Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. (Check one)
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. o
The aggregate market value of the
registrant’s common stock owned by non-affiliates, based on the closing price of $0.0035 as quoted on OTC Markets, on April
12, 2019, is $357,592. For purposes of this computation all officers, directors and 5% beneficial owners of the registrant
are deemed to be affiliates. Such determination should not be deemed an admission that such officers, directors and
beneficial owners are, in fact, affiliates of the registrant. The number of common shares held by non-affiliates of the
Registrant totaled 102,168,914.
The number of shares of the registrant’s common
stock, $0.01 par value per share, outstanding as of April 12, 2019, was 102,168,914.
This annual report on Form 10-K for DarkPulse,
Inc. (“DPI”, “DarkPulse” or the “Company”) and the exhibits attached hereto contain “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward looking statements concern
the Company’s anticipated results and developments in the Company’s operations in future periods, planned development
of the Company’s technology, plans related to its business and other matters that may occur in the future. These statements
relate to analyses and other information that are based on forecasts of future results, estimates of amounts not yet determinable
and assumptions of management. Such forward-looking statements include, among others, those statements including the words “expects”,
“anticipates”, “intends”, “believes” and similar language. Our actual results may differ significantly
from those projected in the forward-looking statements. Factors that might cause or contribute to such differences include, but
are not limited to, those discussed in the section “Risk Factors.” We undertake no obligation to publicly release any
revisions to the forward-looking statements or reflect events or circumstances after the date of this report.
Although we believe that the expectations
reflected in these forward-looking statements are based on reasonable assumptions, there are a number of risks and uncertainties
that could cause actual results to differ materially from such forward-looking statements. These factors include among others:
This list is not exhaustive of the factors
that may affect our forward-looking statements. Some of the important risks and uncertainties that could affect forward-looking
statements are described further under the sections titled “Description of the Business”, “Risk Factors and Uncertainties”,
and “Management’s Discussion and Analysis”. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, believed, estimated or
expected. We caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date
made. We disclaim any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after
the date of such statements or to reflect the occurrence of anticipated or unanticipated events.
We qualify all the forward-looking statements
contained in this annual report on Form 10-K by the foregoing cautionary statements.
PART I
ITEM 1. BUSINESS
As used in this Annual Report, the terms
“we,” “us,” “our,” and the “Company” refer to DarkPulse Inc, Inc., a Delaware corporation.
Corporate Overview
Organization
DarkPulse, Inc. ("DPI", “DarkPulse”
or the "Company") is a technology-security company incorporated in 1989 as Klever Marketing, Inc ("Klever").
Its principal wholly-owned subsidiary, DarkPulse Technologies Inc. ("DPTI"), originally started as a technology spinout
from the University of New Brunswick, Fredericton, Canada. DPI is comprised of two security platforms: Fiber and Ultra-High
Sensitivity Sensors ("UHSS").
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 DPTI 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 was 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.
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.
In December 2010 DPTI entered into an Assignment
Agreement with the University of New Brunswick, Canada (“the University”), pursuant to which the University sold, transferred,
and assigned to the Company certain patents related to the University’s BOTDA dark-pulse technology (the "Patents")
in exchange for the issuance of a debenture to the University in the amount of C$1,500,000 (Canadian dollars). In April 2017, DPTI
entered into an Intellectual Property agreement with the University in exchange for the issuance of a replacement debenture to
the University in the amount of US$1,491,923 (the “Debenture”). The Patents and the Debenture were initially recorded
in the Company’s accounts at $1,491,923, based upon the exchange rate between the US dollar and the Canadian dollar on December
16, 2010, the date of the original debenture. In addition to the repayment of principal and interest, the Debenture requires DPTI
to pay the University a two percent royalty on sales of any and all products or services which incorporate the Patents for a period
of five years commencing on April 24, 2018, as well as to reimburse the University for its patent-related costs.
On September 5, 2017, DarkPulse Technology
Holdings Inc. (“Holdings”), a wholly-owned subsidiary of the Company, entered into a Strategic Alliance Agreement with
Bravatek Solutions Inc., a publicly-held Colorado corporation (“Bravatek”), pursuant to which Bravatek was to promote
the company’s products and the Company was to cross-promote Bravatek’s products and services, and Bravatek would be
paid sales commissions for customers introduced to the Company by Bravatek.
On February 8, 2018, the Company 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 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 ("Licensed
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 JV Entity is considered a variable interest entity, of which Bravatek is considered the primary beneficiary. The Company's
interest in JV Entity is accounted for using the equity method of accounting. The Company previously granted the JV Entity a revocable,
royalty-free non-exclusive license to use the Licensed Technology in North America, Asia, and European government, military and
critical infrastructure/key resources market segments. The initial cash contribution to JV Entity from Bravatek was $10,000, and
the initial cash contribution to JV Entity from the Company was $100. As of December 31, 2018, Bravatek contributed cash totaling
$87,000 to the JV Entity. 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, as further described herein under
“Note 14 - Subsequent Events”.
Our Business
The Company offers a full suite of engineering,
installation and security management solutions to industries and governments. Coupled with our patented BOTDA dark-pulse technology
(the “DarkPulse Technology”), DarkPulse provides its customers a comprehensive data stream of critical metrics for
assessing the health and security of their infrastructure. Our comprehensive system provides for rapid, precise analysis and responsive
activities predetermined by the end-user customer.
Historically, distributed sensor systems
have been too costly, slow and limited in their capabilities to attain widespread use. In addition, Brillouin-based sensors have
been plagued with temperature and strain cross-sensitivity, i.e. the inability to distinguish between temperature and strain change
along the same fiber. The loss of spatial resolution with an increase in fiber length has also limited the use of distributed sensor
systems. Due to these shortcomings, existing technologies are unable to succeed within today’s dynamic environments, and
needs for more advanced sensor technologies have remained unsatisfied.
By contrast to existing technologies, the
DarkPulse Technology is a distributed-fiber sensing system, based on dark-pulse
Brillouin
scattering, which reports in real-time
on conditions such as temperature, stress, strain and load, initially for pipeline and mining installations.
DarkPulse Technology’s differentiators
from and advantages over existing technologies:
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Real-time Reporting: Higher data acquisition
speeds allowing for structural monitoring of dynamic systems
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Cost to Customer: Significantly lower
acquisition and operating costs
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Precision: A greater magnitude of precision
and spatial resolution than other systems currently available
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Applications: Wider range of capabilities
than other systems currently available
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Power consumption: Lower power consumption
than existing systems allowing for off-grid installations
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Integration: Capable of integrating with
existing systems
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Central station monitoring
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We believe that these key advantages should
allow the Company not only to enter existing markets, but more importantly, to open new market opportunities with new applications.
The Company intends to leverage new applications to target clients that have been unable to make use of distributed fiber optic
technology to date.
Revenue Generation
We intend to generate revenue from the
following sources:
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Hardware equipment sales, warranties,
service contracts and licensing to large enterprises and governments.
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Recurring subscription fees paid by enterprise/government
users for access to our 24/7 monitoring services of their critical infrastructure;
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Recurring subscription fees paid by enterprise/government
users for access to our applications by enterprises/governments;
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Recurring subscription fees paid by
enterprise users for access data to stored in the cloud that may be integrated into large, third-party providers such as
Oracle, Google Cloud; and Microsoft; among others;
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Recurring subscription fees paid by enterprise/government
users who subscribe to bundled service offerings.
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Our Market
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. Our DarkPulse Technology allows for the monitoring of highly dynamic environments due to its magnitude
of increased resolution and greater accuracy. The resulting high speed, real-time monitoring capabilities of our DarkPulse Technology
should satisfy a broad range of existing and emerging requirements. Use of the DarkPulse Technology by our customers should result
in lower production costs with increased sensing capabilities that can integrate with existing technology and be upgraded cost
effectively.
