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)
(Former name, former address and former fiscal year, if changed since last report)
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
(1) 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), and (2) has been subject to such filing requirements
for the past 90 days.
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 ☐ No
The number of shares outstanding of the registrant’s common stock, $0.0001 par value per share, outstanding as of November 19, 2024 was .
TABLE OF CONTENTS
| 2 |
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
DARKPULSE, INC.
Consolidated Balance Sheets
| September 30 | December 31 | |||||||
| 2024 | 2023 | |||||||
| Unaudited | Audited | |||||||
| ASSETS | ||||||||
| CURRENT ASSETS: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Due from related party | ||||||||
| Prepaid expenses and other current assets | ||||||||
| TOTAL CURRENT ASSETS | ||||||||
| NON-CURRENT ASSETS: | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Patents, net | ||||||||
| Goodwill | ||||||||
| Investment in related party | ||||||||
| Other assets, net | ||||||||
| Intangible assets, net | ||||||||
| TOTAL NON-CURRENT ASSETS | ||||||||
| TOTAL ASSETS | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| CURRENT LIABILITIES: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Convertible notes, net | ||||||||
| Notes payable, current | ||||||||
| Derivative liability | ||||||||
| Loan payable, current | ||||||||
| Loan payable, related party | ||||||||
| Secured debenture, current | ||||||||
| Operating lease liabilities - current | ||||||||
| Other current liabilities | ||||||||
| TOTAL CURRENT LIABILITIES | ||||||||
| NON-CURRENT LIABILITIES: | ||||||||
| Secured debenture | ||||||||
| Loan payable | ||||||||
| Operating lease liabilities - non-current | ||||||||
| TOTAL NON-CURRENT LIABILITIES | ||||||||
| TOTAL LIABILITIES | ||||||||
| Commitments and contingencies | ||||||||
| STOCKHOLDERS' DEFICIT: | ||||||||
| Series A Super Voting preferred stock - par value $; shares designated, shares issued and outstanding at both September 30, 2024 and December 31, 2023 | ||||||||
| Convertible preferred stock - Series D, par value $, shares designated, shares issued and outstanding as of both September 30, 2024 and December 31, 2023 | ||||||||
| Common stock, par value $, shares authorized, and shares issued as of September 30, 2024 and December 31, 2023, respectively. | ||||||||
| Treasury stock at cost, shares at September 30, 2024 and December 31, 2023 | ( | ) | ( | ) | ||||
| Additional paid-in capital | ||||||||
| Common Stock to be issued | ||||||||
| Non-controlling interests | ||||||||
| Accumulated other comprehensive income (loss) | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| TOTAL STOCKHOLDERS' DEFICIT | ( | ) | ( | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | $ | $ | ||||||
See the accompanying notes to the unaudited condensed consolidated financial statements
| 3 |
DARKPULSE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| Unaudited | Audited | Unaudited | Audited | |||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| REVENUES | $ | $ | $ | $ | ||||||||||||
| COST OF REVENUES | ||||||||||||||||
| GROSS PROFIT (LOSS) | ( | ) | ||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Salaries, wages and payroll taxes | ||||||||||||||||
| Professional fees | ( | ) | ||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Bad debt expense | ||||||||||||||||
| Impairment expense | ( | ) | ||||||||||||||
| Gain on forgiveness of payables | ||||||||||||||||
| TOTAL OPERATING EXPENSES | ||||||||||||||||
| OPERATING LOSS | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER INCOME (EXPENSE): | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ||||||||||
| Loss on deconsolidation | ( | ) | ||||||||||||||
| Change in fair market of derivative liabilities | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss on equity investment | ( | ) | ( | ) | ( | ) | ||||||||||
| Gain on the forgiveness of debt | ||||||||||||||||
| Exceptional Costs gain | ( | ) | ( | ) | ||||||||||||
| Foreign currency exchange rate variance | ( | ) | ( | ) | ||||||||||||
| TOTAL OTHER INCOME (EXPENSE) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| – | ||||||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to non-controlling interests | ( | ) | ||||||||||||||
| Net loss attributable to Darkpulse, Inc. | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share - basic and diluted | $ | ) | $ | ) | $ | ) | $ | |||||||||
| Weighted average common shares outstanding - basic and diluted | ||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| Unaudited | Unaudited | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| NET LOSS | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| OTHER COMPREHENSIVE INCOME (LOSS) | ||||||||||||||||
| Foreign currency translation | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| COMPREHENSIVE LOSS | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
See the accompanying notes to the unaudited condensed consolidated financial statements
| 4 |
DARKPULSE, INC.
