The accompanying footnotes
are an integral part of these unaudited condensed consolidated financial statements.
The accompanying footnotes
are an integral part of these unaudited condensed consolidated financial statements.
The accompanying footnotes
are an integral part of these unaudited condensed consolidated financial statements.
Note
1 - Organization and Basis of Presentation
Organization
and Line of Business
GBT
Technologies Inc. (formerly Gopher Protocol Inc.) (the “Company”, “GBT”, “GTCH”) was incorporated
on July 22, 2009 under the laws of the State of Nevada. The Company is targeting growing markets such as development of Internet
of Things (IoT) and Artificial Intelligence (AI) enabled networking and tracking technologies, including wireless mesh network
technology platform and fixed solutions, development of an intelligent human body vitals device, prepaid services, asset-tracking
IoT, and wireless mesh networks. Effective August 5, 2019, the Company changed its name from Gopher Protocol Inc. to GBT Technologies
Inc. The Company also offers prepaid cellular phone minutes for both domestic and international carriers. In addition, the Company
offers cellular activation (activating SIM cards with wireless carriers) to create additional users (consumers) on those networks
and provides check processing, verification and recovery solutions for small to medium sized businesses. The Company derived revenues
from (i) the provision of IT services; (ii) from the operations of the assets that include the sale of phones, phone card products,
prepaid cellular phone minutes and cellular activation and (iii) from the licensing of its technology.
The
Company is targeting additional growing markets: development of Internet of Things (IoT) and Artificial Intelligence (AI) enabled
networking and tracking technologies, including wireless mesh network technology platform and fixed solutions, development of
an intelligent human body vitals device, prepaid services, asset-tracking IoT and wireless mesh networks.
The
unaudited condensed consolidated financial statements are prepared by the Company, pursuant to the rules and regulations of the
Securities Exchange Commission (“SEC”). The information furnished herein reflects all adjustments, consisting only
of normal recurring adjustments, which in the opinion of management, are necessary to fairly state the Company’s financial
position, the results of its operations, and cash flows for the periods presented. Certain information and footnote disclosures
normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United
States of America were omitted pursuant to such rules and regulations. The results of operations for the three months ended March
31, 2020 are not necessarily indicative of the results expected for the year ending December 31, 2020.
Basis
of Presentation
The
accompanying condensed consolidated financial statements were prepared in conformity with accounting principles generally accepted
in the United States of America (“U.S. GAAP”).
Stock
Split
On
August 5, 2019, the Company effectuated a 1 for 100 reverse stock split. The share and per share information has been retroactively
restated to reflect this reverse stock split. (Also see Note 16 for a proposed 1 for 50 stock split awaiting appeal)
Going
Concern
The
accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue
as a going concern. The Company has an accumulated deficit of $262,664,291 and has a working capital deficit of $14,786,154
as of March 31, 2020, and is in default on a note payable and other obligations, which raises substantial doubt about its ability
to continue as a going concern.
The
Company’s ability to continue as a going concern is dependent upon its ability to generate profitable operations in the
future and/or obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations
when they come due. Management has plans to seek additional capital through some private placement offerings of debt and equity
securities. These plans, if successful, will mitigate the factors which raise substantial doubt about the Company’s
ability to continue as a going concern. These condensed consolidated financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might result
from this uncertainty.
Note
2 – Summary of Significant Accounting Policies
Use
of Estimates
The
preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company
regularly evaluates estimates and assumptions. The Company bases its estimates and assumptions on current facts, historical experience
and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent
from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s
estimates. To the extent there are material differences between the estimates and the actual results, future results of operations
will be affected. Significant estimates in the accompanying financial statements include useful lives of property and equipment,
valuation of beneficial conversion feature, debt discounts, valuation of derivatives, and the valuation allowance on deferred
tax assets.
Principles
of Consolidation
The
accompanying condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries,
UGopherServices Corp. the Company’s 50% owned subsidiaries GBT BitSpeed Corp. and GBT Tokenize Corp; Gopher Protocol UK
Limited (currently inactive); the Company’s 50% owned subsidiary, Gopher Protocol Costa Rica Sociedad De Responabilidad
Limitada (currently inactive), and Altcorp Trading LLC, a Costa Rica company. All significant intercompany transactions and balances
have been eliminated.