Due to the characteristics of the fiber
used in fiber optic sensing, the uses of our DarkPulse Technology are wide ranging. Optical fiber is hard-wearing, which allows
it to be used in environments where other technologies fail (for example, at temperatures ranging from -40°C to 300°C
and 1000psi). Additionally, DarkPulse Technology’s
sensors allow for live sensing due to the speed at which the analysis takes place.
The Company’s management team is
continually identifying markets in which our DarkPulse Technology may be readily applied. Once these markets (as described below)
have been addressed, our DarkPulse Technology may be adapted and applied to new markets.
Structural Monitoring
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Buildings and Skyscrapers
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Bridges, Tunnels and Dams
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Roads and Railway tracks
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Temperature Sensing
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Fire Alarm and Environment control
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Low cost and maintenance
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Long life span
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Ability to withstand harsh working environment
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Security & Defense
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National Border Protection
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Protection of Military and other sensitive
installations
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Consulting Services:
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Consulting (as stand-alone or presales)
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Post sales deployment and Support
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Managed services (monitoring, etc.)
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Additional Potential Markets:
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Monitoring of composite structures in
aircraft
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Dynamic stress monitoring of runways
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Dynamic ship hull stress monitoring, especially
with a view to double-hull oil tankers
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Smart grid and power conservation applications
based on cooling and/or heat proximity – for instance, computer rooms, cell towers for heat soak
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Monitor low temperatures as part of control
systems
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Monitoring of temperatures in extreme
refrigeration environments
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Avalanche early warning systems
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Sea defense monitoring
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Marketing
We utilize our DarkPulse Technology as
the foundation of our ongoing marketing initiatives. Most notably, the greater magnitude of increased capabilities DarkPulse Technology
versus existing bright-pulsing technologies. Existing bright-pulse Brillouin-based sensors have historically been plagued with
temperature and strain cross-sensitivity, i.e. the inability to distinguish between temperature and strain change along the same
fiber. The loss of spatial resolution with an increase in fiber length is also a limiting factor for the use of distributed sensor
systems. Because of these shortcomings, existing bright-pulse Brillouin-based technologies are unable to succeed within today’s
dynamic environments,which coincides with our DarkPulse Technology’s increased capabilities over bright-pulse systems. Our
marketing initiatives include daily, broad-based social media engagement; management of our website; email campaigns, and other
ongoing initiatives designed to increase awareness of our products and services and drive conversion and adoption rates.
Competition
The overall optical sensing market is projected
to reach USD $3.47 billion by 2023 from USD $1.13 billion in 2016, at a CAGR of 15.47% between 2017 and 2023
[1]
. The
Company is active in the optical sensing market, including Oil & Gas pipeline health monitoring, National Border Security applications,
and the mining industry. We believe that fiber sensing applications which incorporate our DarkPulse Technology may provide significant
competitive advantages over structural health monitoring applications offered by the long-term leaders in the field, such as Schlumberger,
Hewlett-Packard, and Yokogawa, which collectively account for a significant portion of industry sales. These companies, as well
as others, have numerous differences in feature sets and functionality, but all share certain basic attributes: a bright-pulse
technology as the core of their systems architecture. An architecture designed using bright-pulsing technology has limited sensing
capabilities and resolutions of one meter allowing for mostly long-term quasi-static deployments.
[1]
Optical Sensing Market by Industry (Aerospace & Defense, Utilities, Oil & Gas, Medical, Construction,
and Consumer Electronics), Application, Method, and Geography - Global Forecast to 2023
(https://www.marketsandmarkets.com/Market-Reports/optical-sensing-market-197592599.html?gclid=EAIaIQobChMIzrfanf
7P4QIVA0GGCh3jlw7rEAAYASAAEgI9bvD_BwE)
However, the Company utilizes its DarkPulse
Technology allowing for multiple applications into those markets unavailable to companies using bright-pulse technology. While
many of the companies using bright-pulse technology have attempted to incorporate various sensing techniques into a legacy technology,
none have been able to offer the order of magnitude resolutions offered by our DarkPulse Technology. This magnitude in resolution
coupled with the DarkPulse Technology’s increased data collection speeds allows our DarkPulse Technology to be installed
into areas of the market that our competitors cannot. The Company’s future financial condition and operating results depend
on its ability to provide a high-quality solution as well as increased distribution of the solutions in each of the markets in
which it competes or intends to compete within.
The
markets for the Company’s products and services are highly competitive and the Company is confronted by aggressive competition.
These markets are characterized by frequent product introductions and rapid technological advances. The Company’s financial
condition and operating results can be adversely affected by these and other industry-wide downward pressures on gross margins.
Principal competitive factors important to the Company include price, product features, relative price and performance, product
quality and reliability, marketing and distribution capability, service and support and corporate reputation.
Intellectual Property
Our policy is to protect our technology
by, among other things, patents, trade secret protection and copyrights. We have taken security measures to protect our trade secrets
and proprietary know-how, to the greatest extent possible. Our means of protecting our proprietary rights may not prove to be adequate
and our competitors may independently develop technology or products that are similar to ours or that compete with ours. Trade
secret, patent and copyright laws afford only certain protections for our technology and products. The laws of many countries do
not protect our proprietary rights to as great an extent as do the laws of the United States. Despite our efforts to protect our
proprietary rights, unauthorized parties may attempt to obtain and use information that we regard as proprietary. Third parties
may also design around our proprietary rights, which may render our protected technology and products less valuable, if the design
around is favorably received in the marketplace.
In addition, any of our products or technology
covered by patents or other intellectual property rights, could cause us to be subject to various legal actions. Litigation may
be necessary to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of
the proprietary rights of others, or to defend against claims of infringement, invalidity, misappropriation, or other claims.
Research and Development
We incurred $91,301 and $33,385 of research
and development expenses during the fiscal years ended December 31, 2018 and 2017 respectively. These funds were primarily used
for development of our Erebos BOTDA hardware.
Suppliers
We currently rely on a full-time, dedicated,
external team of experienced professionals for the coding and maintenance of our products. We believe we have mitigated the associated
risks of managing an external team of software and engineering development professionals by incorporating internal management and
oversight, as well as appropriate systems, protocols, controls, and procedures and ensuring that we have access to additional qualified
professionals to provide like or complementary services.
Government Regulation
Government regulation is not of significant
concern for our business nor is government regulation expected to become an impediment to the business in the near- or mid-term
as management is currently unaware of any planned or anticipated government regulation that would have a material impact on our
business. Our management believes it currently possesses all requisite authority to conduct our business as described in this Annual
Report.
ITEM 1A. RISK FACTORS
Readers should carefully consider the risks
and uncertainties described below.
Our failure to successfully address the
risks and uncertainties described below would have a material adverse effect on our business, financial condition and/or results
of operations, and the trading price of our common stock may decline and investors may lose all or part of their investment. We
cannot assure you that we will successfully address these risks or other unknown risks that may affect our business.
As an enterprise engaged in the development
of new technology, our business is inherently risky. Our common shares are considered speculative during the development
of our new business operations. Prospective investors should consider carefully the risk factors set out below.
We need to continue as a going concern if our business
is to succeed.
Our independent registered public accounting
firm reports on our audited financial statements for the years ended December 31, 2018 and 2017, indicate that there are a number
of factors that raise substantial risks about our ability to continue as a going concern. Such factors identified in the
report are our accumulated deficit since inception, no sales recorded to date, our failure to attain profitable operations, the
excess of liabilities over assets, and our dependence upon obtaining adequate additional financing to pay our liabilities. If
we are not able to continue as a going concern, investors could lose their investments.
