The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part
of these unaudited condensed consolidated financial statements.
Notes to Condensed
Financial Statements
(Unaudited)
NOTE 1 – BASIS OF PRESENTATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated
interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States
for interim financial statements and do not include all the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. The information furnished reflects all adjustments, consisting
only of normal recurring items which are, in the opinion of management, necessary in order to make the financial statements not
misleading. The consolidated financial statements as of December 31, 2018 have been audited by an independent registered public
accounting firm. The accounting policies and procedures employed in the preparation of these condensed consolidated financial statements
have been derived from the audited financial statements of the Company for the year ended December 31, 2018, which are contained
in Form 10-K as filed with the Securities and Exchange Commission on April 16,2019. The consolidated balance sheet as of December
31, 2018 was derived from those financial statements.
Basis of Presentation and Principles
of Consolidation
The consolidated financial statements and
accompanying notes are prepared in accordance with generally accepted accounting principles of the United States of America (“U.S.
GAAP”) and the rules and regulations of the U.S. Securities and Exchange Commission for Interim Financial Information. The
condensed consolidated financial statements of the Company include the Company and its wholly owned subsidiaries. All intercompany
transactions and balances have been eliminated. All adjustments (consisting of normal recurring items) necessary to present fairly
the Company’s financial position as of September 30, 2019, and the results of operations and cash flows for the nine months
ended September 30, 2019 have been included. The results of operations for the three and nine months ended September 30, 2019 are
not necessarily indicative of the results to be expected for the full year.
Description of Business
DarkPulse,
Inc. ("DPI" or "Company") is a technology-security company incorporated in 1989 as Klever Marketing, Inc. ("Klever").
The Company’s wholly-owned subsidiary, DarkPulse Technologies Inc. ("DPTI"), was originally formed as a privately
held technology spinout from the University of New Brunswick, Fredericton, Canada. The Company plans for its security and monitoring
systems to 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”) involving Klever as the surviving parent corporation acquiring
DPTI as its wholly owned subsidiary (the “Merger”). On June 29, 2018, the parties entered into Amendment No. 1 to the
Merger Agreement, and on July 18, 2018 the parties closed the Merger. With the change of control of the Company, the Merger is
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.
Going Concern Uncertainty
As shown in the accompanying financial
statements, during the three months ended September 30, 2019, the Company did not generate any revenues and reported a net gain
of $21,886. As of September 30, 2019, the Company’s current liabilities exceeded its current assets by $2,083,374. As of
September 30, 2019, the Company had $1,408 of cash.
The Company will require additional funding
during the next nine months to finance the growth of its operations and achieve its strategic objectives. These factors, as well
as the uncertain conditions that the Company faces relative to capital raising activities, create substantial doubt as to the Company’s
ability to continue as a going concern. The Company is seeking to raise additional capital principally through private placement
offerings and is targeting strategic partners in an effort to finalize the development of its products and begin generating revenues.
The ability of the Company to continue as a going concern is dependent upon the success of future capital offerings or alternative
financing arrangements and expansion of its operations. The accompanying financial statements do not include any adjustments that
might be necessary should the Company be unable to continue as a going concern. Management is actively pursuing additional sources
of financing sufficient to generate enough cash flow to fund its operations. However, management cannot make any assurances that
such financing will be secured.
Use of Estimates
In preparing the consolidated financial
statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities
as of the date of the statements of financial condition, and revenues and expenses for the years then ended. Actual results may
differ significantly from those estimates. Significant estimates made by management include, but are not limited to, the assumptions
used to calculate stock-based compensation, derivative liabilities, preferred deemed dividend and common stock issued for services.
Cash and Cash Equivalents
The Company considers all highly liquid
investments with a maturity of three months or less when acquired to be cash equivalents. The Company places its cash with a high
credit quality financial institutions. The Company’s account at this institution is insured by the Federal Deposit Insurance
Corporation (“FDIC”) up to $250,000. To reduce its risk associated with the failure of such financial institution,
the Company evaluates at least annually the rating of the financial institution in which it holds deposits.
Intangible Assets
The Company reviews intangibles held and
used for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. In evaluating the fair value and future benefits of its intangible assets, management performs an analysis of the
anticipated undiscounted future net cash flow of the individual assets over the remaining amortization period. The Company recognizes
an impairment loss if the carrying value of the asset exceeds the expected future cash flows.
