Notes to Condensed Financial Statements
(Unaudited)
NOTE 1 – BASIS OF FINANCIAL STATEMENT
PRESENTATION
DarkPulse, Inc. (formerly Klever Marketing,
Inc. or the “Company”) was initially created to develop, market and distribute an electronic shopping cart device for
in-store advertising, promotion and media content, as well as retail shopper services and has not commenced its planned principal
operations. The Company’s activities, since inception, have consisted principally of developing various applications of its
electronic shopping cart concept, including its mobile application for smart phones which the Company is currently testing in retail
supermarkets, obtaining patents and trademarks related to its technology and raising capital. The Company’s activities are
subject to significant risks and uncertainties, including failing to secure additional funding needed to finalize development of
the Company’s technology and to commercialize its product in a profitable manner.
As further discussed in Note 10, 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. (“DarkPulse” or “DP”) as its wholly owned subsidiary. DarkPulse is a development stage
company involved in the development and marketing of certain unique and proprietary fiber optic-based sensing devices, as well
as ultra-high sensitivity sensors for the detection of trace narcotics, chemicals and explosives. DarkPulse does not have current
revenues, but anticipates revenues later in 2018. 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.
The accompanying unaudited, condensed financial
statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting
principles (“GAAP”) have been condensed or omitted in accordance with such rules and regulations. The information furnished
in the interim condensed financial statements includes normal recurring adjustments and reflects all adjustments, which, in the
opinion of management, are necessary for a fair presentation of such financial statements. Although management believes the disclosures
and information presented are adequate to make the information not misleading, it is suggested that these interim condensed financial
statements be read in conjunction with the Company's audited financial statements and notes thereto included in its December 31,
2017 Annual Report on Form 10-K. Operating results for the three months and six months ended June 30, 2018 are not necessarily
indicative of the results that may be expected for the year ending December 31, 2018.
NOTE 2 – SIGNIFICANT ACCOUNTING
POLICIES
The Company’s significant accounting
policies are described in the notes to the Company’s audited financial statements included in its December 31, 2017 Annual
Report on Form 10-K.
Use of Estimates
The preparation of financial statements
in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported
amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ from those estimates.
Income (Loss) Per Common Share
Basic net income (loss) per share of common
stock is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period.
Diluted net income (loss) per share of common stock is computed by dividing net income (loss) by the sum of the weighted average
number of common shares outstanding and the dilutive potential common share equivalents outstanding. Potential dilutive common
share equivalents consist of shares issuable upon exercise of outstanding stock options and the exercise of convertible preferred
stock.
For the six months ended June 30, 2017, 28,740,529 common stock
equivalents related to convertible preferred stock have been included in the calculation of diluted income per common share. For
the three months ended June 30, 2018 and 2017 and the six months ended June 30, 2018, common stock equivalents related to convertible
preferred stock have not been included in the calculation of diluted loss per common share because they are anti-dilutive. Therefore,
basic loss per common share is the same as diluted loss per common share.
Recently Issued Accounting Pronouncements
There were no new accounting pronouncements
issued or proposed by the Financial Accounting Standards Board during the three months ended June 30, 2018 and through the date
of filing of this report that the Company believes has had or will have a material impact on its financial position or results
of operations.
Reclassifications
Certain amounts in the 2017 condensed financial
statements have been reclassified to conform to the current year presentation.
NOTE 3 – GOING CONCERN UNCERTAINTY
As shown in the accompanying financial
statements, during the six months ended June 30, 2018, the Company did not generate any revenues and reported a net loss of $49,539.
As of June 30, 2018, the Company’s current liabilities exceeded its current assets by $225,182. As of June 30, 2018, the
Company had $2,233 of cash.
The Company will require additional funding
during the next twelve months to finance the growth of its 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 2018. However, management cannot
make any assurances that such financing will be secured.
NOTE 4 – INTANGIBLE ASSETS
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|
June 30,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Capitalized software development costs
|
|
$
|
262,243
|
|
|
$
|
262,243
|
|
Patents and trademarks
|
|
|
168,564
|
|
|
|
168,564
|
|
Accumulated amortization of patents and trademarks
|
|
|
(126,208
|
)
|
|
|
(114,097
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
304,599
|
|
|
$
|
316,710
|
|
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. Currently, the Company anticipates amortization
of software development costs to commence in fiscal year 2018. 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
six months ended June 30, 2018 and 2017, and no amortization expense for software development costs was recorded for the three
and six months ended June 30, 2018 and 2017.