Cash
Equivalents
For
the purpose of the statement of cash flows, cash equivalents include time deposits, certificate of deposits, and all highly-liquid
debt instruments with original maturities of three months or less.
Accounts
Receivable
The
Company grants credit to establishments (such as convenience stores) that sell the Company’s products under credit terms
that it believes are customary in the industry and do not require collateral to support customer receivables. The accounts receivable
balances are generally collected within 10 days of the product sale and the Company has minimal bad debts. The Company currently
does not provide an allowance for doubtful collections, which is based upon a review of outstanding receivables, historical collection
information, and existing economic conditions. Normal receivable terms vary from 7-30 days after the issuance of the invoice and
typically would be considered past due when the term expires. Delinquent receivables are written off based on individual credit
evaluation and specific circumstances of the customer. The Company’s allowance for doubtful accounts was $0 and $0 at March
31, 2020 and December 31, 2019, respectively.
Property
and Equipment
Property
and equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals
and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated
depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property
and equipment is provided using the straight-line method for substantially all assets with estimated lives as follows:
Furniture
|
7
years
|
Computers
and equipment
|
3
years
|
POSA
machines
|
3
years
|
Long-Lived
Assets
The
Company applies the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) Topic 360, Property, Plant, and Equipment, which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. ASC 360 requires impairment losses to be recorded on long-lived assets used in operations
when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than
the assets’ carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds
the fair value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except
that fair values are reduced for the cost of disposal. Based on its review at March 31, 2020 and December 31, 2019, the Company
believes there was no impairment of its long-lived assets.
Marketable
Equity Securities
The
Company accounts for marketable equity securities in accordance with ASC Topic 321, Investments – equity securities.
Marketable equity securities are reported at fair value based on quotations available on securities exchanges with any unrealized
gain or loss being reported as a component of other income (expense) on the statement of operations. The portion of marketable
equity security expected to be sold within twelve months of the balance sheet date is reported as a current asset. The marketable
equity securities have been pledged to a third party which vested it under its name (See Note 8).
Derivative
Financial Instruments
The
Company evaluates all of its agreements to determine if such instruments have 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 weighted-average Black-Scholes-Merton
option pricing model 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. As of March 31, 2020, the Company’s only derivative financial instrument was an embedded conversion feature associated
with convertible notes payable due to certain provisions that allow for a change in the conversion price based on a percentage
of the Company’s stock price at the date of conversion.
Fair
Value of Financial Instruments
For
certain of the Company’s financial instruments, including cash and equivalents, restricted cash, accounts receivable, advances
to suppliers, accounts payable, accrued liabilities and short-term debt, the carrying amounts approximate their fair values due
to their short maturities.
FASB
ASC Topic 820, Fair Value Measurements and Disclosures, requires disclosure of the fair value of financial instruments
held by the Company. FASB ASC Topic 825, Financial Instruments, defines fair value, and establishes a three-level valuation
hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying
amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments
and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments
and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined
as follows:
|
●
|
Level
1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.
|
|
●
|
Level
2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices
for identical or similar assets in inactive markets, and inputs that are observable for the asset or liability, either directly
or indirectly, for substantially the full term of the financial instrument.
|
|
●
|
Level
3 inputs to the valuation methodology us one or more unobservable inputs which are significant to the fair value measurement.
|
The
Company analyzes all financial instruments with features of both liabilities and equity under FASB ASC Topic 480, Distinguishing
Liabilities from Equity, and FASB ASC Topic 815, Derivatives and Hedging.
For
certain financial instruments, the carrying amounts reported in the balance sheets for cash and current liabilities, including
convertible notes payable, each qualify as a financial instrument, and are a reasonable estimate of their fair values because
of the short period of time between the origination of such instruments and their expected realization and their current market
rate of interest.
The
Company uses Level 2 inputs for its valuation methodology for derivative liabilities as their fair values were determined by using
the Black-Scholes-Merton pricing model based on various assumptions. The Company’s derivative liabilities are adjusted to
reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations
as adjustments to fair value of derivatives.
