Notes to the Consolidated Financial Statements
For the Years ended December 31, 2019
and 2018
NOTE 1 – BASIS OF FINANCIAL STATEMENT
PRESENTATION
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.
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.
NOTE 2 – SIGNIFICANT ACCOUNTING
POLICIES
A summary of the significant accounting
policies consistently applied in the preparation of the accompanying financial statements are as follows:
Basis of Presentation and Principles
of Consolidation
The Company’s consolidated financial
statements are prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”).
The consolidated financial statements of the Company include the Company and its wholly-owned subsidiaries. All material intercompany
balances and transactions have been eliminated in consolidation.
Our consolidated financial statements as
of December 31, 2019 and 2018 include the accounts of DarkPulse Inc. and its subsidiaries:
DarkPulse Technologies Inc. (“DPTI”),
a New Brunswick, Canada corporation, a wholly owned subsidiary, incorporated December 16, 2010.
DPTI owns 100% of DarkPulse Technology
Holdings Inc., a New York corporation, incorporated July 6, 2017.
DPTI indirectly owns 37.572% of DarkPulse
Technologies International Inc., ("DPTINY") a New York corporation, incorporated on September 7, 2017. On or about September
18, 2017, DPTI entered into a shareholder agreement with 3 investors, whereby DPTI would own 50.2% of DPTINY and the investors would
own 49.8%. On or about October 3, 2017, another investor entered into an agreement with DPTINY to fund it $37,500 for a 0.5% equity
interest in DPTINY. On December 26, 2017, DPTI’s CEO incorporated another corporation named DarkPulse Technologies International
Inc., ("DPTIDel") in the State of Delaware. On or about April 16, 2018, seven investors and DPTI entered into a new agreement
whereby it was agreed that the investors would own 62.428% of DPTIDel, and the September 18, 2017 agreement with respect to DPTINY
was considered null and void. Accordingly, the funding of $37,500 to DPTINY in October 2017 has been converted to an equity interest
in DPTIDel as of April 2018. As of April 16, 2018, DPTI owns approximately 37.572% of the shares of common stock of DPTIDel and
100% of the issued shares of Series A Preferred Stock of DPTIDel, pursuant to which the Company controls both DPTIDel and DPTINY.
The Company does not own any interest in
DarkPulse East LLC, ("DPE") an entity organized on December 8, 2017 in Russia, by two of the shareholders of DPTIDel,
to act as a sales organization to promote the Company's products within Russia. Each of the two shareholders own 50% interest in
DPE. During November and December 2017 DPTINY funded DarkPulse East LLC a total of $20,650 to establish and launch the Company's
business in Russia. The Company is considered to be the primary beneficiary of DPE based on implicit obligations to fund it, and
accordingly, the operations of DPE are consolidated into these financial statements. As of December 31, 2018, DPE had no assets
or liabilities. The Company is not liable for obligations of DPE, and creditors of DPE do not have recourse to the general credit
of the Company.
On February 8, 2018, DPTI formed DarkPulse
BVTK, LLC, a Virginia Limited Liability Company (“JV Entity”). The Company, through its wholly-owned subsidiary DPTI,
holds a 60% equity interest in the JV Entity, and Bravatek Solutions, Inc ("Bravatek") has a 40% interest. The primary
business purpose of the JV Entity was to develop, market, and sell products and services based on the Company's patented BOTDA
dark-pulse technology. Both the CEO of the Company and the CEO of Bravatek were to manage the day to day operations of the JV Entity.
The operations of JV Entity are not consolidated into these financial statements.
On March 26, 2019, DPTI informed the JV
Entity and Bravatek that, effective immediately, DPTI was revoking from the JV Entity the revocable Licensed Technology exclusively
owned by DPTI and the Company.
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 $250,000. To reduce its risk associated with the failure of such financial institution,
the Company evaluates at least annually the rating of the financial institution in which it holds deposits.
Foreign Currency Translation
The Company’s reporting currency
is US Dollars. The accounts of one of the Company’s subsidiaries is maintained using the appropriate local currency, Canadian
Dollar (“CAD”) as the functional currency. All assets and liabilities are translated into U.S. Dollars at balance sheet
date, shareholders' equity is translated at historical rates and revenue and expense accounts are translated at the average exchange
rate for the year or the reporting period. The translation adjustments are reported as a separate component of stockholders’
equity, captioned as accumulated other comprehensive (loss) gain. Transaction gains and losses arising from exchange rate fluctuations
on transactions denominated in a currency other than the functional currency are included in the statements of operations.
The relevant translation rates are as follows:
for the year ended December 31, 2019 closing rate at 1.2988 US$: CAD, average rate at 1.3234 US$:CAD and for the year ended December
31, 2018 closing rate at 1.3642 US$: CAD, average rate at 1.2958 US$.
Intangible assets
Intangible assets consist of capitalized
software development costs and patents and trademarks.