The costs of patents and trademarks 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 was $5,981 and $8,058 for the three months ended June 30, 2018 and 2017, respectively, and $12,111 and $16,042 for
the six months ended June 30, 2018 and 2017, 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.
NOTE 5 – ACCRUED LIABILITIES
Accrued liabilities consist of the following:
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
Compensation - officers and bookkeeper
|
|
$
|
36,000
|
|
|
$
|
539,125
|
|
Taxes
|
|
|
1,800
|
|
|
|
1,800
|
|
Accrued interest – related party
|
|
|
–
|
|
|
|
3,052
|
|
|
|
$
|
37,800
|
|
|
$
|
543,977
|
|
NOTE 6 – PREFERRED STOCK
Authorized Shares
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 June 30, 2018 and
December 31, 2017, there were 509,374 total preferred shares issued and outstanding for all classes. As of June 30, 2018, all of
the Company’s outstanding preferred shares are owned by a Company that is controlled by the Company’s CEO. In connection
with the Merger, as of July 18, 2018, all shares of the Company’s Class A Voting Preferred Stock, Class B Voting Preferred
Stock, and Class C Voting Preferred Stock had been returned to the Company and cancelled.
Preferred Stock Dividends
As of June 30, 2018, the Company had no
accrued and unpaid preferred stock dividends. As of December 31, 2017, the Company had accrued and unpaid preferred stock dividends
totaling $2,546 relating to dividends for the three months ended December 31, 2017.
The Board of Directors of the Company elected
to cancel the preferred stock dividends for the semi-annual period ended March 31, 2018. Consequently, the preferred stock dividends
payable of $2,546 relating to dividends for the three months ended December 31, 2017 was eliminated. Historically, all accrued
dividends for preferred stock have been authorized for payment through the issuance of preferred stock based on the ratios for
each class of preferred stock described below. However, the Board of Directors of the Company has authorized payment of preferred
stock dividends through the issuance of common shares where no authorized shares of preferred stock are available for issuance
in a class.
Class A Voting Preferred Stock
The Company has 300,000 shares of
“Class A Voting Preferred Stock” (“Class A Shares”) authorized. As of June 30, 2018 and December 31,
2017, there were 163,022 Class A Shares outstanding. The Class A Shares are convertible into 99.035 shares of common stock.
Holders of Class A Shares are entitled to receive dividends, when declared by the Board of Directors, at the rate of $2.20
per share per annum, payable semi-annually. Dividends are cumulative and may be paid in cash or in kind through the
distribution of .0425 Class A Shares, Series 1, for each outstanding Class A Share, on each dividend payment date. Class A
Shares carry a liquidation preference of $26.00 per share plus any accrued but unpaid dividends on such shares, if any, and
adjusted for combinations, splits, dividends or distributions of shares of stock with respect to such shares. Class A shares
are redeemable by the Company, in whole or in part, at the option of the Board of Directors of the Company, at any time.
Class B Voting Preferred Stock
The Company has 250,000 shares of “Class
B Voting Preferred Stock” (“Class B Shares”) authorized. As of June 30, 2018 and December 31, 2017, there were
128,990 Class B Shares outstanding. The Class B Shares are convertible into 64.754 shares of common stock. Holders of Class B Shares
are entitled to receive dividends, when declared by the Board of Directors, at the rate of $1.70 per share per annum, payable semi-annually.
Dividends are cumulative and may be paid in cash or in kind through the distribution of .0425 Class B Shares for each outstanding
Class B Share, on each dividend payment date. Class B Shares carry a liquidation preference of $17.00 per share plus any accrued
but unpaid dividends on such shares, if any, and adjusted for combinations, splits, dividends or distributions of shares of stock
with respect to such shares. Class B shares are redeemable by the Company, in whole or in part, at the option of the Board of Directors
of the Company, at any time.
Class C Voting Preferred Stock
The Company has 400,000 shares of “Class
C Voting Preferred Stock” (“Class C Shares”) authorized. As of June 30, 2018 and December 31, 2017, there were
217,362 Class C Shares outstanding. The Class C Shares are convertible into 25.140 shares of common stock. Holders of Class C Shares
are entitled to receive dividends, when declared by the Board of Directors, at the rate of $0.66 per share per annum, payable semi-annually. Dividends
are cumulative and may be paid in cash or in kind through the distribution of .0425 Class C Shares for each outstanding Class C
Share, on each dividend payment date. Class C Shares carry a liquidation preference of $6.60 per share plus any accrued but unpaid
dividends on such shares, if any, and adjusted for combinations, splits, dividends or distributions of shares of stock with respect
to such shares. Class C shares are redeemable by the Company, in whole or in part, at the option of the Board of Directors of the
Company, at any time.