Foreign Currency Translation
The company translates monetary assets
and liabilities (any item paid for or settled in foreign currency) into the United States Dollar at exchange rates prevailing on
the balance sheet date. Non-monetary assets and liabilities are translated at the historical rate in effect when the transaction
occurred. Revenues and expenses are translated at the spot rate on the date the transaction occurred. Exchange gains and losses
from the translation of monetary items are included in unrealized gain/loss on Foreign Exchange as Other Comprehensive Loss.
The following table discloses the dates
and exchange rates used for converting Canadian Dollar amounts to U.S. Dollar amounts disclosed in the balance sheet and the statement
of operations.
The spot exchange rate between the Canadian
Dollar and the U.S. Dollar on December 31, 2018 closing rate at 1.3642 US$: CAD, average rate at 1.2958 US$: CAD and for the three
and nine months ended September 30, 2019 closing rate at 1.3209 US$: CAD, average rate at 1.3294 US$.
Income Taxes
The Company accounts for income taxes in
accordance with ASC 740, Accounting for Income Taxes, as clarified by ASC 740-10, Accounting for Uncertainty in Income Taxes. Under
this method, deferred income taxes are determined based on the estimated future tax effects of differences between the financial
statement and tax basis of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and
benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes, the Company considers
tax regulations of the jurisdictions in which the Company operates, estimates of future taxable income, and available tax planning
strategies. If tax regulations, operating results or the ability to implement tax-planning strategies vary, adjustments to the
carrying value of deferred tax assets and liabilities may be required. Valuation allowances are recorded related to deferred tax
assets based on the "more likely than not" criteria of ASC 740.
ASC 740-10 requires that the Company recognize
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 percent likelihood of being realized upon
ultimate settlement with the relevant tax authority.
Accounting for Derivatives
The Company evaluates all of its financial
instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. 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 probability weighted average series Binomial lattice formula pricing models
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 or not net-cash
settlement of the derivative instrument could be required within 12 months of the balance sheet date.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial
assets and liabilities, such as cash, prepaid expenses, and accruals approximate their fair values because of the short maturity
of these instruments. The Company believes the carrying value of its secured debenture payable approximates fair value because
the terms were negotiated at arms length.
Recent Accounting Pronouncements
There were no new accounting pronouncements
issued or proposed by the Financial Accounting Standards Board during the nine months ended September 30, 2019, and through the
date of filing of this report that the Company believes has had or will have a material impact on its financial position or results
of operations, including the recognition of revenue, cash flows or disclosures. The Company has no lease obligations.
Income (Loss) Per Common Share
Basic net income (loss) per share of common
stock is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period.
Diluted net income (loss) per share of common stock is computed by dividing net income (loss) by the sum of the weighted average
number of common shares outstanding and the dilutive potential common share equivalents outstanding. Potential dilutive common
share equivalents consist of shares issuable upon exercise of outstanding convertible preferred stock and stock options.
For the nine months ended September 30,
2019, there were no stock options nor convertible preferred stock outstanding. For the nine months ended September 30, 2019, common
stock equivalents related to convertible preferred stock and convertible debt have not been included in the calculation of diluted
loss per common share because they are anti-dilutive. Therefore, basic loss per common share is the same as diluted loss per common
share. There are 1,277,690,836 common shares reserved for the potential conversion of the Company's convertible debt.
NOTE 2 - DEBENTURE
DPTI issued a convertible Debenture to
the University in exchange for the Patents assigned to the Company, in the amount of Canadian $1,500,000, or US $1,491,923 on December
16, 2010, the date of the Debenture. On April 24, 2017 DPTI issued a replacement secured term Debenture in the same C$1,500,000
amount as the original Debenture. The interest rate is the Bank of Canada Prime overnight rate plus 1% per annum. The Debenture
had an initial required payment of Canadian $42,000 (US$33,385) due on April 24, 2018 for reimbursement to the University of its
research and development costs, and this has been paid. Interest-only maintenance payments are due annually starting after April
24, 2018. Payment of the principal begins on the earlier of (a) three years following two consecutive quarters of positive earnings
before interest, taxes, depreciation and amortization, (b) six years from April 24, 2017, or (c) in the event DPTI fails to raise
defined capital amounts or secure defined contract amounts by April 24 in the years 2018, 2019, and 2020. The Company has raised
funds in excess of the amount required by April 24, 2018. The principal repayment amounts will be due 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
September 30, 2019, the quarterly principal repayment amounts will be US$49,644. 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 three months ended September 30, 2019 and 2018, were $12,671
and ($20,638) 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 three months ended September 30,
2019, and 2018, the Company recorded interest expense of $12,745 and $12,551, respectively.