At
March 31, 2020 and December 31, 2019, the Company identified the following liabilities that are required to be presented on the
balance sheet at fair value:
|
|
Fair Value
As of
|
|
|
Fair Value Measurements at
|
|
|
|
March 31,
|
|
|
March 31, 2020
|
|
Description
|
|
2020
|
|
|
Using Fair Value Hierarchy
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Marketable equity security - Surge Holdings, Inc.
|
|
$
|
816,667
|
|
|
$
|
-
|
|
|
$
|
816,667
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion feature on convertible notes
|
|
$
|
5,365,843
|
|
|
$
|
-
|
|
|
$
|
5,365,843
|
|
|
$
|
-
|
|
|
|
Fair Value
As of
|
|
|
Fair Value Measurements at
|
|
|
|
December 31,
|
|
|
December 31, 2019
|
|
Description
|
|
2019
|
|
|
Using Fair Value Hierarchy
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Marketable equity security - Surge Holdings, Inc.
|
|
$
|
1,000,000
|
|
|
$
|
-
|
|
|
$
|
1,000,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion feature on convertible notes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Treasury
Stock
Treasury
stock is recorded at cost. The re-issuance of treasury shares is accounted for on a first in, first-out basis and any difference
between the cost of treasury shares and the re-issuance proceeds are charged or credited to additional paid-in capital.
Stock
Loan Receivable
On
January 8, 2019, the Company entered into a Stock Pledge Agreement with Latin American Exchange Latinex Casa de Cambio, S.A.,
a Costa Rica corporation (“Latinex”), to provide that Latinex may maintain its required regulatory capital as required
by various regulators. The Company has pledged 200,267 restricted shares of its common stock valued at $7,610,147 (based on the
closing price on the grant date) for a term of three years in consideration of an annual payment of $375,000 paid in quarterly
installments of $93,750. In lieu of cash payment, Latinex may pay the Company in virtual currency of WISE Network S.A. valued
at a 50% discount of its offering price of $10 per token. In the event that Latinex’s required capital has decreased below
$5,000,000, Latinex is permitted to sell the pledged shares of common stock only in an amount to ensure that Latinex can satisfy
the required capital levels. The Company must consent to such sale of the shares of common stock, which may not be unreasonably
withheld. Upon expiration of the agreement, the remaining shares of common stock shall be returned to the Company free and clear
of all liens. The Company has recorded the value of these shares of common stock as a stock loan receivable which is presented
as a contra-equity account in the accompanying consolidated balance sheets. At December 31, 2019, the Company wrote off the accrued
interest income as Latinex did not perform any payment and the Company has no mean to enforce this payment. Latinex agreed in
principal to return the pledged 200,267 restricted shares to the Company for cancellation. The 200,267 restricted shares have
not yet been returned to the Company as of March 31, 2020.
Revenue
Recognition
Accounting
Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers ("Topic 606"),
became effective for the Company on January 1, 2018. The Company’s revenue recognition disclosure reflects its updated accounting
policies that are affected by this new standard. The Company applied the "modified retrospective" transition method
for open contracts for the implementation of Topic 606. As sales are and have been primarily from IT services,
sale of phones, phone card products, prepaid cellular phone minutes and cellular activation, and the Company has no significant
post-delivery obligations, this new standard did not result in a material recognition of revenue on the Company’s
accompanying consolidated financial statements for the cumulative impact of applying this new standard. The Company made no adjustments
to its previously-reported total revenues, as those periods continue to be presented in accordance with its historical accounting
practices under Topic 605, Revenue Recognition.