Consolidated Statement of Stockholders' Deficit
For the Nine Months Ended September 30, 2024 and 2023
Unaudited
| Preferred Stock | Common stock | |||||||||||||||||||||||||||||||
| Series A | Series D | Common stock | to be issued | |||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | |||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Common stock issued for cash, net of fees | – | – | – | |||||||||||||||||||||||||||||
| Issuance of common stock for legal settlement | – | – | – | |||||||||||||||||||||||||||||
| Common Stock to be issued | – | – | – | – | ||||||||||||||||||||||||||||
| Foreign currency adjustment | – | – | – | – | ||||||||||||||||||||||||||||
| Net loss | – | – | – | – | ||||||||||||||||||||||||||||
| Balance at March 31, 2023 | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Common stock issued for cash, net of fees | – | – | – | |||||||||||||||||||||||||||||
| Issuance of common stock for legal settlement | – | – | – | – | ||||||||||||||||||||||||||||
| Common Stock to be issued | – | – | – | – | ||||||||||||||||||||||||||||
| Foreign currency adjustment | – | – | – | – | ||||||||||||||||||||||||||||
| Net loss | – | – | – | – | ||||||||||||||||||||||||||||
| Balance at June 30, 2023 (audited) | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Common stock issued for cash, net of fees | – | – | – | |||||||||||||||||||||||||||||
| Issuance of common stock for legal settlement | – | – | – | – | ||||||||||||||||||||||||||||
| Common Stock to be issued | – | – | – | – | ||||||||||||||||||||||||||||
| Foreign currency adjustment | – | – | – | – | ||||||||||||||||||||||||||||
| Net loss | – | – | – | – | ||||||||||||||||||||||||||||
| Balance at September 30, 2023 (audited) | $ | $ | ||||||||||||||||||||||||||||||
| Balance at December 31, 2023 | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Common stock issued for cash, net of fees | – | – | – | |||||||||||||||||||||||||||||
| Issuance of common stock for legal settlement | – | – | – | – | ||||||||||||||||||||||||||||
| Common Stock to be issued | – | – | – | – | ||||||||||||||||||||||||||||
| Foreign currency adjustment | – | – | – | – | ||||||||||||||||||||||||||||
| Net loss | – | – | – | – | ||||||||||||||||||||||||||||
| Balance at March 31, 2024 | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Common stock issued for cash, net of fees | – | – | – | |||||||||||||||||||||||||||||
| Issuance of common stock for conversion of convertible debt | – | – | – | |||||||||||||||||||||||||||||
| Common Stock to be issued | – | – | – | |||||||||||||||||||||||||||||
| Foreign currency adjustment | – | – | – | – | ||||||||||||||||||||||||||||
| Net loss | – | – | – | – | ||||||||||||||||||||||||||||
| Balance at June 30, 2024 (unaudited) | $ | $ | $ | $ | ||||||||||||||||||||||||||||
| Common stock issued for cash, net of fees | – | – | – | |||||||||||||||||||||||||||||
| Issuance of common stock for conversion of convertible debt | – | – | – | – | ||||||||||||||||||||||||||||
| Common Stock to be issued | – | – | – | – | ( | ) | ||||||||||||||||||||||||||
| Foreign currency adjustment | – | – | – | – | ||||||||||||||||||||||||||||
| Common stock to be issued for cash | – | – | – | |||||||||||||||||||||||||||||
| Net loss | – | – | – | – | ||||||||||||||||||||||||||||
| Balance at September 30, 2024 (unaudited) | $ | $ | $ | $ | ||||||||||||||||||||||||||||
(continued)
| 5 |
| Treasury stock | Additional paid-in | Non- controlling | Accumulated other comprehensive | Accumulated | Total stockholders’ deficit |
|||||||||||||||||||||||
| Shares | Amount | capital | interests | loss | deficit | (equity) | ||||||||||||||||||||||
| Balance at December 31, 2022 | $ | ( |
) | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||||||||
| Common stock issued for cash, net of fees | – | |||||||||||||||||||||||||||
| Issuance of common stock for legal settlement | – | |||||||||||||||||||||||||||
| Common Stock to be issued | – | |||||||||||||||||||||||||||
| Foreign currency adjustment | – | ( |
) | ( |
) | |||||||||||||||||||||||
| Net loss | – | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||
| Balance at March 31, 2023 | $ | ( |
) | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||||||||
| Common stock issued for cash, net of fees | – | |||||||||||||||||||||||||||
| Issuance of common stock for legal settlement | – | |||||||||||||||||||||||||||
| Common Stock to be issued | – | |||||||||||||||||||||||||||
| Foreign currency adjustment | – | ( |
) | ( |
) | |||||||||||||||||||||||
| Net loss | – | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||
| Balance at June 30, 2023 (audited) | $ | ( |
) | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||||||||
| Common stock issued for cash, net of fees | – | |||||||||||||||||||||||||||
| Issuance of common stock for legal settlement | – | |||||||||||||||||||||||||||
| Common Stock to be issued | – | |||||||||||||||||||||||||||
| Foreign currency adjustment | – | |||||||||||||||||||||||||||
| Net loss | – | ( |
( |
( |
) | |||||||||||||||||||||||
| Balance at September 30, 2023 (audited) | $ | ( |
) | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||||||||
| Balance at December 31, 2023 | $ | ( |
) | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||||||||
| Common stock issued for cash, net of fees | – | |||||||||||||||||||||||||||
| Issuance of common stock for legal settlement | – | |||||||||||||||||||||||||||
| Foreign currency adjustment | – | |||||||||||||||||||||||||||
| Net loss | – | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||
| Balance at March 31, 2024 | $ | ( |
) | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||||||||
| Common stock issued for cash | – | |||||||||||||||||||||||||||
| Issuance of common stock for conversion of convertible debt | – | |||||||||||||||||||||||||||
| Foreign currency adjustment | – | |||||||||||||||||||||||||||
| Net loss | – | ( |
) | ( |
) | ( |
) | |||||||||||||||||||||
| Balance at June 30, 2024 | $ | ( |
) | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||||||||
| Common stock issued for cash, net of fees | – | |||||||||||||||||||||||||||
| Issuance of common stock for conversion of convertible debt | – | |||||||||||||||||||||||||||
| Common Stock to be issued | – | |||||||||||||||||||||||||||
| Foreign currency adjustment | – | ( |
) | ( |
) | |||||||||||||||||||||||
| Common stock issued for cash | – | |||||||||||||||||||||||||||
| Net loss | – | ( |
) | ( |
) | |||||||||||||||||||||||
| Balance at September 30, 2024 (unaudited) | $ | ( |
) | $ | $ | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||||||||||
See the accompanying notes to the unaudited condensed consolidated financial statements
| 6 |
DARKPULSE, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS UNAUDITED
Nine Months Ended September 30,
| 2024 | 2023 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Gain on forgiveness of payables and liabilities | ( | ) | ||||||
| Change in fair market of derivative liabilities | ( | ) | ||||||
| Loss on equity investment | ||||||||
| Issuance of common stock for legal settlement | ||||||||
| Amortization of debt discount | ||||||||
| Impairment of goodwill and intangible assets | ||||||||
| Bad debt expense | ||||||||
| Loss on deconsolidation | ||||||||
| Operating lease expense | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Contract assets | ( | ) | ||||||
| Prepaid expenses and other assets | ( | ) | ||||||
| Contract liabilities | ||||||||
| Loss provision for contracts in progress | ||||||||
| Accounts payable and accrued expenses | ||||||||
| Operating lease liabilities, net | ( | ) | ( | ) | ||||
| Other current liabilities | ( | ) | ( | ) | ||||
| Other assets | ||||||||
| Other liabilities | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ||||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Investment in related party | ||||||||
| Investment in joint venture | ( | ) | ||||||
| Issuance of note receivable, related party | ( | ) | ( | ) | ||||
| Advances to related party | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Issuance of common stock, net of fees | ||||||||
| Proceeds from convertible notes | ||||||||
| Net repayments of loan payable | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Net change in cash | ( | ) | ||||||
| Effect of exchange rate on cash | ( | ) | ||||||
| Cash at beginning of year | ||||||||
| Cash at end of year | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Non-cash financing and investing activities: | ||||||||
| Conversion of convertible debt | $ | |||||||
See the accompanying notes to the unaudited condensed consolidated financial statements
| 7 |
DARKPULSE, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Description of Business
DarkPulse, Inc. (“DPI” or “Company”) is a technology-security 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 monitoring systems will initially be delivered in applications for border security, pipelines, the oil and gas industry 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 subsidiaries consist of
DarkPulse UK Ltd, a company headquartered in, United Kingdom whose focus is in engineering, telecommunications, energy, rail, critical network infrastructure, pipeline integrity systems, renewables and security; Optilan India, PVT located in Kilpauk, Chennai India and Optilan Communication & Security Systems, Ltd located in Ankara, Turkey provid project engineering & design, system provisioning and contract bid services globally and throughout Europe; Remote Intelligence, Limited Liability Company, a company headquartered in Pennsylvania who provides unmanned aerial drone and unmanned ground crawler (UGC) services to a variety of clients from industrial mapping and ecosystem services, to search and rescue, to pipeline security; Wildlife Specialists, Limited Liability Company, a company headquartered in Pennsylvania who provides clients with comprehensive wildlife and environmental assessment, planning, and monitoring services; TerraData Unmanned, PLLC, a company headquartered in Florida who custom manufactures NDAA compliant drones and unmanned ground crawlers to meet the needs of its customers; DarkPulse Electronics Manufacturing Inc., a company headquartered in Arizona who is a U.S. manufacturer of advanced electronics, cables and sub-assemblies specializing in advanced package and complex CCA and hardware.