Because of the unique difficulties
and uncertainties inherent in technology development, we face a risk of business failure.
Potential investors should be aware of
the difficulties normally encountered by companies developing new technology and the high rate of failure of such enterprises.
The likelihood of success must be considered in light of the problems, expenses, difficulties, complications and delays encountered
in connection with the development of new technology with limited personnel and financial means. These potential problems include,
but are not limited to, unanticipated technical problems that extend the time and cost of product development, or unanticipated
problems with the operation of our technology or that with which we are licensing that also extend the time and cost of product
development.
If we do not obtain additional financing
or sufficient revenues, our business will fail.
Our current operating funds are less than
necessary to complete the full development and marketing of our DarkPulse Technology-based systems, and we will need to obtain
additional financing in order to complete our business plan. We currently have minimal operations and we are not currently
generating revenue or net income.
Our business plan calls for significant
expenses in connection with developing our DarkPulse Technology-based systems and paying our current obligations. The Company currently
does not have sufficient funds to pay its obligations. As a result, the Company will require additional financing to execute its
business plan through raising additional capital and/or beginning to generate revenue.
We do not currently have any firm arrangements
for financing, and we can provide no assurance to investors that we will be able to find such additional financing if required.
Obtaining additional financing is subject to a number of factors, including investor acceptance of our DarkPulse Technology and
current financial condition as well as general market conditions. These factors affect the timing, amount, terms or conditions
of additional financing unavailable to us. And if additional financing is not arranged, the company faces the risk of going out
of business. The Company’s management is currently engaged in actively pursuing multiple financing options in order to obtain
the capital necessary to execute the Company’s business plan.
The most likely source of future funds
presently available to us is through the additional sale of private equity capital or through a convertible debt instrument.
Any sale of share capital or conversion of convertible debt will most likely result in dilution to existing shareholders.
There is no history upon which to base
any assumption as to the likelihood we will prove successful, and we can provide investors with no assurance that we will generate
any operating revenues or achieve profitable operations. If we are unsuccessful in addressing these risks, our business will most
likely fail.
Because the SEC imposes additional
sales practice requirements on brokers who deal in our shares that are penny stocks, some brokers may be unwilling to trade them.
This means that investors may have difficulty reselling their shares and may cause the price of the shares to decline.
Our shares qualify as penny stocks and
are covered by Section 15(g) of the Securities Exchange Act of 1934, which imposes additional sales practice requirements on broker/dealers
who sell our securities in this offering or in the aftermarket. In particular, prior to selling a penny stock, broker/dealers must
give the prospective customer a risk disclosure document that: contains a description of the nature and level of risk in the market
for penny stocks in both public offerings and secondary trading; contains a description of the broker/dealers’ duties to
the customer and of the rights and remedies available to the customer with respect to violations of such duties or other requirements
of Federal securities laws; contains a brief, clear, narrative description of a dealer market, including “bid” and
“ask” prices for penny stocks and the significance of the spread between the bid and ask prices; contains the toll
free telephone number for inquiries on disciplinary actions established pursuant to section 15(A)(i); defines significant terms
used in the disclosure document or in the conduct of trading in penny stocks; and contains such other information, and is in such
form (including language, type size, and format), as the SEC requires by rule or regulation. Further, for sales of our securities,
the broker/dealer must make a special suitability determination and receive from you a written agreement before making a sale to
you. Because of the imposition of the foregoing additional sales practices, it is possible that brokers will not want to make a
market in our shares. This could prevent reselling of shares and may cause the price of the shares to decline.
Technology companies face intense
competition. We will have to compete with our competitors for financing and for qualified managerial and technical employees.
The technology industry is intensely competitive
in all of its phases. Competition includes large established technology companies with substantial capabilities and with greater
financial and technical resources than we have. As a result of this competition, we may be unable to become a leader in our industry
and attract and retain qualified managerial and technical employees. If we are unable to successfully compete for financing or
for qualified employees, our technology development and commercialization efforts may be slowed down or suspended.
Product development is a long, expensive and uncertain
process.
The development of DarkPulse Technology-based
systems is a costly, complex and time-consuming process, and the investment in product development often involves a long wait until
a return, if any, is achieved on such investment. We continue to make significant investments in research and development
relating to our DarkPulse Technology-based systems and our other businesses. Investments in new technology and processes
are inherently speculative. We have experienced numerous setbacks and delays in our research and development efforts and may encounter
further obstacles in the course of the development of additional technologies and products. We may not be able to overcome
these obstacles or may have to expend significant additional funds and time. Technical obstacles and challenges we encounter in
our research and development process may result in delays in or abandonment of product commercialization, may substantially increase
the costs of development, and may negatively affect our results of operations.
Successful technical development of our products does
not guarantee successful commercialization.
We may successfully complete the technical
development for one or all of our product development programs, but still fail to develop a commercially successful product for
a number of reasons, including among others the following:
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failure to obtain the required regulatory approvals for their use;
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prohibitive production costs;
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lack of innovation of the product;
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ineffective distribution and marketing;
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lack of sufficient cooperation from our partners; and
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demonstrations of the products not aligning with or meeting customer needs.
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Our success in the market for the products
we develop will depend largely on our ability to prove our products’ capabilities. Upon demonstration, our products
and/or technology may not have the capabilities they were designed to have or that we believed they would have. Furthermore,
even if we do successfully demonstrate our products’ capabilities, potential customers may be more comfortable doing business
with a larger, more established, more proven company than us. Moreover, competing products may prevent us from gaining wide market
acceptance of our products. Significant revenue from new product investments may not be achieved for a number of years,
if at all.
If we fail to protect our intellectual property rights,
we could lose our ability to compete in the marketplace.
Our intellectual property and proprietary
rights are important to our ability to remain competitive and for the success of our products and our business. We rely on a combination
of patent, trademark and trade secret laws as well as confidentiality agreements and procedures, non-compete agreements and other
contractual provisions to protect our intellectual property, other proprietary rights and our brand. We have confidentiality
agreements in place with our consultants, customers and certain business suppliers and plan to require future employees to enter
into confidentiality and non-compete agreements. We have little protection when we must rely on trade secrets and nondisclosure
agreements. Our intellectual property rights may be challenged, invalidated or circumvented by third parties. We may
not be able to prevent the unauthorized disclosure or use of our technical knowledge or other trade secrets by employees or competitors.
Furthermore, our competitors may independently develop technologies and products that are substantially equivalent or superior
to our technologies and/or products, which could result in decreased revenues. Moreover, the laws of foreign countries
may not protect our intellectual property rights to the same extent as the laws of the U.S. Litigation may be necessary to enforce
our intellectual property rights which could result in substantial costs to us and substantial diversion of management attention.
If we do not adequately protect our intellectual property, our competitors could use it to enhance their products. Our
inability to adequately protect our intellectual property rights could adversely affect our business and financial condition, and
the value of our brand and other intangible assets.
.
Other companies may claim that we infringe their intellectual
property, which could materially increase our costs and harm our ability to generate future revenue and profit.
We do not believe that we infringe the
proprietary rights of any third party, but claims of infringement are becoming increasingly common and third parties may assert
infringement claims against us. It may be difficult or impossible to identify, prior to receipt of notice from a third
party, the trade secrets, patent position or other intellectual property rights of a third party, either in the United States or
in foreign jurisdictions. Any such assertion may result in litigation or may require us to obtain a license for the intellectual
property rights of third parties. If we are required to obtain licenses to use any third party technology, we would
have to pay royalties, which may significantly reduce any profit on our products. In addition, any such litigation could
be expensive and disruptive to our ability to generate revenue or enter into new market opportunities. If any of our
products were found to infringe other parties’ proprietary rights and we are unable to come to terms regarding a license
with such parties, we may be forced to modify our products to make them non-infringing or to cease production of such products
altogether.