Revenue
from providing IT services, sale of phones, phone card products, prepaid cellular phone minutes and cellular activation services
are recognized under Topic 606 in a manner that reasonably reflects the delivery of its services and products
to customers in return for expected consideration and includes the following elements:
|
●
|
executed
contracts with the Company’s customers that it believes are legally enforceable;
|
|
●
|
identification
of performance obligations in the respective contract;
|
|
●
|
determination
of the transaction price for each performance obligation in the respective contract;
|
|
●
|
allocation
the transaction price to each performance obligation; and
|
|
●
|
recognition
of revenue only when the Company satisfies each performance obligation.
|
These
five elements, as applied to each of the Company’s revenue category, is summarized below:
|
●
|
IT
services - revenue is recorded on a monthly basis as services are provided;
|
|
●
|
Sale
of phones, phone card products, prepaid cellular phone minutes and cellular activation – revenue is recognized at the
time of sale to the customer; and
|
|
●
|
License
fees and Royalties – revenue is recognized based on the terms of the agreement with its customer.
|
Cost
of Goods Sold
Cost
of goods sold represents the cost of the phone, phone card products and prepaid cellular phone minutes sold by the Company.
Unearned
revenue
Unearned
revenue represents the net amount received for the purchase of products that have not seen shipped to the Company’s customers.
In 2018, the Company ran pre-sales efforts for its pet tracker product and received prepayments for its product. In addition,
during 2018, the Company received $200,000 in connection with an intellectual property license and royalty agreement (see Note
14). At December 31, 2019, the Company determined that the unearned revenue would not likely result in the recognition of revenue;
therefore, $249,094 of unearned revenue was reclassified to accrued expenses.
Income
Taxes
The
Company accounts for income taxes in accordance with ASC Topic 740, Income Taxes. ASC 740 requires a company to use the
asset and liability method of accounting for income taxes, whereby deferred tax assets are recognized for deductible temporary
differences, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion, or all of, the deferred tax assets will not
be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of
enactment.
Under
ASC 740, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would
be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount
of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more
likely than not” test, no tax benefit is recorded. The Company has no material uncertain tax positions for any of the reporting
periods presented.
Basic
and Diluted Earnings Per Share
Earnings
per share is calculated in accordance with ASC Topic 260, Earnings Per Share. Basic earnings per share (“EPS”)
is based on the weighted average number of common shares outstanding. Diluted EPS assumes that all dilutive securities are converted.
Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised
at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase
common stock at the average market price during the period. Due to the net loss incurred potentially dilutive instruments would
be anti-dilutive. Accordingly, diluted loss per share is the same as basic loss for all periods presented. The following potentially-dilutive
shares were excluded from the shares used to calculate diluted earnings per share as their inclusion would be anti-dilutive.
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Series B preferred stock
|
|
|
30
|
|
|
|
30
|
|
Series C preferred stock
|
|
|
8
|
|
|
|
8
|
|
Series G preferred stock
|
|
|
-
|
|
|
|
-
|
|
Series H preferred stock
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
Warrants
|
|
|
19,650,167
|
|
|
|
19,654,167
|
|
Convertible notes
|
|
|
499,972,212
|
|
|
|
1,100,000
|
|
Total
|
|
|
520,622,417
|
|
|
|
21,754,205
|
|
Management’s
Evaluation of Subsequent Events
The
Company evaluates events that have occurred after the balance sheet date of March 31, 2020, through the date which the consolidated
financial statements are issued. Based upon the review, other than described in Note 16 – Subsequent Events, the Company
did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the consolidated
financial statements.
Recent
Accounting Pronouncements
In
June 2018, the FASB issued Accounting Standards Update (“ASU”) ASU 2018-07, Stock Compensation (Topic 718): Improvements
to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments granted to nonemployees
for goods and services and aligns most of the guidance on such payments to nonemployees with the requirements for share-based
payments granted to employees. ASU 2018-07 is effective on January 1, 2019. Early adoption is permitted. The adoption of this
ASU did not have a material impact on the Company’s consolidated financial statements.
In
May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive
revenue recognition standard that will supersede nearly all existing revenue recognition guidance under current U.S. GAAP and
replace it with a principle-based approach for determining revenue recognition. ASU 2014-09 will require that companies
recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require
additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts,
including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.
ASU 2014-09 is effective for interim and annual periods beginning after December 15, 2017. Early adoption is permitted
only in annual reporting periods beginning after December 15, 2016, including interim periods therein. Entities will be
able to transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption.
The Company adopted this ASU beginning on January 1, 2018 and used the modified retrospective method of adoption. The adoption
of this ASU did not have a material impact on the Company’s financial statements and disclosures.