Liquidation/winding up of Optilan (UK) Limited
On May 3, 2023, Eversheds Sutherland (International) LLP, a creditor of Optilan (UK) Limited, filed a petition to wind up (“Winding up Petition”) Optilan (UK) Limited, a wholly owned subsidiary of the Company’s Subsidiary, Optilan HoldCo 3 Limited, and the matter was due to be heard in the Portsmouth Combined Court Centre on June 28, 2023.
On June 28, 2023, the High Court of Justice in the United Kingdom issued a winding-up order for the liquidation and winding up of the affairs of Optilan (UK) Limited (“Optilan Liquidation”). In conjunction with the order, the court appointed the Official Receiver’s Office (“OR”) to take the appointment as liquidator of Optilan (UK) Limited and take control of Optilan (UK) Limited’s assets. At that time DarkPulse, Inc. no longer has any involvement in the operations of Optilan (UK) Ltd.
At the same time the court appointed the OR to take the appointment as liquidator of Optilan (UK) Limited. The OR has taken control of Optilan (UK) Limited’s assets. To date the ORs Office has initiated contact with Optilan but we still wait to receive details of the individual who will be taking the role of OR.
On July 3, 2023, Optilan (UK) Limited received a letter from The Insolvency Service, an executive agency sponsored by the Department for Business and Trade located in the U.K. Pursuant to the letter of The Insolvency Services, the Company was required to provide information relating to Optilan (UK) Limited to the Official Receiver’s Office (a government body of Plymouth, the United Kingdom) and attend an interview with staff of the Official Receiver’s Office to review the prospect of recovering the assets of Optilan (UK) Limited for the benefit of creditors. The interview occurred July 18, 2023.
The Company is an unsecured creditor of Optilan (UK) Limited and is at risk of losing any repayment of obligations due from Optilan (UK) Limited because there are several intercompany relationships between the Company and Optilan (UK) Limited, the financial impact of any future claims and liabilities may not be known for several months. The Company has approximately $19.4 million intercompany payables due from Optilan (UK), which will increase the Company liabilities for any obligations not repaid. At the time of this filing the Company is still evaluating the full effects of the winding-up order for liquidation and the material adverse effects it will have on the Company’s continued operations and ability to meet future obligations.
On August 9, 2023, Evelyn Partners was appointed Joint Liquidator.
| 8 |
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The consolidated financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles of the United States of America (“U.S. GAAP”) and the rules and regulations of the U.S Securities and Exchange Commission for Interim Financial Information. The condensed consolidated financial statements of the Company include the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated. All adjustments (consisting of normal recurring items) necessary to present fairly the Company’s financial position as of September 30, 2024, and the results of operations for three and nine months and cash flows for the nine months ended September 30, 2024 and 2023 have been included.
The Company evaluates its relationships with other entities to identify whether they are variable interest entities (“VIE”) as defined by Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation (“ASC 810”), and to assess whether it is the primary beneficiary of such entities. If the determination is made that the Company is the primary beneficiary, then that entity is consolidated.
Unaudited Interim Financial Information
The accompanying unaudited condensed consolidated balance sheet as of September 30, 2024, the unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2024 and 2023 and of cash flows for the nine months ended September 20, 2024 and 2023 have been prepared by the Company, pursuant to the rules and regulations of the SEC for the interim financial statements. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. The unaudited interim consolidated financial statements have been prepared on a basis consistent with the audited consolidated financial statements and in the opinion of management, reflect all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of the consolidated results for the interim periods presented and of the consolidated financial condition as of the date of the interim consolidated balance sheet. The results of operations are not necessarily indicative of the results expected for the year ending December 31, 2024.
The accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2023 included in the Company’s Annual Form 10-K filed with SEC on July 15, 2024.
Use of Estimates
The preparation of the Company’s financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates and assumptions reflected in these financial statements include, but are not limited to, assumptions used to calculate derivative liabilities, revenue recognition and impairment of long-lived assets. The Company bases its estimates on historical experience, known trends and other market-specific or other relevant factors that it believes to be reasonable under the circumstances. On an ongoing basis, management evaluates its estimates when there are changes in circumstances, facts and experience. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.
| 9 |
Cash
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 a financial institution, the Company evaluates at least annually the rating of the financial institution in which it holds deposits.