The nature of our business involves
significant risks and uncertainties that may not be covered by insurance or indemnity.
We develop and sell products where insurance
or indemnification may not be available, including:
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designing and developing products using advanced and unproven technologies in intelligence and homeland security applications that are intended to operate in high demand, high risk situations; and
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designing and developing products to collect, distribute and analyze various types of information.
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Failure of certain of our products could
result in loss of life or property damage. Certain products may raise questions with respect to issues of privacy rights, civil
liberties, intellectual property, trespass, conversion and similar concepts, which may raise new legal issues. Indemnification
to cover potential claims or liabilities resulting from a failure of technologies developed or deployed may be available in certain
circumstances but not in others. We are not able to maintain insurance to protect against all operational risks and uncertainties.
Substantial claims resulting from an accident, failure of our product, or liability arising from our products in excess of any
indemnity or insurance coverage (or for which indemnity or insurance is not available or was not obtained) could harm our financial
condition, cash flows, and operating results. Any accident, even if fully covered or insured, could negatively affect our reputation
among our customers and the public, and make it more difficult for us to compete effectively.
We are heavily reliant on Dennis
O’Leary, our Chairman and Chief Executive Officer, and the departure or loss of Dennis O’Leary could disrupt our business.
The Company depends heavily on the continued
efforts of Dennis O’Leary, Chairman, Chief Executive Officer and a director. Mr. O’Leary is essential to
the Company’s strategic vision and day-to-day operations and would be difficult to replace. We currently do not have an employment
agreement with Mr. O’Leary, thus we cannot be certain that he will desire to continue with us for the necessary time it will
to complete the product development and initial sales channel development. The departure or loss of Mr. O’Leary, or the inability
to hire and retain a qualified replacement, could negatively impact the Company’s ability to manage its business.
If we are unable to recruit and retain
key management, technical and sales personnel, our business would be negatively affected.
For our business to be successful, we need
to attract and retain highly qualified technical, management and sales personnel. The failure to recruit additional
key personnel when needed with specific qualifications and on acceptable terms or to retain good relationships with our partners
might impede our ability to continue to develop, commercialize and sell our products. To the extent the demand for skilled
personnel exceeds supply, we could experience higher labor, recruiting and training costs in order to attract and retain such employees.
We face competition for qualified personnel from other companies with significantly more resources available to them and thus may
not be able to attract the level of personnel needed for our business to succeed.
The control deficiencies in our internal
control over financial reporting may until remedied cause errors in our financial statements or cause our filings with the SEC
to not be timely.
The Company believes that control deficiencies exist
in our internal control over financial reporting as of December 31, 2018, including those related to (i)
our
internal audit functions and (ii) a lack of segregation of duties within accounting functions.
If our internal control
over financial reporting or disclosure controls and procedures are not effective, there may be errors in our financial statements
that could require a restatement or our filings may not be timely made with the SEC. We intend to implement additional corporate
governance and control measures to strengthen our control environment as we are able, but we may not achieve our desired objectives.
Moreover, no control environment, no matter how well designed and operated, can prevent or detect all errors or fraud. We may
identify material weaknesses and control deficiencies in our internal control over financial reporting in the future that may
require remediation and could lead investors losing confidence in our reported financial information, which could lead to a decline
in our stock price.
Risks Related to Our Organization and
Our Common Stock
Certain shareholders will be
able to exert significant influence over us to the detriment of minority stockholders.
Our largest shareholder beneficially owns
approximately 81.29% of our outstanding common stock as of April 15, 2019, as calculated according to voting power. These stockholders,
if they act together, will be able to exert significant influence on our management and affairs and all matters requiring stockholder
approval, including significant corporate transactions. This concentration of ownership may have the effect of delaying or preventing
our change in control and might affect the market price of our common stock.
You may experience dilution of your
ownership interests because of the future issuance of additional shares of our common or preferred stock or other securities that
are convertible into or exercisable for our common or preferred stock.
On December 13, 2018, the majority stockholders
holding a majority of the issued and outstanding voting shares of the Company approved an amendment to 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. We are authorized
to issue an aggregate of 3,000,000,000 shares of common stock and 2,000,000 shares of “blank check” preferred stock.
In the future, we may issue our authorized but previously unissued equity securities, resulting in the dilution of the ownership
interests of our present stockholders. We may issue additional shares of our common stock or other securities that are convertible
into or exercisable for our common stock in connection with hiring or retaining employees, future acquisitions, future sales of
our securities for capital raising purposes, or for other business purposes. The future issuance of any such additional
shares of our common stock may create downward pressure on the trading price of the common stock. We will need to raise additional
capital in the near future to meet our working capital needs, and there can be no assurance that we will not be required to issue
additional shares, warrants or other convertible securities in the future in conjunction with these capital raising efforts, including
at a price (or exercise or conversion prices) below the price an investor paid for stock.
We do not expect to declare or pay
any dividends.
We have not declared or paid any dividends
on our common stock since our inception, and we do not anticipate paying any such dividends for the foreseeable future.
Volatility of Stock Price.
Our common shares are currently publicly
traded on the OTC Markets under the symbol DPLS. In the future, the trading price of our common shares may be subject to wide fluctuations.
Trading prices of the common shares may fluctuate in response to a number of factors, many of which will be beyond our control.
In addition, the stock market in general, and the market for sensor technology companies in particular, has experienced extreme
price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of such companies.
Market and industry factors may adversely affect the market price of the common shares, regardless of our operating performance.
Readers should carefully consider the risks and uncertainties described below before deciding whether to invest in shares of our
common stock.
Our failure to successfully address the
risks and uncertainties described below would have a material adverse effect on our business, financial condition and/or results
of operations, and the trading price of our common stock may decline and investors may lose all or part of their investment. We
cannot assure you that we will successfully address these risks or other unknown risks that may affect our business.
As an enterprise engaged in the development
of new technology, our business is inherently risky. Our common shares are considered speculative during the development of our
new business operations. Prospective investors should consider carefully the risk factors set out below. As reported herein
in “Item 5. Market For Common Equity and Related Stockholder Matters
”,
the market price of our common
stock has fluctuated significantly.
Being a public company is expensive and administratively
burdensome.
As a public reporting company, we are subject
to the information and reporting requirements of the Securities Act of 1933, as amended (the “Securities Act”), the
Securities Exchange Act of 1934, as amended (the “Exchange Act”) and other federal securities laws, rules and regulations
related thereto, including compliance with the Sarbanes-Oxley Act. Complying with these laws and regulations requires the time
and attention of our Board of Directors and management team, and increases our expenses. We estimate the Company will incur
approximately $200,000 to $300,000 annually in connection with being a public company.
Among other things,
we are required to:
|
·
|
maintain and evaluate a system of internal controls over financial reporting in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board;
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·
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prepare and distribute periodic reports in compliance with our obligations under federal securities laws;
|
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·
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institute a more comprehensive compliance function, including with respect to corporate governance; and
|
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·
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involve, to a greater degree, our outside legal counsel and accountants in the above activities.
|
The costs of preparing and filing annual
and quarterly reports, proxy statements and other information with the SEC and furnishing audited reports to stockholders are expensive
and much greater than that of a privately-held company, and compliance with these rules and regulations may require us to hire
additional financial reporting, internal controls and other finance personnel, and will involve a material increase in regulatory,
legal and accounting expenses and the attention of management. There can be no assurance that we will be able to comply with the
applicable regulations in a timely manner, if at all. In addition, being a public company makes it more expensive for us to obtain
director and officer liability insurance. In the future, we may be required to accept reduced coverage or incur substantially higher
costs to obtain this coverage.