The Company reviews intangibles held and
used for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. In evaluating the fair value and future benefits of its intangible assets, management performs an analysis of the
anticipated undiscounted future net cash flow of the individual assets over the remaining amortization period. The Company recognizes
an impairment loss if the carrying value of the asset exceeds the expected future cash flows.
Intangible Assets - Intrusion Detection
Intellectual Property
The Company relies on patent laws and restrictions
on disclosure to protect its intellectual property rights. As of December 31, 2019, the Company held 3 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 year ended December 31, 2019, the
Company had patent amortization costs on its intrusion detection technology totaling $51,028. Patents costs are being amortized
over the remaining life of each patent, which is from 7 to 16 years.
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.
The following
is a summary of activity related to the DPTI patents for the year ended December 31, 2019:
Balance at January 1, 2019
|
|
$
|
486,932
|
|
Additions
|
|
|
9,114
|
|
Amortization
|
|
|
(51,028
|
)
|
Balance at December 31, 2019
|
|
$
|
445,018
|
|
The
following is a summary of the DPTI patents as of December 31, 2019:
|
|
2019
|
|
Historical cost
|
|
$
|
904,269
|
|
Accumulated amortization
|
|
|
(459,251
|
)
|
Carrying Value
|
|
$
|
445,018
|
|
Future
expected amortization of intangible assets is as follows:
Year Ending December 31,
|
|
|
|
2020
|
|
$
|
51,028
|
|
2021
|
|
|
51,028
|
|
2022
|
|
|
51,028
|
|
2023
|
|
|
51,028
|
|
2024
|
|
|
51,028
|
|
Thereafter
|
|
|
189,878
|
|
|
|
$
|
445,018
|
|
Intangible Assets - Capitalized software, trademarks, and
other patents
The Company capitalizes software development
costs incurred from the time technological feasibility has been obtained until the product is generally released to customers.
Amortization of capitalized software development costs begins when the products are available to customers and is computed using
the straight-line method over the remaining estimated economic life of the product. The Company achieved technological feasibility
with regard to its mobile phone technology during the fourth quarter of 2010. No software development costs were incurred and capitalized
during the years ended December 31, 2019 and 2018, and no amortization expense for software development costs was recorded for
the years ended December 31, 2019 and 2018.
The costs of patents and trademarks related
to the Company's software are amortized on a straight-line basis over 5 years from the date the patent or trademark is issued.
Amortization expense for patents and trademarks related to the Company's software was $0 and $9,811 for the years ended December
31, 2019 and 2018, respectively.
Intangible assets are tested for impairment
on an annual basis or when the facts and circumstances suggest that the carrying amount of the assets may not be recovered.
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. In December 2018, the Company determined that
the products associated with the capitalized software and corresponding trademarks and patents were not in the Company’s
immediate future due to the fact that future cash raised would be used for the further development of its intrusion detection technology.
As such the Company determined it was appropriate to impair these assets and recorded an impairment charge of $294,238 for the
year ended December 31, 2018.
Property and Equipment
Property and equipment are capitalized
and depreciated over their estimated economic useful lives. Upon sale or other disposition of property and equipment, the cost
and related accumulated depreciation or amortization are removed from the accounts and any gain or loss is included in the determination
of income or loss. The Company had no assets as of December 31, 2019 and 2018.
Revenue Recognition
The Company currently has no revenues from
its operations. We anticipate that revenues from product sales, net of estimated returns and allowances, will be recognized when
evidence of an arrangement is in place, related prices are fixed and determinable, contractual obligations have been satisfied,
title and risk of loss have been transferred to the customer and collection of the resulting receivable is reasonably assured.
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.
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.
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 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.
Income Taxes
The Company accounts for income taxes pursuant
to the provision of ASC 740-10, “Accounting for Income Taxes” (“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 2019 and 2018.
The Company has filed tax returns in Canada for the years ending December 31, 2018, 2017, 2016, 2015, 2014, and 2013, and they
are still subject to audit.
Income (Loss) Per Common Share
The Company accounts for earnings per share
pursuant to ASC 260, Earnings per Share, which requires disclosure on the financial statements of "basic" and "diluted"
earnings (loss) per share. Basic earnings (loss) per share are computed by dividing net income (loss) by the weighted average number
of common shares outstanding for the year. Diluted earnings (loss) per share is computed by dividing net income (loss) by the weighted
average number of common shares outstanding plus common stock equivalents (if dilutive) related to stock options and warrants for
each year. In periods where the Company has a net loss, all dilutive securities are excluded.
|
|
|
December 31, 2019
|
|
|
|
December 31, 2018
|
|
Convertible preferred stock
|
|
|
–
|
|
|
|
–
|
|
Stock Options
|
|
|
–
|
|
|
|
–
|
|
Stock Warrants
|
|
|
–
|
|
|
|
–
|
|
Total
|
|
|
–
|
|
|
|
–
|
|
Recently Issued Accounting Pronouncements
On February 25, 2016, the FASB issued Accounting
Standards Update No. 2016-02, Leases (Topic 842). The new guidance establishes the principles to report transparent and economically
neutral information about the assets and liabilities that arise from leases. The updated standard was effective for us in the first
quarter of 2019. Adoption of this standard did not have a material impact on the Company’s financial statements as the Company
does not have any leases.