As of September 30, 2019 the debenture
liability totaled $1,132,965, all of which was long term.
Future minimum required payments over
the next 5 years and thereafter are as follows:
Period ending September 30,
|
|
|
|
2020
|
|
$
|
–
|
|
2021
|
|
|
–
|
|
2022
|
|
|
–
|
|
2023
|
|
|
–
|
|
2024 and after
|
|
|
1,132,965
|
|
Total
|
|
$
|
1,132,965
|
|
NOTE 3 – CONVERTIBLE DEBT SECURITIES
The Company uses the Black-Scholes Model
to calculate the derivative value of its convertible debt. The valuation result generated by this pricing model is necessarily
driven by the value of the underlying common stock incorporated into the model. The values of the common stock used were based
on the price at the date of issue of the debt security as of September 30, 2019. Management determined the expected volatility
between 318.38-487.51%, a risk free rate of interest between 1.75-1.92%, and contractual lives of the debt varying from six months
to two years. The table below details the Company's outstanding convertible notes, with totals for the face amount, amortization
of discount, initial loss, change in the fair market value, and the derivative liability.
|
|
Face
|
|
|
Amortization
|
|
|
Initial
|
|
|
Q3 change
|
|
|
Derivative
Balance
|
|
|
|
Amount
|
|
|
of Discount
|
|
|
Loss
|
|
|
in FMV
|
|
|
9/30/2019
|
|
|
|
$
|
90,228
|
|
|
$
|
–
|
|
|
$
|
58,959
|
|
|
$
|
(67,989
|
)
|
|
$
|
–
|
|
|
|
|
162,150
|
|
|
|
–
|
|
|
|
74,429
|
|
|
|
(128,965
|
)
|
|
|
–
|
|
|
|
|
75,652
|
|
|
|
–
|
|
|
|
11,381
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
208,436
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
79,622
|
|
|
|
–
|
|
|
|
8,904
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
65,372
|
|
|
|
–
|
|
|
|
5,651
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
55,180
|
|
|
|
12,344
|
|
|
|
28,566
|
|
|
|
(7,305
|
)
|
|
|
62,544
|
|
|
|
|
33,194
|
|
|
|
6,647
|
|
|
|
16,558
|
|
|
|
(3,934
|
)
|
|
|
33,677
|
|
|
|
|
29,250
|
|
|
|
367
|
|
|
|
–
|
|
|
|
(340
|
)
|
|
|
28,368
|
|
|
|
|
49,726
|
|
|
|
624
|
|
|
|
–
|
|
|
|
(579
|
)
|
|
|
48,226
|
|
|
|
|
41,774
|
|
|
|
524
|
|
|
|
–
|
|
|
|
(486
|
)
|
|
|
40,514
|
|
|
|
|
29,250
|
|
|
|
367
|
|
|
|
–
|
|
|
|
(340
|
)
|
|
|
28,368
|
|
|
|
|
40,000
|
|
|
|
10,055
|
|
|
|
10,605
|
|
|
|
(4,593
|
)
|
|
|
38,274
|
|
|
|
|
64,000
|
|
|
|
16,339
|
|
|
|
17,676
|
|
|
|
(7,348
|
)
|
|
|
61,238
|
|
Subtotal
|
|
|
1,023,834
|
|
|
|
47,266
|
|
|
|
232,729
|
|
|
|
(221,879
|
)
|
|
|
341,209
|
|
Transaction expense
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
$
|
1,023,834
|
|
|
$
|
47,266
|
|
|
$
|
232,729
|
|
|
$
|
(221,879
|
)
|
|
$
|
341,209
|
|
During the three months ended September
30, 2019, a total of $70,696 in principal and $10,070 in interest were converted into 633,134,558 shares of the Company’s
common stock.
As of September 30, 2019 and 2018 respectively,
there was $928,702 and $0 of convertible debt outstanding, net of debt discount of $93,138, and $0, As of September 30, 2019 and
2018 respectively, there was derivative liability of $341,209 and $0 related to convertible debt securities.