If we fail to establish and maintain
an effective system of internal control, we may not be able to report our financial results accurately or to prevent fraud. Any
inability to report and file our financial results accurately and timely could harm our reputation and adversely impact the trading
price of our common stock.
Effective internal control is
necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial
reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control
environment existed, and our business and reputation with investors may be harmed. As a result, our small size and any
current internal control deficiencies may adversely affect our financial condition, results of operation and access to
capital. We have not performed an in-depth analysis to determine if historical un-discovered failures of internal
controls exist, and may in the future discover areas of our internal control that need improvement.
Public company compliance may make it more difficult to
attract and retain officers and directors.
The Sarbanes-Oxley Act and new rules subsequently
implemented by the SEC have required changes in corporate governance practices of public companies. As a public company,
we expect these new rules and regulations to increase our compliance costs in 2019 and beyond and to make certain activities more
time consuming and costly. As a public company, we also expect that these new rules and regulations may make it more
difficult and expensive for us to obtain director and officer liability insurance in the future and we may be required to accept
reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a
result, it may be more difficult for us to attract and retain qualified persons to serve on our Board of Directors or as executive
officers.
You could lose all of your investment.
An investment in our securities is speculative
and involves a high degree of risk. Potential investors should be aware that the value of an investment in the Company may go down
as well as up. In addition, there can be no certainty that the market value of an investment in the Company will fully reflect
its underlying value. You could lose your entire investment.
The ability of our Board of Directors
to issue additional stock may prevent or make more difficult certain transactions, including a sale or merger of the Company.
Our Board of Directors is authorized to
issue up to 2,000,000 shares of preferred stock with powers, rights and preferences designated by it. See “Preferred
Stock” in the section of this Current Report titled “Description of Securities.” Shares of voting or convertible
preferred stock could be issued, or rights to purchase such shares could be issued, to create voting impediments or to frustrate
persons seeking to effect a takeover or otherwise gain control of the Company. The ability of the Board of Directors to issue
such additional shares of preferred stock, with rights and preferences it deems advisable, could discourage an attempt by a party
to acquire control of the Company by tender offer or other means. Such issuances could therefore deprive stockholders of
benefits that could result from such an attempt, such as the realization of a premium over the market price for their shares in
a tender offer or the temporary increase in market price that such an attempt could cause. Moreover, the issuance of such
additional shares of preferred stock to persons friendly to the Board of Directors could make it more difficult to remove incumbent
officers and directors from office even if such change were to be favorable to stockholders generally.
Our stock may be traded infrequently
and in low volumes, so you may be unable to sell your shares at or near the quoted bid prices if you need to sell your shares.
Until our common stock is listed on a national
securities exchange such as the New York Stock Exchange or the Nasdaq Stock Market, we expect our common stock to remain eligible
for quotation on the OTC Markets, or on another over-the-counter quotation system. In those venues, however, the shares of our
common stock may trade infrequently and in low volumes, meaning that the number of persons interested in purchasing our common
shares at or near bid prices at any given time may be relatively small or non-existent. An investor may find it difficult to obtain
accurate quotations as to the market value of our common stock or to sell his or her shares at or near bid prices or at all. In
addition, if we fail to meet the criteria set forth in SEC regulations, various requirements would be imposed by law on broker-dealers
who sell our securities to persons other than established customers and accredited investors. Consequently, such regulations may
deter broker-dealers from recommending or selling our common stock, which may further affect the liquidity of our common stock.
This would also make it more difficult for us to raise capital.
There currently is no active public
market for our common stock and there can be no assurance that an active public market will ever develop. Failure to develop or
maintain a trading market could negatively affect the value of our common stock and make it difficult or impossible for you to
sell your shares.
There is currently no active public market
for shares of our common stock and one may never develop. Our common stock is quoted on the OTC Markets. The OTC Markets is a thinly
traded market and lacks the liquidity of certain other public markets with which some investors may have more experience. We may
not ever be able to satisfy the listing requirements for our common stock to be listed on a national securities exchange, which
is often a more widely-traded and liquid market. Some, but not all, of the factors which may delay or prevent the listing of our
common stock on a more widely-traded and liquid market include the following: our stockholders’ equity may be insufficient;
the market value of our outstanding securities may be too low; our net income from operations may be too low; our common stock
may not be sufficiently widely held; we may not be able to secure market makers for our common stock; and we may fail to meet the
rules and requirements mandated by the several exchanges and markets to have our common stock listed. Should we fail to satisfy
the initial listing standards of the national exchanges, or our common stock is otherwise rejected for listing, and remains listed
on the OTC Markets or is suspended from the OTC Markets, the trading price of our common stock could suffer and the trading market
for our common stock may be less liquid and our common stock price may be subject to increased volatility, making it difficult
or impossible to sell shares of our common stock.
Our common stock is subject to the
“penny stock” rules of the SEC and the trading market in the securities is limited, which makes transactions in the
stock cumbersome and may reduce the value of an investment in the stock.
Rule 15g-9 under the Exchange Act establishes
the definition of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price
of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any
transaction involving a penny stock, unless exempt, the rules require: (a) that a broker or dealer approve a person’s account
for transactions in penny stocks; and (b) the broker or dealer receive from the investor a written agreement to the transaction,
setting forth the identity and quantity of the penny stock to be purchased.
In order to approve a person’s account
for transactions in penny stocks, the broker or dealer must: (a) obtain financial information and investment experience objectives
of the person and (b) make a reasonable determination that the transactions in penny stocks are suitable for that person and the
person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny
stocks.
The broker or dealer must also deliver,
prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which,
in highlight form: (a) sets forth the basis on which the broker or dealer made the suitability determination; and (b) confirms
that the broker or dealer received a signed, written agreement from the investor prior to the transaction. Generally, brokers
may be less willing to execute transactions in securities subject to the “penny stock” rules. This may make it
more difficult for investors to dispose of our common stock and cause a decline in the market value of our common stock.
Disclosure also has to be made about the
risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both
the broker or dealer and the registered representative, current quotations for the securities and the rights and remedies available
to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent
price information for the penny stock held in the account and information on the limited market in penny stocks.
Our stock price may be volatile.
The market price of our common stock is
likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control,
including the following:
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·
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changes in our industry;
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·
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competitive pricing pressures;
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·
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our ability to obtain working capital financing;
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·
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additions or departures of key personnel;
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·
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sales of our common stock;
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·
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our ability to execute our business plan;
|
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·
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operating results that fall below expectations;
|
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·
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loss of any strategic relationship;
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·
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regulatory developments; and
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·
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economic and other external factors.
|
In addition, the securities markets have
from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular
companies. These market fluctuations may also materially and adversely affect the market price of our common stock.
Offers or availability for sale of
a substantial number of shares of our common stock may cause the price of our common stock to decline.
If our stockholders sell substantial amounts
of our common stock in the public market, including upon the expiration of any statutory holding period under Rule 144, or issued
upon the conversion of preferred stock or exercise of warrants, it could create a circumstance commonly referred to as an "overhang"
and in anticipation of which the market price of our common stock could fall. The existence of an overhang, whether
or not sales have occurred or are occurring, also could make more difficult our ability to raise additional financing through the
sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
None.
ITEM 3. LEGAL PROCEEDINGS
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.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
Notes to the Consolidated Financial Statements
For the Years ended December 31, 2018
and 2017
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, 2018 and 2017 include the accounts of DarkPulse Inc. and its subsidiaries:
DarkPulse Technologies
Inc., 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 liabilties. 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, as further described herein under “Note 14- Subsequent Events”.