In August 2018, the FASB issued Accounting
Standards Update No. 2018-15 (“ASU 2018-15”), Intangibles — Goodwill and Other — Internal-Use
Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That
Is a Service Contract. The standard is intended to clarify the accounting for implementation costs of a hosting arrangement
that is a service contract. For the Company, the amendments in ASU 2018-15 are effective for annual periods beginning January 1,
2021. The Company is evaluating the impact this new guidance may have on its Consolidated Financial Statements.
In December 2019, the FASB issued Accounting
Standards Update No. 2019-12 (“ASU 2019-12”), Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.
The standard is intended to simplify the accounting for income taxes by removing certain exceptions to the general principles in
Topic 740, as well as improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending
existing guidance. For the Company, the amendments in ASU 2019-12 are effective for annual periods beginning January 1, 2022. The
Company is evaluating the impact this new accounting guidance may have on its Consolidated Financial Statements.
Although there are several other new accounting
pronouncements issued or proposed by the FASB, which the Company has adopted or will adopt, as applicable, the Company does not
believe any of these accounting pronouncements has had or will have a material impact on its financial position or results of operations.
NOTE 3 – GOING CONCERN
As shown in the accompanying
financial statements, the Company generated net losses of $1,825,469 and $3,318,059 during the years ended December 31, 2019
and 2018, respectively. The Company did not generate any revenue from product sales during the years ended December 31, 2019
and 2018. As of December 31, 2019, the Company’s current liabilities exceeded its current assets by $3,213,915. As of
December 31, 2019, the Company had $1,210 of cash.
The Company will require additional funding
during the next twelve months to finance the growth of its current operations and achieve its strategic objectives. These factors,
as well as the uncertain conditions that the Company faces relative to capital raising activities, create substantial doubt as
to the Company’s ability to continue as a going concern. The Company is seeking to raise additional capital principally through
private placement offerings and is targeting strategic partners in an effort to finalize the development of its products and 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 and 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 2020. However,
management cannot make any assurances that such financing will be secured.
NOTE 4 – REVERSE ACQUISITION
Effective April 27, 2018, the Company,
formerly known as Klever Marketing, Inc. ("Klever"), entered into a Merger Agreement with DarkPulse Technologies Inc.,
pursuant to which the DarkPulse Technologies Inc. shareholders agreed to contribute 100% of the outstanding securities of DarkPulse
Technologies Inc. in exchange for an aggregate of 88,235 shares of our Series D Preferred Stock. Following the closing, DarkPulse
Technologies Inc. became a wholly owned subsidiary and the DarkPulse Technologies Inc. shareholders became our stockholders and
control our Company through the ownership of the outstanding preferred stock.
The transaction was accounted for as a
reverse acquisition using the acquisition method of accounting in accordance with FASB ASC Topic 805. DarkPulse Technologies Inc.
is the acquirer solely for financial accounting purposes. The following table summarizes the purchase accounting for the fair value
of the assets acquired and liabilities assumed at the date of the reverse acquisition.
Capitalized software
|
|
$
|
262,243
|
|
Patents and trademarks, net
|
|
|
42,356
|
|
Total assets acquired
|
|
|
304,599
|
|
Due to former management
|
|
|
150,000
|
|
Total liabilities assumed
|
|
|
150,000
|
|
Total assets less liabilities assumed
|
|
|
154,599
|
|
|
|
|
|
|
|
|
|
|
|
Net assets attributed to non-controlling interests (Klever shareholders)
|
|
|
23,190
|
|
Net assets acquired
|
|
|
131,409
|
|
Consideration [1]
|
|
|
131,409
|
|
[1] The fair
value of the consideration effectively transferred, $131,409, was measured based on the net asset value of the Klever Marketing,
Inc. assets immediately before the transaction.
The merger agreement was modified on June
29, 2018. The Company secured financing for the closing of the Merger, and it closed on July 18, 2018. On July 20, 2018, Klever's
name was changed to DarkPulse Inc., ("DPI") and on September 4, 2018, DarkPulse. Inc.'s stock symbol was changed to DPLS.