Accounts Receivable
Accounts receivable and contract assets include amounts billed to customers under the terms and provisions of the contracts. Most billings are determined based on contractual terms. As is common practice in the industry, the Company classifies all accounts receivable and contract assets, including retainage, as current assets. The contracting cycle for certain long-term contracts may extend beyond one year, and accordingly, collection of retainage on those contracts may extend beyond one year. Contract assets include amounts billed to customers under retention provisions in construction contracts. Such provisions are standard in the Company’s industry and usually allow for a portion of progress billings on the contract price, typically 5-10%, to be withheld by the customer until after the Company has completed work on the project. Billings for such retention balances at each balance sheet date are finalized and collected after project completion. Generally, unbilled amounts will be billed and collected within one year. The Company determined that there are no material amounts due past one year and no material amounts billed but not expected to be collected within one year. Also, the Company adopted ASU 2016-13 in January 2023 and the adoption did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures for the year ended December 31, 2023.
Each month, the Company reviews its receivables
on a customer-by-customer basis and evaluates whether an allowance for doubtful accounts is necessary based on any known or perceived
collection issues. Any balances that are eventually deemed uncollectible are written off against the allowance after all means of collection
have been exhausted and the potential for recovery is considered remote. As of both September 30, 2024 and December 31, 2023, the Company
determined that the allowance for doubtful accounts was $
Accounts receivable includes retainage amounts
for the portion of the contract price earned by us for work performed but held for payment by the customer as a form of security until
we reach certain construction milestones or complete the project. As of September 30, 2024 and December 31, 2023, retainage receivable
was $
Foreign Currency Translation
The Company’s reporting currency is U.S. Dollars. The accounts of one of the Company’s subsidiaries is maintained using the appropriate local currency, British Pound (“GBP”) as the functional currency, as well as the Turkish lira, Emiraes Dirham, Azerbajani Manat and Indian Rupee. The accounts of one of the Company’s subsidiaries are 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 as foreign currency exchange variance.
*Optilian has been deconsolidated, and as a result, no translation rates were applied for the nine-months ended September 30, 2024.
The relevant translation rates are as follows:
for the nine months ended September 30, 2024 closing rate at
| 10 |
Long-Lived Assets and Goodwill
The Company accounts for long-lived assets in accordance with the provisions of ASC 360-10-35, Property, Plant and Equipment, Impairment or Disposal of Long-lived Assets. This accounting standard requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Indefinite-lived intangible assets established in connection with business combinations consist of the tradename. The impairment test for identifiable indefinite-lived intangible assets consists of a comparison of the estimated fair value of the intangible asset with its carrying value. If the carrying value exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
The Company accounts for goodwill and intangible assets in accordance with ASC 350, Intangibles – Goodwill and Other. Goodwill represents the excess of the purchase price of an entity over the estimated fair value of the assets acquired and liabilities assumed. ASC 350 requires that goodwill and other intangibles with indefinite lives be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value. This guidance simplifies the accounting for goodwill impairment by removing Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. The quantitative impairment test calculates any goodwill impairment as the difference between the carrying amount of a reporting unit and its fair value, but not to exceed the carrying amount of goodwill. It is our practice, at a minimum, to perform a qualitative or quantitative goodwill impairment test in the fourth quarter every year. The Company has one reporting unit it evaluates during its impairment test.
As a result of the Optilan Liquidation as described
in Note 1, management determined that certain events and circumstances occurred that indicated that the carrying amount of the Company’s
reporting unit may not be recoverable. The qualitative assessment was primarily due to the customer contracts held by Optilan (UK) Limited
and the associated revenue projections by the UK subsidiary that is subject to the potential winding up. As such, the Company compared
the fair value of the reporting unit to the carrying amounts and recorded an impairment loss of $
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 |
| 11 |
Revenue Recognition
The Company’s revenues are generated primarily from the sale of our services, which consist primarily of advanced technology solutions for integrated communications and security systems, as well as habitat management. The Company’s sales of products are primarily generated from our TJM subsidiaries. Sales of products and services are separate from one another. At contract inception, we assess the goods and services promised in the contract with customers and identify a performance obligation for each. To determine the performance obligation, we consider all products and services promised in the contract regardless of whether they are explicitly stated or implied by customary business practices. The timing of satisfaction of the performance obligation is not subject to significant judgment. We measure revenue as the amount of consideration expected to be received in exchange for transferring goods and services. We recognize service revenues as the performance obligations are met, which is generally as milestones are satisfied over time. We generally recognize product revenues at the time of shipment, provided that all other revenue recognition criteria have been met.
The Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which we expect to receive in exchange for those goods or services. To determine revenue recognition for arrangements that the Company determines are within the scope of ASC 606, we perform the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) we satisfy a performance obligation. The five-step model is applied to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services transferred to the customer. At contract inception, once the contract is determined to be within the scope of ASC 606, we assess the goods or services promised within each contract and determine those that are performance obligations and assess whether each promised good or service is distinct. We then recognize revenue in the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied.
The Company considers each individual sale of service contract to be its own performance obligation. Services in the contract are highly interdependent and interrelated, and the successful completion of each milestone is necessary for the overall success of the contract. Therefore, each milestone is not separately identifiable from other promises in the contract, and not distinct and ultimately not individual performance obligations.
The Company records revenue over time using the input measure as it is the most faithful depiction of an entity’s performance because it directly measures the value of the goods and services transferred to the customer. The Company utilizes the Right to Invoice for these contracts, as the pricing structure is based on various milestones that are specified in the contract. These milestones include Construction Phase Plan, Start of the construction phase, installation phase, site surveys, fiber splicing, recoveries, and closeouts. There are specified payments associated with these milestones in the contract, and the value allocated is commensurate with work done. In the event that there are advances such as upfront retainers and not based on the value, those are recorded as contract liabilities.