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 a high
credit quality financial institutions. The Company’s account at this institution is insured by the Federal Deposit Insurance
Corporation (“FDIC”) up to $250,000. To reduce its risk associated with the failure of such financial institution,
the Company evaluates at least annually the rating of the financial institution in which it holds deposits.
Foreign Currency Translation
The Company’s reporting currency
is US Dollars. The accounts of one of the Company’s subsidiaries is maintained using the appropriate local currency, Canadian
Dollar (“CAD”) as the functional currency. All assets and liabilities are translated into U.S. Dollars at balance sheet
date, shareholders' equity is translated at historical rates and revenue and expense accounts are translated at the average exchange
rate for the year or the reporting period. The translation adjustments are reported as a separate component of stockholders’
equity, captioned as accumulated other comprehensive (loss) gain. Transaction gains and losses arising from exchange rate fluctuations
on transactions denominated in a currency other than the functional currency are included in the statements of operations.
The relevant translation rates are as
follows: for the year ended December 31, 2018 closing rate at 1.3642 US$: CAD, average rate at 1.2958 US$: CAD and for the year
ended December 31, 2017 closing rate at 1.2573 US$: CAD, average rate at 1.2982 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, 2018, 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
30, 2018, 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, 2018:
Balance at January 1, 2018
|
|
$
|
537,960
|
|
Amortization
|
|
|
(51,028
|
)
|
Balance at December 31, 2018
|
|
$
|
486,932
|
|
The
following is a summary of the DPTI patents as of December 31, 2018:
|
|
2018
|
|
Historical cost
|
|
$
|
895,155
|
|
Accumulated amortization
|
|
|
(408,223
|
)
|
Carrying Value
|
|
$
|
486,932
|
|
Future
expected amortization of intangible assets is as follows:
Year Ending December 31,
|
|
|
|
2019
|
|
$
|
51,028
|
|
2020
|
|
|
51,028
|
|
2021
|
|
|
51,028
|
|
2022
|
|
|
51,028
|
|
2023
|
|
|
51,028
|
|
Thereafter
|
|
|
231,792
|
|
|
|
$
|
486,932
|
|
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, 2018 and 2017, and no amortization expense for software development costs was recorded for the years
ended December 31, 2018 and 2017.
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 $9,811 and $0 for the years ended December
31, 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.
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. There were no impairments for the year ended December 31, 2017.
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, 2018 and 2017.
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 year
2018. The Company has filed tax returns in Canada for the years ending December 31, 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, 2018
|
|
|
December 31, 2017
|
|
Convertible preferred stock
|
|
|
–
|
|
|
|
–
|
|
Stock Options
|
|
|
–
|
|
|
|
–
|
|
Stock Warrants
|
|
|
–
|
|
|
|
–
|
|
Total
|
|
|
–
|
|
|
|
–
|
|
Recently Issued Accounting
Pronouncements
In July 2017, the FASB issued Accounting
Standards Update ("ASU") 2017-11, "Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic
480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement
of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Non-controlling Interests with a Scope Exception." Part I of this update addresses the complexity of accounting
for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments
(or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current
accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible
instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II
of this update addresses the difficulty of navigating Topic 480, "Distinguishing Liabilities from Equity," because of
the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of
the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities
and certain mandatorily redeemable non-controlling interests. The amendments in Part II of this update do not have an accounting
effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The
Company is currently unable to determine the impact on its consolidated financial statements of the adoption of this new accounting
pronouncement.
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 is effective for us in the first
quarter of 2019. The Company will assess the impact at the time leases are executed.
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 $3,318,059 and $140,303 during the years ended December 31, 2018 and
2017, respectively. The Company did not generate any revenue from product sales during the years ended December 31, 2018 and
2017. As of December 31, 2018, the Company’s current liabilities exceeded its current assets by $1,670,816.
As of December 31, 2018, the Company had $72,294 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 2018. 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 and December 31, 2018. Management determined the expected volatility range
between 95.3 – 100.5%, a risk free rate of interest of 7.91%, and contractual lives of the debt varying from six months to
two years. The table below details the Company's nine 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
|
|
|
Amortization
|
|
|
Initial
|
|
|
Change
|
|
|
Derivative Balance
|
|
|
|
Amount
|
|
|
of Discount
|
|
|
Loss
|
|
|
in FMV
|
|
|
12/31/2018
|
|
|
|
$
|
189,750
|
|
|
$
|
86,817
|
|
|
$
|
58,959
|
|
|
$
|
(54,412
|
)
|
|
$
|
145,031
|
|
|
|
|
201,000
|
|
|
|
88,110
|
|
|
|
74,429
|
|
|
|
(60,713
|
)
|
|
|
141,466
|
|
|
|
|
97,000
|
|
|
|
70,114
|
|
|
|
11,381
|
|
|
|
(3,004
|
)
|
|
|
78,377
|
|
|
|
|
100,000
|
|
|
|
35,531
|
|
|
|
8,904
|
|
|
|
(23,491
|
)
|
|
|
75,163
|
|
|
|
|
103,000
|
|
|
|
38,280
|
|
|
|
5,651
|
|
|
|
(21,252
|
)
|
|
|
77,399
|
|
|
|
|
247,500
|
|
|
|
54,480
|
|
|
|
–
|
|
|
|
(1,228
|
)
|
|
|
123,038
|
|
|
|
|
29,250
|
|
|
|
1,053
|
|
|
|
–
|
|
|
|
(1,764
|
)
|
|
|
2,763
|
|
|
|
|
49,726
|
|
|
|
1,790
|
|
|
|
–
|
|
|
|
(3,440
|
)
|
|
|
4,255
|
|
|
|
|
41,774
|
|
|
|
1,502
|
|
|
|
–
|
|
|
|
(2,890
|
)
|
|
|
3,576
|
|
|
|
|
29,250
|
|
|
|
1,053
|
|
|
|
–
|
|
|
|
(1,764
|
)
|
|
|
2,763
|
|
Subtotal
|
|
|
1,088,250
|
|
|
|
378,730
|
|
|
|
159,324
|
|
|
|
(173,958
|
)
|
|
|
653,831
|
|
Transaction expense
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(51,250
|
)
|
|
|
–
|
|
|
|
$
|
1,088,250
|
|
|
$
|
378,730
|
|
|
$
|
159,324
|
|
|
$
|
(225,208
|
)
|
|
$
|
653,831
|
|
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 year ended December 31, 2018, the Company made repayments totaling $42,200. Subsequent to December 31, 2018,
Carebourn converted $53,932 in principal of its' convertible note into 7,688,347 shares of common stock in addition to repayments
totaling $10,150.
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 the
date the consolidated financial statements were available for issuance, DPI received $150,000 net cash, and $75,000 is due to
be received.
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 the date the consolidated financial statements were available for issuance, DPI received $70,000 net cash, and $55,000
is due to be received.
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.
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 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 current market price, $0.25, or 70% of the lowest trading price of the Company's common stock during
the 20 prior trading days. The Company received $90,000 net cash on September 28, 2018.
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.
As of December 31, 2018 and 2017 respectively,
there was $601,250 and $0 of convertible debt outstanding, net of debt discount of $440,800, and $0, As of December 31, 2018 and
2017 respectively, there was derivative liability of $653,831 and $0 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, 2018, and 2017, were $90,772 and
($77,226) 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, 2018, and 2017, the Company recorded interest expense of $76,275 and $32,296, respectively.
As of December 31,
2018 the debenture liability totaled $1,102,243, all of which was long term.