On August 17, 2018, the Merger Agreement was amended effective July 18, 2018, to effect the merger by share exchange instead of
by subsidiary merger. On July 18, 2018, the 882 outstanding common shares of DarkPulse Technologies Inc. were exchanged for 88,235
shares of Klever Marketing Inc. Series D Preferred Stock. The Company is now a wholly owned subsidiary of DPI, a publicly traded
company incorporated in Delaware. Terms of the Merger Agreement were that all outstanding liabilities of Klever would be settled
in full prior to the merger, with the single exception for two year notes to be issued to the prior management of Klever in the
total amount of $150,000 at zero percent interest. Additionally, all outstanding shares of preferred stock would be retired and
cancelled, and approximately 28,358,000 shares of common stock would be issued to the former management, who were also the shareholders
of the preferred shares to be cancelled. At the closing of the merger, the Klever common stockholders owned approximately 15% of
the ownership of the merged entity, and the DarkPulse Technologies Inc. shareholders owned approximately 85% of the entity. The
intellectual property assets of Klever remained in the merged entity. Cash assets in the Klever bank account were used to settle
the prior outstanding liabilities, and were not for the benefit of the newly merged entity.
NOTE 5 – 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 December 31, 2019. Management determined the expected volatility
between 402.91-545.47%, a risk free rate of interest between 1.58-1.59%, and contractual lives of the debt varying from zero months
to seven months. Management made the determination to use an expected life rather than contractual life for the calculations for
the matured debt as of December 31, 2019. The expected life is equal to the contractual life extended by one year which vary from
two to seven months. The table below details the Company's 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
|
|
|
12/31/2019
|
|
|
|
$
|
90,228
|
|
|
$
|
–
|
|
|
$
|
58,959
|
|
|
$
|
(10,369
|
)
|
|
$
|
134,662
|
|
|
|
|
162,150
|
|
|
|
–
|
|
|
|
74,429
|
|
|
|
101,920
|
|
|
|
243,386
|
|
|
|
|
72,488
|
|
|
|
–
|
|
|
|
11,381
|
|
|
|
1,286
|
|
|
|
79,663
|
|
|
|
|
208,436
|
|
|
|
–
|
|
|
|
–
|
|
|
|
134,777
|
|
|
|
257,815
|
|
|
|
|
76,657
|
|
|
|
–
|
|
|
|
8,904
|
|
|
|
19,762
|
|
|
|
94,925
|
|
|
|
|
65,372
|
|
|
|
–
|
|
|
|
5,651
|
|
|
|
27,560
|
|
|
|
104,959
|
|
|
|
|
53,864
|
|
|
|
4,040
|
|
|
|
28,566
|
|
|
|
32,262
|
|
|
|
32,262
|
|
|
|
|
25,468
|
|
|
|
2,175
|
|
|
|
16,558
|
|
|
|
15,254
|
|
|
|
15,254
|
|
|
|
|
29,250
|
|
|
|
1,220
|
|
|
|
–
|
|
|
|
25,157
|
|
|
|
27,920
|
|
|
|
|
49,726
|
|
|
|
2,418
|
|
|
|
–
|
|
|
|
43,210
|
|
|
|
47,465
|
|
|
|
|
41,774
|
|
|
|
2,032
|
|
|
|
–
|
|
|
|
36,300
|
|
|
|
39,875
|
|
|
|
|
29,250
|
|
|
|
1,423
|
|
|
|
–
|
|
|
|
25,157
|
|
|
|
27,920
|
|
|
|
|
40,000
|
|
|
|
9,945
|
|
|
|
10,605
|
|
|
|
22,954
|
|
|
|
22,954
|
|
|
|
|
128,000
|
|
|
|
16,161
|
|
|
|
17,676
|
|
|
|
146,440
|
|
|
|
146,440
|
|
Subtotal
|
|
|
1,072,663
|
|
|
|
39,414
|
|
|
|
232,729
|
|
|
|
(621,670
|
)
|
|
|
1,275,500
|
|
Transaction expense
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
$
|
1,072,663
|
|
|
$
|
39,414
|
|
|
$
|
232,729
|
|
|
$
|
(621,670
|
)
|
|
$
|
1,275,500
|
|
On July 17, 2018, The Company entered into
a securities purchase agreement with Carebourn Capital L.P., (“Carebourn”) issuing to Carebourn a convertible promissory
note in the aggregate principal amount of $189,750 with a $24,750 original issue discount and $15,000 in transactional expenses
due to Carebourn. The note bears interest at 12% per annum and may be converted into common shares of DPI's common stock at a conversion
price equal to 60% of the average of the three lowest trading prices of the DPI's common stock during the 20 prior trading days.
For the years ended December 31, 2019 and 2018, the Company made repayments totaling $32,090 and $42,200. For the year ended December
31, 2019, Carebourn converted $53,932 in principal of its' convertible note into 7,688,347 shares of common stock.
On July 27, 2018, The Company entered into
a securities purchase agreement with Carebourn, issuing to Carebourn a convertible promissory note in the aggregate principal amount
of $276,000 with a $36,000 original issue discount and $15,000 in transactional expenses due to Carebourn. The note bears interest
at 12% per annum and may be converted into common shares of the Company's common stock at a conversion price equal to 60% of the
average of the three lowest trading prices of the Company's common stock during the 20 prior trading days. As of December 31, 2019,
the Company received $150,000 net cash, and $75,000 is not expected to be received. For the years ended December 31, 2019 and 2018,
the Company made repayments totaling $10,150 and $0.
