgment against the Company and granted DarkPulse’s motion to compel More. The Court directed More to produce all responsive documents to certain requests for production served by DarkPulse within seven days thereof.
The Company remains committed to actively litigating its claims for relief under the Securities Exchange Act of 1934.
DarkPulse, Inc. v. FirstFire Global Opportunities Fund, LLC, and Eli Fireman (SDNY)
On May 26, 2022, the FirstFire Parties filed their motion to dismiss the Company’s first amended complaint, filed on May 5, 2022, and opening memorandum of law in support thereof. On June 16, 2022, the Company filed its memorandum of law in opposition to the FirstFire Parties’ motion to dismiss, and on June 30, 2022, the FirstFire Parties filed their memorandum of law in reply and further support of their motion to dismiss.
As of the date hereof, the FirstFire Parties’ motion to dismiss is 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 and the Racketeer Influenced and Corrupt Organizations Act.
DarkPulse, Inc. v. EMA Financial, LLC et al
On June 22, 2022, the EMA Parties filed their motion to dismiss the Company’s first amended complaint, filed on March 28, 2022, and opening memorandum of law in support thereof. On July 13, 2022, the Company filed its memorandum of law in opposition to the EMA Parties’ motion to dismiss, and on July 22, 2022, the EMA Parties filed their memorandum of law in reply and further support of their motion to dismiss. As of the date hereof, no decision has been 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 the Racketeer Influenced and Corrupt Organizations Act.
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Carebourn Capital et al v. Standard Registrar and Transfer et al
On May 20, 2022, Carebourn Capital, L.P. (“Carebourn”) and More Capital, LLC (“More”) (Carebourn and More, together, the “MN Noteholders”) commenced an action in the United States District Court for the District of Utah against (i) Standard Registrar and Transfer Co., Inc. (“Standard”), (ii) Amy Merrill (“Merrill”) (Standard and Merrill, together, the “TA Defendants”), (iii) DarkPulse, Inc., (iv) Dennis O’Leary (“O’Leary”), (v) Thomas Seifert (“Seifert”), (vi) Carl Eckel (“Eckel”), (vii) Anthony Brown (“Brown”), and (viii) Faisal Farooqui (“Farooqui”) (DarkPulse, O’Leary, Seifert, Eckel, Brown, and Farooqui, collectively, the “DPLS Defendants”). The MN Noteholders’ complaint alleges, among other things, that the TA Defendants and DPLS Defendants conspired together and acted in unison to preclude the MN Noteholders’ from receiving the benefits of the convertible note transactions between Carebourn, More, and DarkPulse.
On July 5, 2022, the TA Defendants filed their motion to dismiss the MN Noteholders’ complaint. Pursuant to the local rules of the U.S. Dist. Court for the District of Utah, the MN Noteholders must reply to the TA Defendants’ motion to dismiss on or before August 2, 2022. As of the date hereof, the DPLS Defendants have not been served and, thus, no deadline exists by which the DPLS Defendants must answer or otherwise respond to the MN Noteholders’ complaint.
The Company intends to vigorously defend itself against the MN Noteholders’ lawsuit.
DarkPulse, Inc. v. Brunson Chandler Jones et al
On July 8, 2022, the Company commenced an action against the law firm of Brunson Chandler Jones, PLLC and Lance B. Brunson (“Chandler Defendants”) in the United States District Court for the District of Utah. The Company’s claims, consisting of professional negligence/malpractice and breach of contract, arise from the legal services and relationship between DarkPulse and the Chandler Defendants and in connection with the merger between DarkPulse, DarkPulse Technologies Inc., and Klever Marketing, Inc.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
GHS Equity Lines
Pursuant to the Equity Financing Agreement, on June 16, 2022, we and GHS agreed that the Company would issue and sell to GHS, and GHS would purchase from us, 23,799,766 shares of Common Stock for total proceeds to us, net of discounts, of $402,086, at an effective price of $0.018584 per share (the “Eleventh EFA Closing”). We received approximately $360,852 in net proceeds from the Eleventh EFA Closing after deducting the fees and other estimated offering expenses payable by us. We used the net proceeds from the Eleventh EFA Closing for working capital and for general corporate purposes.
On May 27, 2022, we entered the EFA with GHS.
Pursuant to the EFA, on June 24, 2022, we and GHS agreed that the Company would issue and sell to GHS, and GHS would purchase from us, 38,391,106 shares of Common Stock for total proceeds to us, net of discounts, of $643,539, at an effective price of $0.01978 per share (the “1st EFA Closing”). We received approximately $578,160 in net proceeds from the 1st EFA Closing after deducting the fees and other estimated offering expenses payable by us. We used the net proceeds from the 1st EFA Closing for working capital and for general corporate purposes.
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 $104,563 in sales commissions paid to J.H. Darbie Co., Inc. (“J.H. Darbie”) pursuant to these transactions.
Series A Preferred Stock Issuance
On June 24, 2022, pursuant to the Employment Agreement dated effective April 1, 2022 with Dennis O’Leary, our CEO, we issued 100 shares of Series A Preferred Stock to Mr. O’Leary.
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 no commissions paid pursuant to this transactions.
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Item 6. Exhibits
| SEC Ref. No. | Title of Document |
| 10.1* | Consulting Agreement dated June 1, 2022 with Dr Ehab M. Eldemeri |
| 10.2* | Employment Agreement dated effective April 1, 2022 with Dennis O’Leary |
| 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.
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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: August 10, 2022 | By | /s/ Dennis O’Leary |
| Dennis O’Leary, Chairman, Chief Executive Officer, President, Chief Financial Officer | ||
| (Principal Executive Officer and Principal | ||
| Financial Officer) | ||
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