In
December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes which amends ASC 740 Income
Taxes (ASC 740). This update is intended to simplify accounting for income taxes by removing certain exceptions to the general
principles in ASC 740 and amending existing guidance to improve consistent application of ASC 740. This update is effective for
fiscal years beginning after December 15, 2021. The guidance in this update has various elements, some of which are
applied on a prospective basis and others on a retrospective basis with earlier application permitted. The Company is currently
evaluating the effect of this ASU on the Company’s consolidated financial statements and related disclosures.
Management
does not believe that any recently issued, but not yet effective, accounting standards could have a material effect on the accompanying
financial statements. As new accounting pronouncements are issued, we will adopt those that are applicable under the circumstances.
Note
3 – Discontinued Operations
On
September 30, 2019, the Company entered into an Asset Purchase Agreement with Surge Holdings, Inc., a Nevada corporation (“SURG”)
pursuant to which the Company agreed to sell and assign to SURG all the assets and certain specified liabilities of its ECS Prepaid,
Electronic Check Services and the Central State Legal Services businesses in consideration of $5,000,000 to be paid through the
issuance of 3,333,333 shares of SURG’s common stock and a convertible promissory note in favor of the Company in the principal
amount of $4,000,000. The 3,333,333 shares of SURG’s common stock have been pledged to a third party for providing working
capital needs of the Company (See Note 8).
The
ECS Prepaid, Electronic Check Services and the Central State Legal Services businesses have been presented as discontinued operations
on the accompanying financial statements.
The
operating results for ECS Prepaid, Electronic Check Services and the Central State Legal Services have been presented in the accompanying
consolidated statement of operations for the three months ended March 31, 2020 and 2019 as discontinued operations and are summarized
below:
|
|
Three Months Ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
8,801,308
|
|
Cost of revenue
|
|
|
-
|
|
|
|
8,645,869
|
|
Gross Profit
|
|
|
-
|
|
|
|
155,439
|
|
Operating expenses
|
|
|
-
|
|
|
|
342,762
|
|
Loss from operations
|
|
|
-
|
|
|
|
(187,323
|
)
|
Other income (expenses)
|
|
|
-
|
|
|
|
(3
|
)
|
Net loss
|
|
$
|
-
|
|
|
$
|
(187,326
|
)
|
As
a result of this transaction, the Company recognized a gain on the disposition of discontinued operations of $1,381,803 during
the third quarter of 2019.
Note
4 - Property and Equipment, Net
Property
and equipment consisted of the following as of March 31, 2020 and December 31, 2019:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Furniture
|
|
$
|
33,739
|
|
|
$
|
33,739
|
|
Computers and equipment
|
|
|
23,316
|
|
|
|
23,316
|
|
POSA machines
|
|
|
289,645
|
|
|
|
287,895
|
|
|
|
|
346,700
|
|
|
|
344,950
|
|
Less accumulated depreciation
|
|
|
(250,382
|
)
|
|
|
(227,264
|
)
|
Property and equipment, net
|
|
$
|
96,318
|
|
|
$
|
117,686
|
|
Depreciation
expense for the three months ended March 31, 2020 and 2019 was $23,118 and $27,399, respectively.
Note
5 – Investment in. Surge Holdings, Inc. and Mobiquity Technologies, Inc. ; Convertible Note Receivable
Surge
Holdings, Inc.
On
September 30, 2019, the Company entered into an Asset Purchase Agreement with Surge Holdings, Inc., a Nevada corporation (“SURG”)
pursuant to which the Company agreed to sell and assign to SURG, all the assets and certain specified liabilities, of its ECS
Prepaid, Electronic Check Services and the Central State Legal Services businesses in consideration of $5,000,000 to be paid through
the issuance of 3,333,333 shares of SURG’s common stock (See Note 8 for pledge to third party) and a convertible promissory
note in favor of the Company in the principal amount of $4,000,000 (the “SURG Note”), convertible into SURG’s
shares of common stock following the six-month anniversary of the issuance date. The conversion price of the SURG Note is the
volume weighted-average price of SURG’s common stock over the 20 trading days prior to the conversion; provided, however,
the conversion price shall never be lower than $0.10 or higher than $0.70. The Company has agreed to restrict its ability to convert
the SURG Note and receive shares of common stock such that the number of shares of common stock held by it in the aggregate and
its affiliates after such conversion does not exceed 4.99% of the then issued and outstanding shares of common stock. The SURG
Note is payable by SURG to the Company on the 18-month anniversary of the issuance date and does not bear interest.