On August 20, 2018, the Company entered
into a securities purchase agreement with More Capital LLC, ("More") issuing to More a convertible promissory note in
the aggregate principal amount of $152,000 with a $20,000 original issue discount and $7,000 in transactional expenses due to More.
The note bears interest at 12% per annum and may be converted into common shares of the Company's common stock at a conversion
price equal to 60% of the average of the three lowest trading prices of the Company's common stock during the 20 prior trading
days. As of December 31, 2019, the Company received $70,000 net cash, and $55,000 is not expected to be received. For the years
ended December 31, 2019 and 2018, More converted $24,512 and $0 in principal of its' convertible note into 20,880,639 and 0 shares
of common stock.
On September 24, 2018, the Company entered
into a securities purchase agreement with Auctus Fund, LLC, (“Auctus”) issuing to Auctus a convertible promissory
note in the aggregate principal amount of $100,000 with $10,250 in transactional expenses due to Auctus and its counsel. The note
bears interest at 8% per annum and may be converted into common shares of the Company's common stock at a conversion price equal
to 70% of the lowest trading price of the Company's common stock during the 20 prior trading days. As of November 30, 2018, the
Company has been in breach of the note and default interest as of that date at the rate of 24% due to the failure to maintain
the required amount of reserve shares. The Company received $89,750 net cash on September 27, 2018. For the years ended December
31, 2019 and 2018, Auctus converted $23,343 and $0 in principal of its' convertible note into 377,325,592, and 0 shares of common
stock. On May 18, 2020, the Company received a default notice from Auctus demanding full payment of the note and damages of $155,729.
The Company has notified Auctus that a full review of their conversions is underway due to some inconsistencies in previous conversion
prices thus conversion amounts.
On September 25, 2018, the Company entered
into a securities purchase agreement with EMA Financial, LLC, (“EMA”) issuing to EMA a convertible promissory note
in the aggregate principal amount of $100,000 with a 6% original issue discount and $4,000 in transactional expenses due to EMA.
The note originally bore interest at 8% per annum and was converted into common shares of the Company's common stock at a conversion
price equal to the lower of current market price, $0.25, or 70% of the lowest trading price of the Company's common stock during
the 20 prior trading days. Due to an outstanding balance of the convertible promissory note at maturity, the conversion price
is now 55%, down from 70%, and the interest rate has increased to 24% from 8%. The Company received $90,000 net cash on September
28, 2018. For the years ended December 31, 2019 and 2018, EMA converted $37,628 and $0 in principal of its' convertible note into
188,100,000 and 0 shares of common stock.
On
September 24, 2018, the Company entered into a securities purchase agreement with FirstFire Global Opportunities Fund LLC,
(“FirstFire”) issuing to FirstFire a convertible promissory note in the aggregate principal amount of $247,500, with
a $22,500 original issue discount and $5,000 in transactional expenses due to FirstFire's counsel. The note bears interest at 8%
per annum and may be converted into common shares of the Company's common stock at a conversion price equal to the lower of $0.25,
or 70% of the lowest trading price of the Company's common stock during the 20 prior trading days. The Company received $220,000
net cash on October 9, 2018. For the years ended December 31, 2019 and 2018, EMA converted $37,628 and $0 in principal of
its' convertible note into 188,100,000 and 0 shares of common stock.
On January 10, 2019, the Company
entered into a Securities Purchase Agreement with GS Capital Partners, LLC, (“GS
Capital”) issuing a convertible redeemable note in the principal amount of $65,000. The
note may be converted into common shares of the Company's common stock at a conversion price equal to the lower of $0.25, or
70% of the lowest trading price of the Company's common stock during the 20 prior trading days. For the year ended
December 31, 2019, GS Capital converted $11,136 in principal of its' convertible note into 79,605,027 shares of common
stock.
On February 12, 2019, the Company entered
into a securities purchase agreement with Crown Bridge Partners, LLC, (“Crown”)
issuing a convertible promissory note in the aggregate principal amount of up to $35,000. The note may be converted into
common shares of the Company's common stock at a conversion price equal 70% of the lowest trading price of the Company's common
stock during the 20 prior trading days. For the year ended December 31, 2019, Crown converted $9,532 in principal of its' convertible
note into 259,259,259 shares of common stock.