NOTE 7 – COMMON STOCK
In accordance
with the Company’s bylaws, the Company has authorized a total of 250,000,000 shares of common stock, par value $0.01 per
share. As of June 30, 2018 and December 31, 2017, there were 89,680,567 and 61,322,567 common shares issued and outstanding, respectively.
During
the six months ended June 30, 2018, the Company issued 28,358,000 shares of common stock
as
settlement of deferred compensation and notes payable to the 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 in connection with the
Merger. The Company’s Board of Directors agreed on April 21, 2018, to issue common shares, and the
following shares were authorized at the recent stock price of $0.02 per share, and were issued on or about May 11, 2018:
Paul G. Begum – 8,650,000 shares, Robert A. Campbell – 7,383,000 shares, Jerry Wright – 3,325,000 shares,
and PSF, Inc. – 9,000,000 shares.
During the
six months ended June 30, 2017, the Company issued a total of 1,091,000 shares of common stock to investors for $40,300
cash.
NOTE 8 – STOCK OPTIONS
The Company’s 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.
During the six months ended June 30, 2018,
the Company did not issue any stock options and had no stock options outstanding at June 30, 2018.
A summary of the Company’s stock
option awards as of June 30, 2018, and changes during the six months then ended is as follows:
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|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contract
Term
(Years)
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
2,800,000
|
|
|
$
|
0.050
|
|
|
.08
|
|
|
|
|
Granted
|
|
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
(2,800,000
|
)
|
|
$
|
0.050
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable
at June 30, 2018
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 9 – RELATED PARTY TRANSACTIONS
In the past, the Company periodically received
funding from its CEO, CFO and directors to fund operating costs of the Company. Jerry Wright, a director, loaned the Company $30,000
during the year ended December 31, 2015, which bears interest at the rate of 6% per annum. The related party note payable had a
principal balance of $25,500 as of June 30, 2018 and 2017, respectively, and accrued interest payable of $3,504 and $2,746 as of
June 30, 2018 and December 31, 2017, respectively. The loan was to have been paid by June 30, 2016, and is currently in default.
Refer to Note 7 for payment of this debt by common stock.
A shareholder loaned the Company $12,500
on July 5, 2017, which bears interest at the rate of 5% per annum, matured on January 5, 2018 and is currently in default. At June
30, 2018 and December 31, 2017, the note had a principal balance of $12,500 and accrued interest payable of $616 and $306, respectively.
Refer to Note 7 for payment of this debt by common stock.
During the six months ended June 30, 2018,
the three Directors of the Company advanced the Company a total of $13,500: $4,000 by Jerry Wright, $4,000 by Robert Campbell and
$5,500 by Tree of Stars, Inc., a company controlled by Paul Begum. The short-term loans are non-interest bearing. Refer to Note
7 for payment of this debt by common stock.
The Company’s CEO and the bookkeeper,
who is the wife of the CEO, provide consulting services to the Company through companies controlled by the individuals. The Company
did not accrue any compensation to the CEO or to the bookkeeper during the three months and six months ended June 30, 2018. The
Company accrued compensation to the CEO of $15,000 and $30,000 during the three months and six months ended June 30, 2017, respectively,
and accrued compensation to the bookkeeper of $3,000 and $6,000 during the three months and six months ended June 30, 2017, respectively.
Accrued compensation to the CEO totaled $503,125 as of December 31, 2017, and this was paid through the issuance of common stock
on or about May 11, 2018. Refer to Note 7 for payment of this debt by common stock. Accrued compensation to the bookkeeper totaled
$36,000 as of June 30, 2018 and December 31, 2017.
NOTE 10 – SUBSEQUENT EVENTS
The Company evaluated events occurring
after the date of the accompanying condensed balance sheets through the date the financial statements were issued and has identified
the following subsequent events that it believes require disclosure:
Completion of Merger
On April 27, 2018, the Company, DarkPulse
Technologies Inc., a New Brunswick corporation (the “
Private Company
”), and DPTH Acquisition Corporation, a
Utah corporation and wholly owned subsidiary of the Private Company (the “
Merger Subsidiary
”) entered into an
Agreement and Plan of Merger (the “
Merger Agreement
”), pursuant to which the Merger Subsidiary would merge with
and into the Private Company and the Private Company would be the surviving corporation and become a wholly owned subsidiary of
the Company (the “
Merger
”). On July 7, 2018, the parties to the Merger Agreement amended the Merger Agreement
to (i) eliminate the requirement that the Company effect a reverse stock split prior to closing, (ii) modify the number and type
of shares that would be issued to the shareholders of the Private Company in the Merger, and (iii) make several other clerical
amendments to the Merger Agreement.