Mobiquity
Technologies, Inc (Divested in 2019).
On
September 4, 2018, the Company and Mobiquity Technologies, Inc., a New York corporation (“Mobiquity”) entered an agreement
pursuant to which the parties exchanged equity interest in each of the companies. In accordance with the agreement, the Company
received 1,000 shares of Mobiquity’s restricted Series AAAA Preferred Stock (the “Mobiquity Preferred Stock”)
in consideration of Company’s concurrent sale and issuance to Mobiquity of 10,000,000 shares of Company’s common stock.
The shares of Mobiquity Preferred Stock are convertible into an aggregate of up to 100,000,000 shares of Mobiquity common stock
(the “Mobiquity Common Stock”) and 150,000,000 common stock purchase warrants (the “Mobiquity Warrants”).
The Mobiquity Warrants shall have a term of 5 years from the date of grant and shall be exercisable at a price of $0.12 per share
and the shares of Mobiquity Preferred Stock shall not be convertible into shares of Mobiquity Common Stock and the Mobiquity Warrants
shall not be contemporaneously granted until after Mobiquity’s Board of Directors and stockholders shall have increased
the authorized number of shares of Mobiquity’s common stock to a number sufficient to accommodate a reserve in the Company’s
favor of 250,000,000 shares of Mobiquity’s common stock. The Mobiquity Preferred Stock shall have immediate voting rights
equal to the number of shares of Mobiquity Common Stock into which they may be converted, not including the shares of Mobiquity’s
common stock underlying the Mobiquity Warrants.
On
November 19, 2018, the Company and Mobiquity entered into an Amendment and Exercise Letter waiving the requirement that Mobiquity’s
Board of Directors and stockholders increase the authorized number of shares of Mobiquity’s common stock to a number sufficient
to accommodate a reserve in the Company’s favor of 250,000,000 shares of Mobiquity’s common stock prior to the conversion
of the Mobiquity Preferred Stock or exercise of the Mobiquity Warrants. In addition, the Company converted 200 shares of Mobiquity
Preferred Stock resulting in the issuance to the Company by Mobiquity of 20,000,000 shares of Mobiquity Common Stock and 30,000,000
Mobiquity Warrants. The Company exercised the 30,000,000 Mobiquity Warrants at an exercise price of $0.12 per share of common
stock, payable through of the issuance to Mobiquity of 10,000,000 shares of common stock of the Company.
In
addition, the Company issued 20,000 shares of common stock to Glen Eagles Acquisition LP (“GEAL”) in consideration
of its consulting services associated with the negotiation of the number of shares of common stock to be delivered to Mobiquity
upon exercise of the Mobiquity Warrants.
As
a result of the transaction on September 4, 2018, the Company had an approximate 21% interest in Mobiquity and began to account
for its investment in Mobiquity using the equity method of accounting. During the fourth quarter of 2018, Mobiquity issued additional
shares of common stock resulting in the Company’s ownership in Mobiquity dropping to approximately 18% at December 31, 2018.
The Company determined that during the fourth quarter of 2018 that it did not exercise significant influence over Mobiquity due
to its decreased ownership percentage and the Company’s intent to begin selling shares of Mobiquity common stock that will
further decrease its ownership percentage. As a result, during the fourth quarter of 2018 the Company began accounting for its
investment in Mobiquity as a marketable equity security.
On
May 10, 2019, the Company entered into a Membership Interest Purchase Agreement with GEAL pursuant to which the Company acquired
49% of the membership interest in Advangelists, LLC (the “AVNG Interest”) in consideration of the assumption of a
Promissory Note payable by GEAL to the former owners of the AVGN Interest with an outstanding balance of $7,475,000 (the “AVNG
Note”) and cancellation of an outstanding Promissory Note payable by GEAL to the Company in the amount of $1,200,000 originally
issued on March 1, 2019. Concurrently, the Company entered into a Membership Interest Purchase Agreement with Mobiquity pursuant
to which the Company sold the AVNG Interest to Mobiquity in consideration of Mobiquity assuming the AVNG Note and Mobiquity amending
the terms of the Remaining Mobiquity Warrant providing for cashless exercise.