On April 23, 2019, the Company entered
into a securities purchase agreement with GS Capital Partners, LLC, ("GS Capital") issuing to GS Capital a convertible
promissory note in the aggregate principal amount of $40,000 with a $2,000 original issue discount and $2,000 in transactional
expenses due to GS Capital and its counsel. The note bears interest at 8% per annum and may be converted into common shares of
the Company's common stock at a conversion price equal to 70% of the average of the three lowest trading prices of the Company's
common stock during the 20 prior trading days. As of the date the consolidated financial statements were available for issuance,
DPI received $36,000 net cash. For the year ended December 31, 2019, GS Capital has not converted principal into common stock.
On May 3, 2019, the Company entered into
a securities purchase agreement with Geneva Roth Remark Holdings, Inc. (“Geneva”) issuing to Geneva a convertible
promissory note in the aggregate principal amount of $64,000 with a $6,000 original issue discount and $2,800 in transactional
expenses due to Geneva and its counsel. The note bears interest at 9% per annum and may be converted into common shares of the
Company's common stock at a conversion price equal to 70% of the lowest trading price of the Company's common stock during the
20 prior trading days. The Company received $55,200 net cash. For the year ended December 31, 2019, Geneva has not converted principal
into common stock. The Company was notified on October 15, 2019 that the note was in default and subject to a 200% penalty. The
additional $64,000 was recorded as interest expense as of December 31, 2019.
As of December 31, 2019 and 2018 respectively,
there was $1,040,663 and $601,250 of convertible debt outstanding, net of debt discount of $93,138, and $440,800, As of December
31, 2019 and 2018 respectively, there was derivative liability of $323,481 and $653,831 related to convertible debt securities.
NOTE 6 - 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
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 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 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 gain (loss) for the years ended December 31, 2019, and 2018, were $71,084 and
$90,772 respectively. These amounts are included in Accumulated Other Comprehensive Loss in the Equity section of the consolidated
balance sheet, and as Unrealized Loss on Foreign Exchange on the consolidated statement of comprehensive loss. The Debenture also
includes a provision requiring DPTI to pay the University a two percent (2%) royalty on sales of any and all products or services
which incorporate the Patents for a period of five (5) years from April 24, 2018.
For the years ended December 31, 2019, and 2018, the Company
recorded interest expense of $52,538 and $76,275, respectively.
As of December 31, 2019 the debenture liability totaled $1,155,150,
all of which was long term.
Future minimum required payments over
the next 5 years and thereafter are as follows:
Period ending December 31,
|
|
|
|
|
2020
|
|
|
$
|
0
|
|
2021
|
|
|
|
0
|
|
2022
|
|
|
|
0
|
|
2023
|
|
|
|
0
|
|
2024 and after
|
|
|
|
1,155,150
|
|
Total
|
|
|
$
|
1,155,150
|
|
NOTE 7 – ACCRUED LIABILITIES
Accrued liabilities consist of the following as of December
31:
|
|
2019
|
|
|
2018
|
|
Accrued payroll
|
|
$
|
293,434
|
|
|
$
|
202,112
|
|
Taxes
|
|
|
1,996
|
|
|
|
1,996
|
|
Accrued interest
|
|
|
201,648
|
|
|
|
139,411
|
|
|
|
$
|
497,078
|
|
|
$
|
343,519
|
|
NOTE 8 – INCOME TAXES
The provision (benefit) for income taxes
for the years ended December 31, 2019 and 2018 differs from the amount which would be expected as a result of applying the statutory
tax rates to the losses before income taxes due primarily to the valuation allowance to fully reserve net deferred tax assets.
The following table summarizes the significant
differences between statutory rates for the years ended December 31, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
Statutory tax rate:
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
21.00%
|
|
|
|
21.00%
|
|
State taxes
|
|
|
3.63%
|
|
|
|
3.63%
|
|
Change in valuation allowance:
|
|
|
(24.63)%
|
|
|
|
(24.63)%
|
|
|
|
|
–%
|
|
|
|
–%
|
|
The Company’s
deferred tax assets and liabilities as of December 31, 2019 and 2018 are as follows:
|
|
2019
|
|
|
2018
|
|
Deferred Tax (Liabilities):
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
1,283,957
|
|
|
$
|
834,344
|
|
Intangible assets
|
|
|
(208
|
)
|
|
|
(208
|
)
|
Less: Valuation allowance
|
|
|
(1,283,749
|
)
|
|
|
(834,136
|
)
|
|
|
$
|
–
|
|
|
$
|
–
|
|
The Company has approximately $1,284,000
non-capital income tax losses as of December 31, 2019, which will begin to expire in the year 2038.
The Company calculates its income tax expense
by estimating the annual effective tax rate and applying that rate to the year-to-date ordinary income (loss) at the end of the
period. The Company records a tax valuation allowance when it is more likely than not that it will not be able to recover the value
of its deferred tax assets. For the years ended December 31, 2019 and 2018, the Company calculated its estimated annualized effective
tax rate at 0% and 0%, respectively, for both the United States and Canada. The Company had no income tax expense on its losses
for the years ended December 31, 2019 and 2018, respectively.