In accordance with ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedient, which is to (1) clarify the objective of the collectability criterion for applying paragraph 606-10-25-7; (2) permit an entity to exclude amounts collected from customers for all sales (and other similar) taxes from the transaction price; (3) specify that the measurement date for noncash consideration is contract inception; (4) provide a practical expedient that permits an entity to reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations; (5) clarify that a completed contract for purposes of transition is a contract for which all (or substantially all) of the revenue was recognized under legacy GAAP before the date of initial application, and (6) clarify that an entity that retrospectively applies the guidance in Topic 606 to each prior reporting period is not required to disclose the effect of the accounting change for the period of adoption. The amendments of this ASU are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. There was no impact as a result of adopting this ASU on the financial statements and related disclosures. Based on the terms and conditions of the product arrangements, the Company believes that its products and services can be accounted for separately as its products and services have value to the Company’s customers on a stand-alone basis. When a transaction involves more than one product or service, revenue is allocated to each deliverable based on its relative fair value; otherwise, revenue is recognized as products are delivered or as services are provided over the term of the customer contract.
| 12 |
Liquidation of Optilan (UK) Limited
On June 28, 2023, the High Court of Justice in the United Kingdom issued a winding-up order for the liquidation and winding up of the affairs of Optilan (UK) Limited (“Optilan Liquidation”). In conjunction with the order, the court appointed the Official Receiver’s Office (“OR”) to take the appointment as liquidator of Optilan (UK) Limited and take control of Optilan (UK) Limited’s assets. At that time DarkPulse, Inc no longer had any involvement in the operations of Optilan (UK) Ltd.
Cost of Revenues
Cost of revenues consists primarily of materials 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. Cost of revenues also includes direct labor attributable to revenue service arrangements.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents. The Company has not experienced any losses related to its cash and does not believe that it is subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
Leases
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.
| 13 |
Fair Value of Financial Instruments
The Company measures its financial assets and liabilities in accordance with the requirements of FASB ASC 820, Fair Value Measurements and Disclosures. As defined in FASB ASC 820, the fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilized the market data of similar entities in its industry or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. The Company classifies fair value balances based on the observability of those inputs. FASB ASC 820 established a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement) as follows:
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.
Level 2 – Pricing inputs are other than quoted prices in active markets included in level 1, which are either directly or indirectly observable as of the reported date and includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.
Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
The Company’s derivative liability is a Level 3 liability measured at fair value on a recurring basis. See Note 11.
Equity Investments
The Company uses the equity method to account for investments in which it has the ability to exercise significant influence over the investee’s operating and financial policies, or in which its holds a partnership or limited liability company interest in an entity with specific ownership accounts, unless it has virtually no influence over the investee’s operating and financial policies. The Company follows the guidance in ASC 323-10-30-2, Joint Ventures, which prescribes the use of the equity method for investments in joint ventures where the Company has significant influence. Equity method investments are recorded at cost and are adjusted to recognize (1) the Company’s share, based on percentage ownership or other contractual basis, of the investee’s net income or loss after the date of investment, (2) amortization of the recorded investment that exceeds the Company’s share of the book value of the investee’s net assets, (3) additional contributions made and dividends received, and (4) impairments resulting from other-than- temporary declines in fair value. Gain (loss) on equity investment includes realized gains or losses upon the sale of the investment and are included as other income (expense) in the consolidated statements of operations and comprehensive (loss).
Per ASC 323-10-30-2, Joint Ventures are accounted for using the equity method, in which the Company initially records its investment at cost, including transaction costs. Under the equity method, an investment in common stock and in-substance common stock is presented on the balance sheet of an investor as a single amount. However, any difference between the cost of the investment and the underlying equity in net assets of an investee — commonly referred to as a basis difference — should be accounted for as if the investee were a consolidated subsidiary.
| 14 |
Income Taxes
The Company accounts for income taxes pursuant to the provision of ASC 740-10, (“ASC 740-10”) which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized.
The Company follows the provision of ASC 740-10 related to Accounting for Uncertain Income Tax Positions. When tax returns are filed, there may be uncertainty about the merits of positions taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions.
Tax positions that meet the more likely than not recognition threshold are measured at the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefit associated with tax positions taken that exceed the amount measured as described above should be reflected as a liability for uncertain tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
The Company believes its tax positions are all more likely than not to be upheld upon examination. As such, the Company has not recorded a liability for uncertain tax benefits.
The Company has adopted ASC 740-10-25, Definition of Settlement which provides guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits and provides that a tax position can be effectively settled upon the completion and examination by a taxing authority without being legally extinguished. For tax positions considered effectively settled, an entity would recognize the full amount of tax benefit, even if the tax position is not considered more likely than not to be sustained based solely on the basis of its technical merits and the statute of limitations remains open. The federal and state income tax returns of the Company are subject to examination by the IRS and state taxing authorities, generally for three years after they are filed.
The Company's U.S. subsidiaries were incorporated in 2017, and tax returns have not yet been filed. The Company does not anticipate a tax liability for the years 2022 and 2021, however may be subject to certain penalties. The Company has filed tax returns in Canada for the year ended December 31, 2018, and they are still subject to audit.
Non-controlling Interests
Non-controlling interests are classified as a separate component of equity in the Company's consolidated balance sheets and statements of changes in stockholders’ equity. Net income (loss) and comprehensive income (loss) attributable to non-controlling interests are reflected separately from consolidated net income (loss) and comprehensive income (loss) in the consolidated statements of comprehensive income (loss) and statements of changes in stockholders’ equity. Any change in ownership of a subsidiary while the controlling financial interest is retained is accounted for as an equity transaction between the controlling and non-controlling interests. In addition, when a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary will be initially measured at fair value and the difference between the carrying value and fair value of the retained interest will be recorded as a gain or loss. The Company has non-controlling interests via its subsidiaries TerraData, Remote Intelligence and Wildlife Specialists.
During the nine months ended September 30, 2024
and 2023, the Company recorded a loss of $
| 15 |
Comprehensive Loss
Comprehensive loss includes net loss as well as other changes in stockholders’ equity that result from transactions and economic events other than those with stockholders. During the nine months ended September 30, 2024 and 2023 the Company’s only element of other comprehensive loss was foreign currency translation.
Stock-based Compensation
Stock-based compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition in the consolidated financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.
Pursuant to ASC Topic 718, for share-based payments
to consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized
over the vesting period of the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain.
The Company initially records compensation expense based on the fair value of the award at the reporting date. Further, ASC Topic 718,
provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification
accounting in Topic 718, such as the repricing of share options, which would revalue those options and the accounting for the cancellation
of an equity award whether a replacement award or other valuable consideration is issued in conjunction with the cancellation. If not,
the cancellation is viewed as a replacement and not a modification, with a repurchase price of $
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. Potentially dilutive items outstanding as of September 30, 2024 and December 31, 2023 are as follows:
September 30, 2024 | December 31, 2023 | |||||||
| Convertible notes | ||||||||
| Series D preferred stock | ||||||||
| 16 |
Recent Accounting Pronouncements
In November 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, issued by the Financial Accounting Standards Board. This ASU requires entities to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The update will generally result in the recognition of contract assets and contract liabilities at amounts consistent with those recorded by the acquiree immediately before the acquisition date rather than at fair value. The Company expects that there would be no material impact on the Company’s condensed consolidated financial statements upon the adoption of this ASU.