Future
minimum required payments over the next 5 years and thereafter are as follows:
Period ending December 31,
|
|
|
|
2019
|
|
$
|
–
|
|
2020
|
|
|
–
|
|
2021
|
|
|
–
|
|
2022
|
|
|
–
|
|
2023 and after
|
|
$
|
1,102,243
|
|
Total
|
|
$
|
1,102,243
|
|
NOTE 7 – ACCRUED LIABILITIES
Accrued liabilities consist of the following as of December
31:
|
|
2018
|
|
|
2017
|
|
Accrued payroll
|
|
$
|
202,112
|
|
|
$
|
–
|
|
Taxes
|
|
|
1,996
|
|
|
|
1,299
|
|
Accrued interest
|
|
|
139,411
|
|
|
|
32,295
|
|
|
|
$
|
343,519
|
|
|
$
|
33,594
|
|
NOTE 8 – INCOME TAXES
The provision (benefit) for income taxes
for the years ended December 31, 2018 and 2017 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, 2018 and 2017:
|
|
2018
|
|
|
2017
|
|
Statutory tax rate:
|
|
|
|
|
|
|
|
|
U.S.
|
|
|
21.00
|
%
|
|
|
34.00
|
%
|
State taxes
|
|
|
3.63
|
%
|
|
|
3.63
|
%
|
Change in valuation allowance:
|
|
|
(24.63
|
)%
|
|
|
(37.63
|
)%
|
|
|
|
–
|
%
|
|
|
–
|
%
|
The Company’s
deferred tax assets and liabilities as of December 31, 2018 and 2017 are as follows:
|
|
2018
|
|
|
2017
|
|
Deferred Tax (Liabilities):
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
|
834,344
|
|
|
|
150,328
|
|
Intangible assets
|
|
|
(208
|
)
|
|
|
(208
|
)
|
Less: Valuation allowance
|
|
|
(834,136
|
)
|
|
|
(150,120
|
)
|
|
|
$
|
–
|
|
|
$
|
–
|
|
The Company has approximately $834,000
non-capital income tax losses as of December 31, 2018, which will begin to expire in the year 2037.
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, 2018 and 2017, 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, 2018 and 2017, 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, 2018 and 2017, the Company had no uncertain tax positions.
On December 22, 2017, the Tax Cuts and
Jobs Act (the “Act”) was signed into law. The Act decreases the U.S. corporate federal income tax rate from a maximum
of 35% to a flat 21% effective January 1, 2018. The impact of the re-measurement on the Corporation’s net deferred tax
asset, as of December 31, 2017, was an approximately $84,000 decrease in net deferred tax assets, with a corresponding
decrease in the Company’s valuation allowance, and no impact on income tax expense. The Act also includes a number of other
provisions including, among others, the elimination of net operating loss carrybacks and limitations on the use of future losses,
the repeal of the Alternative Minimum Tax regime and the repeal of the domestic production activities deduction. These provisions
are not expected to have a material effect on the Corporation.
Given the significant complexity of the
Act and anticipated additional implementation guidance from the Internal Revenue Service, further implications of the Act may be
identified in future periods.
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, 2018 and 2017 respectively, there were 88,235 and 0 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
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 December 31,
2018 and December 31, 2017, there were 89,680,567 and 100 common shares issued and outstanding.
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.
During the year ended December 31, 2017,
the Company issued 1,591,000 shares of common stock to investors for $50,300 cash.
At December 31, 2018, the Company had
160,319,433 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.
A summary of the Company’s stock
option awards as of December 31, 2018, and changes during the two years then ended is as follows:
|
|
Shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted Average
Remaining
Contract Term
(Years)
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
2,800,000
|
|
|
|
0.05
|
|
|
|
2.09
|
|
|
$
|
–
|
|
Granted
|
|
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
2,800,000
|
|
|
|
0.05
|
|
|
|
.08
|
|
|
$
|
–
|
|
Granted
|
|
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
–
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
Forfeited or expired
|
|
|
2,800,000
|
|
|
$
|
0.05
|
|
|
|
.08
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2018
|
|
|
–
|
|
|
$
|
–
|
|
|
|
–
|
|
|
$
|
–
|
|
The aggregate intrinsic value in the
preceding table represents the total pretax intrinsic value, based on our closing stock price of $0.04 as of December 31, 2018,
which would have been received by the holders of in-the-money options had the option holders exercised their options as of that
date.
NOTE 12 - LITIGATION AND CONTINGENT
LIABILITIES
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.
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.
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, 2018.
NOTE 14 – SUBSEQUENT EVENTS
Amendment of the Certificate of Incorporation
to Increase of Authorized Shares
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.
Entry into Material Agreement
Effective January 3, 2019, the Company,
through its wholly-owned subsidiary, DarkPulse Technology Holdings, Inc. (“DTHI”), entered into a License Agreement
with Battelle Memorial Institute (“Battelle”), which operates the Pacific Northwest National Laboratory (the “Battelle
License”), pursuant to which Battelle granted DTHI the right to make, have made, use, import and sell products incorporating
certain patents pertaining to (i) explosives detection when combined with a quadrupole or ion trap mass spectrometer, or with an
ion mobility spectrometer, (ii) illicit drug detection when combined with a quadrupole or ion trap mass spectrometer, or with an
ion mobility spectrometer and (iii) chemical warfare agent detection when combined with a quadrupole or ion trap mass spectrometer,
or with an ion mobility spectrometer. The license is non-exclusive with respect to the explosive and illicit drug detection and
exclusive with respect to the chemical warfare agent detection. The territory covered by the Battelle License includes any
country in which Battelle has pending patent applications or issued patents set forth in the Battelle License and
DTHI agreed to reimburse Battelle for agreed upon patenting expenses.
In consideration for the license, DTHI
agreed to: (i) Pay Battelle $20,000 at the time of signing the Battelle License, of which $15,000 was paid and $5,000 was initially
paid by the Company as an option fee, which was applied towards the fee; (ii) pay Battelle $10,000 on or before the 90-day anniversary
of signing the Battelle License; (iii) pay to Battelle a royalty equal to 6% of gross sales of products or services incorporating
the licensed patents, subject to minimum royalty payments of $10,000 for 2019, $30,000 for 2020, $50,000 for 2021 and $80,000 for
2022 and thereafter; (iv) pay to Battelle, in the event DTHI sublicenses the licensed patents, 25% of the Company's revenues from
sublicensing; and (v) reimburse Battelle for certain costs and expenses of securing patent protection for the licensed patented
technology.
The term of the Battelle License continues
until the last of the licensed patents rights has expired, or the earlier adjudication that all of such proprietary rights are
unenforceable. DTHI may terminate at anytime upon providing 60 days notice to Battelle. Either party may terminate the Battelle
License Agreement prior to expiration of the term in the event that the other party breaches the Battelle License and fails to
cure such breach within 60 days from receipt of notice of breach. However, in the event DTHI fails to provide Battelle a required
report or a payment, then Battelle may terminate at anytime without notice.
Financings
GS Capital Partners, LLC
On January 10, 2019, the Company entered
into a Securities Purchase Agreement with GS Capital Partners, LLC (“GS Capital”) for the sale of an 8% convertible
redeemable note in the principal amount of $65,000 (the “GS Note") with an original issue discount of $4,000.
The financing closed on January 15, 2019.
The GS Note bears interest at
the rate of 8% per annum. All interest and principal must be repaid on January 10, 2020. Subject to the Company
increasing its authorized shares of common stock, the GS Note is convertible into common stock, at GS Capital’s option, at
a 30% discount to the lowest trading prices of the common stock during the 20-trading day period prior to conversion. In
the event the Company prepays the GS Note in full, the Company is required to pay off all principal, interest and any other amounts
owing multiplied by a premium ranging from 15% to 30%.