The
Company paid 60,000,000 of its Mobiquity shares as partial consideration for the purchase of GBT Technologies, S. A. (see Note
6).
On
August 6, 2019, Mobiquity delivered a counter signed letter agreement dated August 2, 2019 pursuant to which the Company exchanged
120,000,000 Mobiquity Warrants into 20,000,000 shares of Mobiquity common stock, which resulted in the Company holding 60,000,000
shares of Mobiquity common stock.
On
September 10, 2019, the Company entered into (i) a Stock Purchase Agreement with Mobiquity pursuant to which the Company agreed
to return 15,000,000 shares of Mobiquity common stock to Mobiquity in exchange for 110,000 shares of common stock of the Company,
(ii) a Stock Purchase Agreement with Marital Trust GST Subject U/W/O Leopold Salkind (“Salkind Trust”) pursuant to
which the Company agreed to sell 7,000,000 shares of Mobiquity common stock to Salkind Trust in consideration of $67,200, (iii)
Stock Purchase Agreement with Dr. Gene Salkind (“Salkind”) pursuant to which the Company agreed to sell 28,000,000
shares of Mobiquity common stock to Salkind in consideration of $268,000 and (iv) a Stock Purchase Agreement with Deepanker Katyal
(“Katyal”) pursuant to which the Company agreed to sell 10,000,000 shares of Mobiquity common stock to Katyal in consideration
of 90,000 shares of common stock of the Company. The closing of the agreements occurred on September 13, 2019. As a result of
these transactions, the Company realized a loss on the sale of Mobiquity common stock of $3,673,595. At December 31, 2019, the
Company owned no shares of Mobiquity common stock.
Note
6 – Equity Investment in GBT Technologies, S.A.
On
June 17, 2019, the Company, Altcorp Trading LLC, a Costa Rica company and a wholly-owned subsidiary of the Company (“Altcorp”),
GBT Technologies, S.A., a Costa Rica company (“GBT-CR”) and Pablo Gonzalez, a shareholder’s representative of
GBT-CR (“Gonzalez”), entered into and closed an Exchange Agreement (the “GBT Exchange Agreement”) pursuant
to which the parties exchanged certain securities. In accordance with the Exchange Agreement, Altcorp acquired 625,000 shares
of GBT-CR representing 25% of its issued and outstanding shares of common stock from Gonzalez in exchange for the issuance of
20,000 shares of Series H Convertible Preferred Stock of the Company and a Convertible Note in the principal amount of $10,000,000
issued by the Company (the “Gopher Convertible Note”) as well as the transfer and assignment of a Promissory Note
payable by Gopher Protocol Costa Rica Sociedad De Responsabilidad Limitada to the Company in the principal amount of $5,000,000
dated February 6, 2019 (of which the underlying security for this Promissory Note is 30,000,000 restricted shares of common stock
of Mobiquity) and 60,000,000 restricted shares of common stock of Mobiquity.
The
Gopher Convertible Note bears interest of 6% per annum and is payable at maturity on December 31, 2021. At the election of Gonzalez,
the Gopher Convertible Note can be converted into a maximum of 20,000 shares of Series H Preferred Stock. Each share of Series
H Preferred Stock is convertible, at the option of the holder but subject to the Company increasing its authorized shares of common
stock, into such number of shares of common stock of the Company as determined by dividing the Stated Value ($500 per share) by
the conversion price ($10.00 per share). The Series H Preferred Stock has no liquidation preference, does not pay dividends
and the holder of Series H Preferred Stock shall be entitled to one vote for each share of common stock that the Series H Preferred
Stock may be convertible into. Upon conversion of the Gopher Convertible Note and the 20,000 shares of Series H Preferred
Stock, Gonzalez would be entitled to less than 50% of the resulting outstanding shares of common stock of the Company following
conversion in full and, as a result, such transaction is not considered a change of control.