In August 2020, the FASB issued ASU 2020-06, which simplifies the guidance on the issuer’s accounting for convertible debt instruments by removing the separation models for convertible debt with a cash conversion feature and convertible instruments with a beneficial conversion feature. As a result, entities will not separately present in equity an embedded conversion feature in such debt and will account for a convertible debt instrument wholly as debt, unless certain other conditions are met. The elimination of these models will reduce reported interest expense and increase reported net income for entities that have issued a convertible instrument that is within the scope of ASU 2020-06. ASU 2020-06 is applicable for fiscal years beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. The Company adopted ASU 2020-06 on January 1, 2022, and the adoption of this ASU did not have a material impact on the Company’s consolidated financial statements and related disclosures.
On January 1, 2023, the Company adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASC 326). This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (“CECL”) methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts and generally applies to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the net amount expected to be collected by using an allowance for credit losses. The Company adopted this new guidance on January 1, 2023, and the adoption did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.
Management does not believe that any other recently issued, but not yet effective, accounting standards could have a material effect on the accompanying financial statements. As new accounting pronouncements are issued, the Company will adopt those that are applicable.
| 17 |
NOTE 3 – LIQUIDITY AND GOING CONCERN
The Company generated net losses 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 begin generating 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 consolidated 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 for twelve months from the issuance date of these consolidated financial statements. However, management cannot make any assurances that such financing will be secured.
NOTE 4 – BUSINESS ACQUISITIONS
Optilan India PV,TLtd and Optilan Communication & Security Systems, Ltd.
On September 11, 2024, the Company closed a sale
agreement with COLIN HARDMAN, CHRISTOPHER ALLEN AND GREGORY ANDREW PALFREY as Joint Liquidators, Optilan (UK) Limited incorporated and
registered in England and Wales acting by the Joint Liquidators (Seller), purchasing the right, title and interest of shares in Optilan
India, PVT located in Kilpauk, Chennai India and Optilan Communication & Security Systems, Ltd located in Ankara, Turkey along with
the applicable intellectual property rights including the following software; (a) the accounting systems ; (b) customer resource management;
and (c) the user interface for sensor systems. (2) The “Optilan.com” domain name and continued use of the “@optilan.com”
email accounts. The Company agreed to pay $
The Company has accounted for the purchase using the acquisition method of accounting for business combinations under ASC 805. Accordingly, the purchase price has been allocated to the underlying assets and liabilities in proportion to their respective fair values. The excess of the consideration transferred over the estimated fair values of the net assets acquired was recorded as goodwill. The following table summarizes the acquired assets and assumed liabilities for the fair value of the assets and liabilities recognized at the date of acquisition:
| Consideration | ||||
| Property, Plant & Equipment | $ | |||
| Shares | ||||
| Purchase price | $ | |||
| 18 |
The allocation of the total purchase price to the tangible and intangible assets acquired and liabilities assumed by DarkPulse based on the estimated fair values as of September 11, 2024 was as follows:
| (Amounts in US$’s) | Amounts Recognized as of Acquisition Date | Measurement Period Adjustments | Fair Value | |||||||||
| Cash | $ | $ | $ | |||||||||
| Accounts receivable | ||||||||||||
| Other current assets | ||||||||||||
| Property & equipment | ||||||||||||
| Goodwill | ||||||||||||
| Total assets | ||||||||||||
| Assumed liabilities | ||||||||||||
| Non-controlling interest | ||||||||||||
| Total Consideration for 100% of equity interests | $ | $ | $ | |||||||||
NOTE 5 – REVENUE
The following table is a summary of the Company’s timing of revenue recognition for the three and nine months ended September 30, 2024 and 2023:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| 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.
Revenue by source consisted of the following for the three and nine months ended September 30, 2024 and 2023:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| Products | $ | $ | $ | $ | ||||||||||||
| Services | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
Revenue by geographic destination consisted of the following for the three and nine months ended September 30, 2024 and 2023:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2024 | 2023 | 2024 | 2023 | |||||||||||||
| North America | $ | $ | $ | $ | ||||||||||||
| United Kingdom | ||||||||||||||||
| Rest of world | ||||||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
| 19 |
Contracts
Contract revenue is recognized over time using the cost-to-cost measure of progress for fixed price contracts. The cost-to-cost measure of progress best depicts the continuous transfer of control of goods or services to the customer. The contractual terms provide that the customer compensates the Company for services rendered.
Contract costs include all direct materials, labor and subcontracted costs, as well as indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and the costs of capital equipment. The cost estimation and review process for recognizing revenue over time under the cost-to-cost method is based on the professional knowledge and experience of the Company’s project managers, engineers and financial professionals. Management reviews estimates of total contract transaction price and total project costs on an ongoing basis. Changes in job performance, job conditions and management’s assessment of expected variable consideration are factors that influence estimates of the total contract transaction price, total costs to complete those contracts and profit recognition. Changes in these factors could result in revisions to revenue and costs of revenue in the period in which the revisions are determined on a prospective basis, which could materially affect the Company’s consolidated results of operations for that period. Provisions for losses on uncompleted contracts are recorded in the period in which such losses are determined.
Performance Obligations
A performance obligation is a contractual promise to transfer a distinct good or service to the customer and is the unit of account under Accounting Standards Codification (“ASC”) Topic 606. The transaction price of a contract is allocated to distinct performance obligations and recognized as revenue when or as the performance obligations are satisfied. The Company’s contracts often require significant integrated services and, even when delivering multiple distinct services, are generally accounted for as a single performance obligation. Contract amendments and change orders are generally not distinct from the existing contract due to the significant integrated service provided in the context of the contract and are accounted for as a modification of the existing contract and performance obligation. The majority of the Company’s performance obligations are completed within one year.
When more than one contract is entered into with a customer on or close to the same date, the Company evaluates whether those contracts should be combined and accounted for as a single contract as well as whether those contracts should be accounted for as more than one performance obligation. This evaluation requires significant judgment and is based on the facts and circumstances of the various contracts, which could change the amount of revenue and profit recognition in a given period depending upon the outcome of the evaluation.