GS Capital has agreed to restrict
its ability to convert the GS Note and receive shares of common stock such that the number of shares of common stock held
by them in the aggregate and their affiliates after such conversion or exercise does not exceed 4.99%
of the then issued and outstanding shares of common stock. As of the date hereof, the Company is obligated on $65,000 in face amount
of GS Note issued to GS Capital. The GS Note is a debt obligation arising other than in the ordinary course of business which constitute
a direct financial obligation of the Company.
The GS Note was offered and sold to GS
Capital in a private placement transaction made in reliance upon exemptions from registration pursuant to Section 4(a)(2) under
the Securities Act of 1933 (the “Securities Act”) and/or Rule 506 promulgated under the Securities Act. GS Capital
is an accredited investor as defined in Rule 501 of Regulation D promulgated under the Securities Act.
Crown Bridge Partners, LLC
Effective February 12, 2019, the Company
entered into a Securities Purchase Agreement with Crown Bridge Partners, LLC (“Crown Bridge”) for the sale of a convertible
promissory note in the aggregate principal amount of up to $105,000 (the “February 2019 Crown Bridge Note”), which
was dated February 5, 2019. Crown Bridge purchased the February 2019 Crown Bridge Note and agreed to pay aggregate consideration
of up to $105,000 with an original issue discount of $10,500 in tranches as follows: $35,000 of principal amount was funded by
payment of $31,500 on the effective date and the balance may be funded in Crown Bridge’s sole discretion at any time. The
first tranche of funding under the February 2019 Crown Bridge Note carries a prorated original issue discount of $3,500.00 and
bears interest at the rate of 8% per year. Interest accrues daily on the outstanding principal amount of the note at a rate per
annum equal to 8% on the basis of a 365-day year.
Crown Bridge is entitled to, at any time
or from time to time, convert the February 2019 Crown Bridge Note into shares of our common stock, at a conversion price per share
equal to seventy percent (70%) of the lowest traded price of the common stock during the twenty (20) trading days immediately preceding
the date of the date of conversion, upon the terms and subject to the conditions of the February 2019 Crown Bridge Note. The conversion
price of the February 2019 Crown Bridge Note is subject to adjustment in the event of stock splits, stock dividends and similar
corporate events.
Crown Bridge has agreed to restrict
its ability to convert the February 2019 Crown Bridge Note and receive shares of common stock such that the number of shares of
common stock held by them in the aggregate and their affiliates after such conversion or exercise
does not exceed 4.99% of the then issued and outstanding shares of common stock.
As of the date hereof, the Company is obligated
on $35,000 in face amount of February 2019 Crown Bridge Note issued to Crown Bridge. The February 2019 Crown Bridge Note is a debt
obligation arising other than in the ordinary course of business which constitute a direct financial obligation of the Company.
The February 2019 Crown Bridge Note was
offered and sold to Crown Bridge in a private placement transaction made in reliance upon exemptions from registration pursuant
to Section 4(a)(2) under the Securities Act of 1933 (the “Securities Act”) and/or Rule 506 promulgated under the Securities
Act. February 2019 Crown Bridge Note is an accredited investor as defined in Rule 501 of Regulation D promulgated under the Securities
Act.
The foregoing information is a summary
of each of the agreements involved in the transactions described above, is not complete, and is qualified in its entirety by reference
to the full text of those agreements, each of which is attached an exhibit to this Current Report on Form 8-K. Readers
should review those agreements for a complete understanding of the terms and conditions associated with this transaction.
Removal of
Directors and Certain Officers; Appointment of Certain Officers
On February 7, 2019, the stockholder holding
a majority of the voting rights (the “Majority Stockholder”) of the Company executed a stockholder consent in accordance
with Delaware General Corporation Law and the Company’s Bylaws to remove Thomas A. Cellucci as a director of the Company.
As a result of the foregoing action by the Majority Stockholder, Thomas A. Cellucci was removed as a director of the Company on
February 7, 2019.
On February 7, 2019, the Company, in its
capacity as the stockholder holding 100% of the voting rights of its wholly-owned subsidiary, DarkPulse Technologies, Inc. (“DPT”),
removed Thomas A. Cellucci as a director of DPT in accordance with the relevant provisions of the New Brunswick Business Corporations
Act and DPT’s Articles of Incorporation and Bylaws.
On March 1, 2019, the Board of Directors
of the Company terminated Thomas A. Cellucci as an Executive Officer of the Company, and appointed Dennis M. O’Leary as Chief
Executive Officer and Secretary of the Company.
On March 1, 2019, the Board of Directors
of DPT terminated Thomas A. Cellucci as an Executive Officer of DPT, and appointed Dennis M. O’Leary as Chief Executive Officer
of DPT.
On March 8, 2019, DarkPulse, Inc. terminated
Stephen Goodman as Chief Financial Officer of the Company, and appointed Dennis M. O’Leary as Chief Financial Officer of
the Company. The decisions to dismiss Stephen Goodman as Chief Financial Officer of the Company and appoint Dennis O’Leary
as Chief Financial Officer of the Company were approved and ratified by the Company’s Board of Directors.
On March 18, 2019, the Company terminated
Mark A. Banash as Chief Technology Officer of the Company. The decision to dismiss Mark Banash as Chief Technology Officer of the
Company was approved and ratified by the Company’s Board of Directors.
On March 18, 2019, DPT terminated Mark
A. Banash as Chief Technology Officer of DPT. The decision to dismiss Mark A. Banash as Chief Technology Officer of DPT was approved
and ratified by DPT’s Board of Directors.
On March 19, 2019, the Company terminated
David Singer as Chief Marketing Officer of the Company. The decision to dismiss David Singer as Chief Marketing Officer of the
Company was approved and ratified by the Company’s Board of Directors.
Change in Certifying Accountant
On March 11, 2019, the Company advised
Haynie & Company (the “Former Auditor”) that it was dismissed as the Company’s independent registered public
accounting firm. The decision to dismiss the Former Auditor as the Company’s independent registered public accounting firm
was approved by the Company’s Board of Directors. On March 11, 2019, the Company engaged Boyle CPA, LLC (the “New Auditor”)
as its independent registered public accounting firm for the Company’s fiscal year ended December 31, 2018. The decision
to engage the New Auditor as the Company’s independent registered public accounting firm was approved and ratified by the
Company’s Board of Directors.
Technology License Revocation
On March 26, 2019 (the “Technology
License Revocation Date”), DarkPulse Technologies, Inc. (“DPT”), a wholly-owned subsidiary of the Company, informed
DarkPulse BVTK, LLC (the “JV Entity”) and Bravatek Solutions, Inc. ("Bravatek") that, effective immediately,
DPT was revoking from the JV Entity that certain exclusive, but revocable, right and license to promote, market and sell products
and services based on the patented BOTDA dark-pulse technology (the “Technology”) exclusively owned by DPT and the
Company, and that, as of the Technology License Revocation Date, neither the JV Entity, nor Bravatek or any of its respective shareholders,
officers, directors, affiliates, agents, consultants, counsel, employees, vendors, investors, subsidiaries, executors, administrators,
successors or assigns (collectively, the “BVTK Parties”) will possess or maintain any rights, powers, licenses or privileges
to promote, market, sell or develop products and services anywhere in the world based on the Technology or any derivative thereof
(collectively, the “DarkPulse Technology”), and that, accordingly, as of the Technology License Revocation Date, any
and all ownership rights, powers, licenses and privileges to the DarkPulse Technology exclusively and solely remain with and belong
to DPT and the Company. In addition, DPT directed the JV Entity and the BVTK Parties to return all confidential and proprietary
information, documents and materials pertaining to DPT and its DarkPulse Technology that are in their possession, and DPT informed
the JV Entity and the BVTK Parties that they are strictly prohibited from sharing with third parties any confidential and proprietary
information, documents or materials pertaining to or in connection with DPT or its DarkPulse Technology.