NOTE 4 - STOCKHOLDERS' DEFICIT
As of September 30, 2019, there were 872,309,164 shares of common stock and 88,235 shares of preferred
stock issued and outstanding.
NOTE 5 - COMMITMENTS & CONTINGENCIES
Potential Royalty Payments
The Company, in consideration of the terms
of the debenture to the University of New Brunswick, shall pay to the University a two percent royalty on sales of any and all
products or services which incorporate the Company's patents for a period of five years from April 24, 2018.
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 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
has filed 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 6 – INTANGIBLE ASSETS
Intangible Assets - Intrusion Detection
Intellectual Property
The Company relies on patent laws and restrictions
on disclosure to protect its intellectual property rights. As of March 31, 2019, the Company held 3 U.S. and foreign patents on
its intrusion detection technology, which expire in calendar years 2025 through 2034 (depending on the payment of maintenance fees).
The DPTI issued patents cover a System
and Method for Brillouin Analysis, a System and Method for Resolution Enhancement of a Distributed Sensor, and a Flexible Fiber
Optic Deformation System Sensor and Method. Maintenance of intellectual property rights and the protection thereof is important
to our business. Any patents that may be issued may not sufficiently protect the Company's intellectual property and third parties
may challenge any issued patents. Other parties may independently develop similar or competing technology or design around any
patents that may be issued to the Company. The Company cannot be certain that the steps it has taken will prevent the misappropriation
of its intellectual property, particularly in foreign countries where the laws may not protect proprietary rights as fully as in
the United States. Further, the Company may be required to enforce its intellectual property or other proprietary rights through
litigation, which, regardless of success, could result in substantial costs and diversion of management's attention. Additionally,
there may be existing patents of which the Company is unaware that could be pertinent to its business, and it is not possible to
know whether there are patent applications pending that the Company's products might infringe upon, since these applications are
often not publicly available until a patent is issued or published.
For the three
months ended September 30, 2019 and 2018, the Company amortized $12,757, respectively. Future amortization of intangible assets
is as follows:
2019
|
|
$
|
12,757
|
|
2020
|
|
|
51,028
|
|
2021
|
|
|
51,028
|
|
2022
|
|
|
51,028
|
|
2023
|
|
|
51,028
|
|
Thereafter
|
|
|
236,805
|
|
|
|
$
|
453,674
|
|
NOTE 7 – 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.
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 September 30, 2019.
NOTE 8 – 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 September 30, 2019, and December 31, 2018, there were 88,235 total preferred shares issued and outstanding for all classes.
On July 12, 2018, the Company filed a Certificate
of Designation with the State of Delaware amending the designation of its previously designated “Class D Voting Preferred
Stock,” designating 100,000 shares of the Company’s preferred stock as “Series D Preferred Stock.” Each
share of Series D Preferred Stock entitles the holder to 6,000 votes on all matters submitted to a vote of the Company’s
stockholders and is convertible at the election of the holder into a number of shares of common stock equal to the number of outstanding
shares of common stock of the Company multiplied by 5 ⅔, divided by the number of outstanding shares of Series D Preferred
Stock. All of these shares are owned by the Company's management, with control ownership held by the Company's CEO.
NOTE 9 – COMMON STOCK
In accordance with the Company’s
bylaws, the Company has authorized a total of 3,000,000,000 shares of common stock, par value $0.01 per share. As of September
30, 2019 and December 31, 2018 respectively, there were 872,309,164 and 89,680,567 common shares issued and outstanding.
During the three months ended September
30, 2019, the Company issued 633,134,558 shares of common stock as settlement of convertible
notes payable and interest in the total amount of $80,766.
NOTE 10 – STOCK OPTIONS
The Company’s shareholders approved,
by a majority vote, the adoption of the 1998 Stock Incentive Plan (the “Plan”). As amended on August 11, 2003, the
Plan reserves 20,000,000 shares of common stock for issuance upon the exercise of options which may be granted from time-to-time
to officers, directors, certain employees and consultants of the Company or its subsidiaries by the Board of Directors. The Plan
permits the award of both qualified and non-qualified incentive stock options.
During the three months ended September
30, 2019, the Company did not issue any stock options and had no stock options outstanding at September 30, 2019.
NOTE 11 – SUBSEQUENT EVENTS
The Company evaluated events occurring
after the date of the accompanying unaudited condensed consolidated balance sheets through the date the financial statements were
issued and the Company does not have any subsequent events to be disclosed prior to this filing.