Contract Assets and Liabilities
The Company bill its customers based on contractual terms, including, milestone billings based on the completion of certain phases of the work. Sometimes, billing occurs after revenue recognition, resulting in unbilled revenue, which is accounted for as a contract asset. Sometimes the Company receives advances payments from our customers before revenue is recognized, resulting in deferred revenue, which is accounted for as a contract liability.
Contract assets in the consolidated balance sheets represents costs and estimated earnings in excess of billings, which arise when revenue has been recorded but the amount has not been billed.
Contract liabilities on September 30, 2024 are $
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Variable Consideration
Transaction pricing for the Company’s contracts may include variable consideration, such as unapproved change orders, claims, incentives and liquidated damages. Management estimates variable consideration for a performance obligation utilizing estimation methods that best predict the amount of consideration to which the Company will be entitled. Variable consideration is included in the estimated transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Management’s estimates of variable consideration and determination of whether to include estimated amounts in transaction price are based on past practices with the customer, specific discussions, correspondence or preliminary negotiations with the customer, legal evaluations and all other relevant information that is reasonably available. The effect of a change in variable consideration on the transaction price of a performance obligation is typically recognized as an adjustment to revenue on a cumulative catch-up basis. To the extent unapproved change orders, claims and liquidated damages reflected in transaction price are not resolved in the Company’s favor, or to the extent incentives reflected in transaction price are not earned, there could be reductions in, or reversals of, previously recognized revenue.
NOTE 6 – ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following as of September 30, 2024 and December 31, 2023:
September 30, 2024 | December 31, 2023 | |||||||
| Accounts receivable | $ | $ | ||||||
| Less: Allowance for doubtful accounts | ( | ) | ||||||
| Accounts receivable, net | $ | $ | ||||||
The Company performed an analysis of the trade
receivables related to Wildlife Specialists and determined that $
NOTE 7 – PROPERTY AND EQUIPMENT
Property and equipment consisted of the following as of September 30, 2024 and December 31, 2023:
September 30, 2024 | December 31, 2023 | |||||||
| Property and equipment | $ | $ | ||||||
| Leasehold improvements | ||||||||
| Property and equipment at cost | ||||||||
| Less - accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
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NOTE 8 – GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
The following is a summary of activity of goodwill for the three months ended September 30, 2024:
| Goodwill | ||||
| Balances at December 31, 2023 | $ | |||
| Goodwill pertaining to new Acquisitions | ||||
| Balances at September 30, 2024 | $ | |||
Patents - Intrusion Detection Intellectual Property
The Company relies on patent laws and restrictions on disclosure to protect its intellectual property rights. As of September 30, 2024 and 2023, the Company held three U.S. and foreign patents on its intrusion detection technology, which expire in calendar years 2025 through 2034 (depending on the payment of maintenance fees).
The DPTI issued patents cover a System and Method for Brillouin Analysis, a System and Method for Resolution Enhancement of a Distributed Sensor, and a Flexible Fiber Optic Deformation System Sensor and Method. Maintenance of intellectual property rights and the protection thereof is important to our business. Any patents that may be issued may not sufficiently protect the Company's intellectual property and third parties may challenge any issued patents. Other parties may independently develop similar or competing technology or design around any patents that may be issued to the Company. The Company cannot be certain that the steps it has taken will prevent the misappropriation of its intellectual property, particularly in foreign countries where the laws may not protect proprietary rights as fully as in the United States. Further, the Company may be required to enforce its intellectual property or other proprietary rights through litigation, which, regardless of success, could result in substantial costs and diversion of management's attention. Additionally, there may be existing patents of which the Company is unaware that could be pertinent to its business, and it is not possible to know whether there are patent applications pending that the Company's products might infringe upon, since these applications are often not publicly available until a patent is issued or published.
For the nine months ended September 30, 2024 and
2023, the Company had patent amortization costs on its intrusion detection technology totaling $
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.
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The following is a summary of the DPTI patents:
September 30, 2024 | December 31, 2023 | |||||||
| Patents | $ | $ | ||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||
| Patents, net | $ | $ | ||||||
For the nine months ended September 30, 2024 and 2023, the Company amortized $ 38,271 and $ 38,271, respectively.
Future expected amortization of patents is as follows:
| As of December 31, | ||||
| 2024 | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| Thereafter | ||||
| Total patents | $ | |||
NOTE 9 – JOINT VENTURE
On September 9, 2022, the Company entered into
a Joint Venture Agreement with Neural Signals Inc, (“NSI”), for the purpose of developing, marketing and selling products
and services based on the patents issued to NSI. The parties established the Joint Venture, Neural Logistics Inc., under a separate entity
to conduct business. The Company has
During the nine months ended September 30, 2024,
the Company contributed $
NOTE 10 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following as of September 30, 2024 and December 31, 2023:
September 30, 2024 | December 31, 2023 | |||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Total accounts payable and accrued expenses | $ | $ | ||||||
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NOTE 11 – DEBT
Convertible Notes
The Company uses the Black-Scholes Model to calculate
the derivative value of its convertible debt. The valuation result generated by this pricing model is necessarily driven by the value
of the underlying common stock incorporated into the model. The values of the common stock used were based on the price at the date of
issue of the debt security as of September 30, 2024 and December 31, 2023. In 2024 management determined the expected volatility of
On August 7, 2023, the Company entered into a
convertible note for a principal of $
On September 29, 2023, the Company entered into
a convertible note for a principal of $
On December 4, 2023, the Company entered into
a convertible note for a principal of $
As of both September 30, 2024 and December 31,
2023, there was $
The summary of convertible notes is as follows:
September 30, 2024 | December 31, 2023 | |||||||
| Principal Outstanding | $ | $ | ||||||
| Less: unamortized debt discount | ( | ) | ||||||
| Convertible notes, net | $ | $ | ||||||
Notes Payable
July 24, 2024, we and GS Capital Partners,
LLC entered into a Settlement Agreement pursuant to which the Company entered into a confession of judgment in favor of GS Capital
in the amount of $
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Loans Payable
The Company’s RI and WS subsidiaries have various loans including Small Business Association (“SBA”) Economic Injury Disaster Loan (“EIDL’) loans, lines of credit and other advances. The loans bear interest with varying rates up to 9.25% per annum. The following is a summary of the loans payable at September 30, 2024 and December 31, 2023:
September 30, 2024 | December 31, 2023 | |||||||
| RI - line of credit | $ | $ | ||||||
| RI - Short-term loans | ||||||||
| WS - line of credit | ||||||||
| WS- Short-term loans | ||||||||
| Optilan Communication & Security Ltd – Short Term Loan | ||||||||
| Loan payable, current | $ | $ | ||||||
| RI - SBA EIDL | $ | $ | ||||||
| RI - long-term loans | ||||||||
| WS - SBA EIDL | ||||||||
| WS - long-term loans | ||||||||
| Loan payable, non-current | $ | $ | ||||||
NOTE 12 – SECURED DEBENTURE
DPTI issued a convertible Debenture to the University (see Note 1) 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 CAD 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 CAD 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 for 2020, 2019 and 2018. Beginning in 2023, The principal repayment amounts will be due quarterly 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 December 31, 2018, the quarterly principal repayment amounts will be US$48,447. 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.