The Company recognizes the financial statement
benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position
following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements
is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax
authority. The Company recognizes interest accrued on uncertain tax positions as well as interest received from favorable tax settlements
within interest expense. The Company recognizes penalties accrued on unrecognized tax benefits within selling, general and administrative
expenses. As of December 31, 2019 and 2018, the Company had no uncertain tax positions.
The Company does not anticipate any significant
changes to the total amounts of unrecognized tax benefits in the next twelve months. The Company files income tax returns in New
Brunswick, Canada, and the U.S. federal, New York, and Delaware jurisdictions. Tax years 2011 to current remain open to examination
by Canadian authorities; the tax year 2018 remains open to examination by U.S. authorities.
NOTE 9 – PREFERRED STOCK
In accordance with the Company’s
bylaws, the Company has authorized a total of 2,000,000 shares of preferred stock, par value $0.01 per share, for all classes.
As of December 31, 2019 and 2018 respectively, there were 88,235 and 88,235 total preferred shares issued and outstanding for all
classes.
On July 12, 2018, the Company filed a Certificate
of Designation with the State of Delaware amending the designation of its previously designated “Class D Voting Preferred
Stock,” designating 100,000 shares of the Company’s preferred stock as “Series D Preferred Stock.” Each
share of Series D Preferred Stock entitles the holder to 6,000 votes on all matters submitted to a vote of the Company’s
stockholders and is convertible at the election of the holder into a number of shares of common stock equal to the number of outstanding
shares of common stock of the Company multiplied by 5 ⅔, divided by the number of outstanding shares of Series D Preferred
Stock. All of these shares are owned by the Company's management, with control ownership held by the Company's CEO.
NOTE 10 – COMMON STOCK
On July 1, 2019, the majority stockholders holding a majority of the issued and outstanding voting shares
of the Company amended the Company’s Certificate of Incorporation to increase the number of authorized shares of Common Stock
from 3,000,000,000 to 20,000,000,000.
In accordance with the Company’s
bylaws, the Company has authorized a total of 20,000,000,000 shares of common stock, par value $0.01 per share. As of December
31, 2019 and 2018, there were 1,392,042,112 and 89,680,567 common shares issued and outstanding.
During the year ended December 31, 2019,
the Company issued 1,302,361,545 shares of common stock as settlement of notes payable and
accrued interest in the total amount of $184,737 and $54,534 respectively.
During the year ended December 31, 2018,
the Company issued 28,358,000 shares of common stock as settlement of deferred compensation
and notes payable to former officers and directors of the Company in the total amount of $558,745.74, and in recognition of the
upcoming cancellation of the PSF, Inc. preferred shares.
At December 31, 2019, the Company had 1,589,257,888
in common shares reserved for issuance for convertible debt securities.
On February 5, 2019, the majority stockholders
holding a majority of the issued and outstanding voting shares of the Company amended the Company’s Certificate of Incorporation
to increase the number of authorized shares of Common Stock from 250,000,000 to 3,000,000,000.
NOTE 11 – STOCK OPTIONS
The shareholders approved, by a majority
vote, the adoption of the 1998 Stock Incentive Plan (the “Plan”). As amended on August 11, 2003, the Plan reserves
20,000,000 shares of common stock for issuance upon the exercise of options which may be granted from time-to-time to officers,
directors, certain employees and consultants of the Company or its subsidiaries by the Board of Directors. The Plan permits the
award of both qualified and non-qualified incentive stock options.
As of December 31, 2019 and 2018,
the Company had no outstanding stock options.
NOTE 12 – COMMITMENTS AND 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.
Potential Commission
Payments
The Company, in consideration of the Strategic
Alliance Agreement with Bravatek, for the purpose of promoting the Company’s products, will pay Bravatek sales commissions
for clients introduced to the Company by Bravatek. This agreement expired on September 5, 2019.
License agreement
with Battelle Memorial Institute
On December 27, 2018,
the Company signed a license agreement with Battelle Memorial Institute ("Battelle"). The license agreement allows the
Company to utilize patents of Battelle for payments totaling $30,000. The Company also must pay a royalty of 6% of gross sales
and 25% of sublicensing revenue. The minimal royalties under the agreement are as follows:
2019
|
|
$
|
10,000
|
|
2020
|
|
|
30,000
|
|
2021
|
|
|
50,000
|
|
2022 and thereafter
|
|
|
80,000
|
|
|
|
$
|
170,000
|
|
Legal Matters
On
October 2, 2018, the Company received a demand for payment from Bravatek Solutions, Inc. for payment in the amount of $35,750 for
software services. The Company is not a party to any significant pending legal proceedings, and no other such proceedings
are known to be contemplated. No director, officer or affiliate of the Company, and no owner of record or beneficial owner of more
than 5.0% of the securities of the Company, or any associate of any such director, officer or security holder is a party adverse
to the Company or has a material interest adverse to the Company in reference to pending litigation.