With respect to the merger consideration
to be received by the shareholders of the Private Company, instead of 85,000 shares of Company common stock being issued for each
1 share of Private Company common stock in the Merger, the parties amended the Merger Agreement to require the Company to issue
100 shares of Series D Preferred Stock for each 1 share of Private Company common stock.
On July 18, 2018, the parties closed the
Merger and filed Articles of Merger merging the Merger Subsidiary with and into the Private Company, the Private Company paid the
Company $150,000 as required by the Merger Agreement, and the Company issued 88,235 shares of its Series D Preferred Stock (the
“Shares”) to the Private Company shareholders in consideration of their shares of the Private Company, with the Private
Company becoming a wholly owned subsidiary of the Company. As a result of the Merger, the Private Company has been acquired by
the Company, and the name of the Company was subsequently changed to DarkPulse, Inc. The Merger Agreement required the Company
to pay or settle all liabilities of the Company, so that there would be no outstanding liabilities when the Merger closed. This
included all of the previously unpaid accounts payable for services provided to the Company. The $150,000 merger consideration
paid to the Company was, or is being used, to satisfy those obligations.
In connection with the Merger, as of July
18, 2018, all shares of the Company’s Class A Voting Preferred Stock, Class B Voting Preferred Stock, and Class C Voting
Preferred Stock had been returned to the Company and cancelled, and immediately prior to closing the Merger on July 18, 2018, there
were 89,680,567 shares of the Company’s common stock outstanding. As each share of Series D Preferred Stock entitles the
holder to 6,000 votes on all matters submitted to a vote of the stockholders, and 88,235 shares of Series D Preferred Stock (the
“Shares”) were issued to the Private Company shareholders in connection with the merger on July 18, 2018, the issuance
of the Shares to the Private Company shareholders constituted a change of control as the Private Company shareholders now own 100%
of the Company’s outstanding preferred stock, and the Shares entitle the Private Company shareholders to approximately 85.5%
of the total votes associated with the Company’s common and preferred stock. With the change of control of the Company, the
Merger will be accounted for as a recapitalization in a manner similar to a reverse acquisition.
With
the exception of the CEO, who received some compensation over the years, there had been no compensation for the officers and directors
over the past 10 years. As settlement of deferred compensation to the officers and directors of the Company, and in recognition
of the upcoming cancellation of the PSF, Inc. preferred shares in connection with the Merger, the Company’s Board of
Directors agreed on April 21, 2018, to issue the following common shares. The following shares were authorized at the recent
stock price of $0.02 per share and were issued on or about May 11, 2018: Paul G. Begum – 8,650,000 shares, Robert A.
Campbell – 7,383,000 shares, Jerry Wright – 3,325,000 shares, and PSF, Inc. – 9,000,000 shares. By closing
of the Merger on July 18, 2018, the following preferred shares had been cancelled: 163,022 Series A preferred
shares owned by PSF, Inc., 128,990 Series B preferred shares owned by PSF, Inc., and 217,362 Series C preferred
shares owned by PSF, Inc. After the cancellation of these shares, there are no outstanding shares of Series A,
Series B, nor Series C preferred stock.
Series D Preferred Stock
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 stock of the Company multiplied by 5 ⅔, divided by the number of outstanding shares of Series D Preferred Stock.
Name Change
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 intends to file a corporate action notification with the Financial Industry Regulatory Authority (FINRA) to change
the name of the Company and its ticker symbol with the over-the-counter markets.
Securities Purchase Agreements
Effective July 18, 2018 the Company entered
into a securities purchase agreement with Carebourn Capital, L.P., a Delaware limited partnership (“Carebourn”),
providing for and issuing to Carebourn a convertible promissory note in the aggregate principal amount of $184,000, with a $24,000
original issue discount and $10,000 in transactional expenses due to Carebourn. The note bears interest at the rate of 12% per
annum, is due and payable on June 20, 2019, and may be converted by Carebourn at any time after funding into shares of Company
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. The $150,000 in net proceeds were used for payment of the consideration for the Merger.
Effective July 27, 2018, the Company entered
into a securities purchase agreement with Carebourn providing for and 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, and funding in tranches of $150,000 and $75,000 to the Company, with the initial $150,000 tranche funded to the Company
on July 27, 2018. The note bears interest at the rate of 12% per annum, is due and payable on July 24, 2019, and may be converted
by Carebourn at any time after funding into shares of Company 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.