The Debenture was initially recorded at the $1,491,923 equivalent U.S. 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 U.S. 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 Debenture also includes a provision requiring DPTI to pay the University a 2% royalty on sales of any and all products or services which incorporate the Patents for a period of five years from April 24, 2018. To date, no royalties have been paid.
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On February 1, 2024, our board of directors approved entering into the Amendment No. 01 to Convertible Debenture (Secured) Term Debenture with the University pursuant to which, effective January 17, 2024, section (c) of the recitals of the Convertible Debenture (Secured) Term Debenture effective April 24, 2017 was amended to the following:
“(c) the date that is seven (7) years from the Issue Date; or”
Section 3.1 of the Debenture is amended to the following:
3.1 Payback on the Principal Sum will commence over a four (4) year period upon the earlier of the following (each a “Payback Period”): (a) three (3) years following the Payor achieving positive earnings before interest, taxes, depreciation and amortization for two (2) consecutive quarters; or (b) the date that is seven (7) years from the Issue Date.
Section 3.2 of the Debenture is amended to the following:
“3.2 The Payor shall be required to pay the Payee, in quarterly installments over a four (4) year period commencing from the start of the Payback Period, the following:
(a) Ninety-Three Thousand Seven Hundred and Fifty Canadian Dollars ($93,750.00 CDN); and
(b) interest accrued on the Principal Sum on a declining balance; and
(c) all costs associated with protecting the Technology.”
For the nine months ended September 30, 2024,
and 2023, the Company recorded interest expense of $
NOTE 13 – LEASES
The following was included in our balance sheet as of September 30, 2024 and December 31, 2023:
| Operating leases | September 30, 2024 | December 31, 2023 | ||||||
| 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 September 30, 2024 and December 31, 2023 were as follows:
| Operating leases | September 30, 2024 |
December 31, 2023 |
||||||
| Weighted average remaining lease term (years) | ||||||||
| Weighted average discount rate | % | % | ||||||
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Operating Leases
On January 12, 2021, the Company’s newly
acquired subsidiary entered into an operating lease agreement to rent office space in Mumbai, India. This three-year agreement commenced
January 12, 2021 with an annual rent of approximately $
On May 27, 2021, the Company’s newly acquired
subsidiary entered into an operating lease agreement to rent office space in Warwick, United Kingdom. This ten-year agreement commenced
May 27, 2021 with an annual rent of approximately $
On August 31, 2021, the Company’s newly
acquired subsidiary entered into an operating lease agreement to rent office space in Tempe, Arizona. This five-year agreement commenced
August 31, 2021 with an annual rent of approximately $
On October 20, 2021, the Company’s newly
acquired subsidiary entered into an operating lease agreement to rent office space in Warwick, United Kingdom. This ten-year agreement
commenced October 20, 2021 with an annual rent of approximately $
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 $
On June 28, 2023, the Company recognized a gain on deconsolidation of $1,642,146 related to Optilan (UK) and its subsidiaries leases.
NOTE 14 – STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock
In accordance with the Company’s bylaws, the Company has authorized a total of shares of preferred stock, par value $ per share, for all classes. As of September 30, 2024 and December 31, 2023, there were and total preferred shares issued and outstanding for all classes, respectively.
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 September 30, 2024 and December 31, 2023, there were and common shares issued, respectively.
2022 Transactions
On May 27, 2022 we entered an Equity Financing Agreement (the “2022 EFA”) and Registration Rights Agreement (the “RRA”) with GHS, pursuant to which GHS agreed to purchase up to $70,000,000 in shares of our Common Stock, from time to time over the course of 24 months after effectiveness of a registration statement on Form S-1 (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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2023 Transactions
On April 28, 2023, the Company entered into an Equity Financing Agreement with GHS, to which GHS agreed to Purchase $30,000,000 in shares of our Common Stock over the course of 12 months at 92% of the current market price.
On June 13, 2023, the Company entered into an Amendment to the Equity Financing Agreement with GHS, to which GHS agreed to Purchase $30,000,000 in shares of our Common Stock over the course of 12 months at 92% of the current market price.
On July 10, 2023, the Company entered into a Second Amendment to the Equity Financing Agreement with GHS, to which GHS agreed to purchase up to $30,000,000 in shares of our Common Stock over the course of 12 months at 92% of the current market price.
2024 Transactions
On August 14, 2024, the Company entered into a
Third Amendment to the Equity Financing Agreement with GHS, 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.
Below is a table of all puts made by the Company under the 2022 EFA during 2024:
| Date of Put | Number of Common Shares Issued |
Total Proceeds, Net of Discounts |
Effective Price per Share |
Net Proceeds | ||||||||||
| 1/8/2024 | $ | $ |
$ | |||||||||||
| 2/29/2024 | $ |
|||||||||||||
| 8/19/2024 | $ |
|||||||||||||
| $ | $ | |||||||||||||
* Issued shares pursuant to an individual stock purchase agreement with an unrelated investor (not under 2022 EFA)
In
January 2023, the Company entered into a settlement of a dispute between certain stockholders in which the Company decided, during the
period ended September 30, 2023, to issue shares to settle the dispute. In January 2023, the Company issued shares of common
stock to the individuals. The fair value of $