On March 27, 2019, Thomas A. Cellucci,
et al. v. DarkPulse, Inc. et al. (the “Complaint”) was filed in the United States District Court for the Southern District
of New York by certain of the Company’s former executive officers, one also being a former director, and a non-employee shareholder
(collectively, the “Plaintiffs”), against the Company, its sole officer and director, and others, claiming that the
Plaintiffs brought the action to protect their individual rights as minority shareholders, as improperly-ousted officers (other
than the non-employee shareholder), and as an improperly-ousted director, seeking equitable relief, damages, recovery of unpaid
salaries and other relief. It is the Company's position that the Complaint represents a frivolous harassment lawsuit, and the Company
intends to file a motion to dismiss all claims made in the Complaint and intends to otherwise defend itself vigorously in
this matter. The Company is also exploring filing counterclaims against the Plaintiffs in the action.
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.
COVID-19
On March 11, 2020, the World Health Organization
announced that infections of the novel Coronavirus (COVID-19) had become pandemic, and on March 13, the U.S. President announced
a National Emergency relating to the disease. There is a possibility of continued widespread infection in the United States and
abroad, with the potential for catastrophic impact. National, state and local authorities have required or recommended social distancing
and imposed or are considering quarantine and isolation measures on large portions of the population, including mandatory business
closures. These measures, while intended to protect human life, are expected to have serious adverse impacts on domestic and foreign
economies of uncertain severity and duration. Some economists are predicting the United States will soon enter a recession. The
sweeping nature of the coronavirus pandemic makes it extremely difficult to predict how the Company’s business and operations
will be affected in the longer run, but we expect that it may materially affect our business, financial condition and results of
operations. The extent to which the coronavirus impacts our results will depend on future developments, which are highly uncertain
and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions
to contain the coronavirus or treat its impact, among others. Moreover, the coronavirus outbreak has begun to have indeterminable
adverse effects on general commercial activity and the world economy, and our business and results of operations could be adversely
affected to the extent that this coronavirus or any other epidemic harms the global economy generally and/or the markets in which
we operate specifically. Any of the foregoing factors, or other cascading effects of the coronavirus pandemic that are not currently
foreseeable, could materially increase our costs, negatively impact our revenues and damage the Company’s results of operations
and its liquidity position, possibly to a significant degree. The duration of any such impacts cannot be predicted.
NOTE 13– RELATED PARTY TRANSACTIONS
The Company follows
subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure of related
party transactions. Pursuant to Section 850-10-20 the related parties include a) affiliates of the Company; b) Entities for
which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value
Option Subsection of Section 825-10-15, to be accounted for by the equity method by the investing entity; c) trusts for the benefit
of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; d) principal
owners of the Company; e) management of the Company; f) other parties with which the Company may deal if one party controls or
can significantly influence the management or operating policies of the other to an extent that one of the transacting parties
might be prevented from fully pursuing its own separate interests; and g) Other parties that can significantly influence the management
or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly
influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate
interests. The financial statements shall include disclosures of material related party transactions, other than compensation
arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions
that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements. The
disclosures shall include: a) the nature of the relationship(s) involved; b) a description of the transactions, including transactions
to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such
other information deemed necessary to an understanding of the effects of the transactions on the financial statements; c) the dollar
amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the
method of establishing the terms from that used in the preceding period; and d) amounts due from or to related parties as of the
date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.
During the year ended December 31, 2018,
two of the Company’s previous officers and directors of the Company advanced personal funds in the amount of $10,689 for
Company expenses, and $10,689 was repaid to them prior to December 31, 2018.
In May 2018, the JV Entity received $42,000
for an order from Bravetek and the JV Entity then placed a corresponding order with the Company. The Company’s former executive
office is also the CEO of Bravatek. The proceeds were to be used for marketing efforts to generate sales of our intrusion detection
product. The order has been recorded as a prepaid sale and is a current liability as of December 31, 2019.
NOTE 14 – SUBSEQUENT EVENTS
On April 29, 2020, the Company issued an
aggregate of 68,571,429 shares of common stock upon the conversion of convertible debt, as issued on May 3, 2019, in the amount
of $4,800.
On May 4, 2020, the Company issued an aggregate
of 72,857,143 shares of common stock upon the conversion of convertible debt, as issued on May 3, 2019, in the amount of $5,100.
On March 11, 2020, the World Health Organization
declared a pandemic related to the rapidly spreading coronavirus (COVID-19) outbreak, which has led to a global health emergency.
The extent of the public-health impact of the outbreak is currently unknown and rapidly evolving, and the related health crisis
could adversely affect the global economy, resulting in an economic downturn. Any disruption of the Company’s facilities
or those of our suppliers could likely adversely impact the Company’s operations. Currently, there is significant uncertainty
relating to the potential effect of the novel coronavirus on our business.