GBT-CR
is in the business of the strategic management of BPO (Business Process Outsourcing) digital communications processing for enterprises
and startups, distributed ledger technology development, AI development and fintech software development and applications.
The
Company accounted for its investment in GBT-CR using the equity method of accounting; however, in 2020, the Company owned less
than 20% of and exercised no control over GBT-CR; therefore this investment is currently accounted for under the cost method.
Moreover, as on March 19, 2020, California Governor Gavin Newsom issued a stay at home order to protect the health and well-being
of all Californians and to establish consistency across the state in order to slow the spread of COVID-19. California was therefore
under strict quarantine control and travel has been severely restricted, resulting in disruptions to work, communications, and
access to files (due to limited access to facilities). As such, the Company’s was unable to access or to contact GBT-CR
on a on-going basis, and cannot get information about GBT-CR.
At
December 31, 2019, the Company evaluated the carrying amount of this equity investment and determined that this investment was
fully impaired and as a result an impairment charge of $30,731,534 was taken.
Note
7 – Investment in Joint Venture
On
March 6, 2020, the Company through its newly acquired wholly owned subsidiary, Greenwich International Holdings, a Costa Rica
corporation (“Greenwich”), entered into a Joint Venture and Territorial License Agreement (the “Tokenize Agreement”)
with Tokenize-It, S.A. (“Tokenize”), which is owned by a Costa Rica Trust represented by Pablo Gonzalez (“Gonzalez”).
Gonzalez also represents Gonzalez Costa Rica Trust, which holds a note in the principal amount of $10,000,000 and is also a shareholder
of the Company. Under the Tokenize Agreement, the parties formed GBT Tokenize Corp., a Nevada corporation (“GBT Tokenize”).
The purpose of GBT Tokenize is to develop, maintain and support source codes for its proprietary technologies including advanced
mobile chip technologies, tracking, radio technologies, AI core engine, electronic design automation, mesh, games, data storage,
networking, IT services, business process outsourcing development services, customer service, technical support and quality assurance
for business, customizable and dedicated inbound and outbound calls solutions, as well as digital communications processing for
enterprises and startups (“Technology Portfolio”), throughout the State of California. Upon generating any revenue
from the Technology Portfolio, the Joint Venture will earn the first right of refusal for other territories.
Tokenize
shall contribute the services and resources for the development of the Technology Portfolio to GBT Tokenize. The Company shall
contribute 100,000,000 shares of common stock of the Company (“GBT Shares”) to GBT Tokenize. Tokenize and the Company
will each own 50% of GBT Tokenize. The Company pledged its 50% ownership in GBT Tokenize and its 100% ownership of Greenwich to
Tokenize to secure its Technology Portfolio investment. The Company shall appoint two directors and Tokenize shall appoint one
director of GBT Tokenize.
In
addition, GBT Tokenize and Gonzalez entered into a Consulting Agreement in which Gonzalez is engaged to provide services in consideration
of $33,333.33 per month payable quarterly which may be paid in shares of common stock calculated by the amount owed divided by
the Company’s 10-day VWAP. Gonzalez will provide services in connection with the development of the business as well as
GBT Tokenize’s capital raising efforts. The term of the Consulting Agreement is two years. The closing of the Tokenize Agreement
occurred on March 9, 2020.
At
March 31, 2020, the Company evaluated the carrying amount of this joint venture investment and determined that this investment
was fully impaired and as a result an impairment charge of $5,500,000 was taken.
Note
8 – Convertible Notes Payable
Convertible
notes payable at March 31, 2020 and December 31, 2019 consist of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Convertible note payable to GBT Technologies
|
|
$
|
10,000,000
|
|
|
$
|
10,000,000
|
|
Convertible note payable to Glen Eagle
|
|
|
1,000,000
|
|
|
|
1,000,000
|
|
Convertible note payable to Power Up
|
|
|
183,600
|
|
|
|
-
|
|
Convertible note payable to Stanley Hills
|
|
|
869,011
|
|
|
|
-
|
|
Convertible note payable to Iliad
|
|
|
2,601,983
|
|
|
|
-
|
|
Total convertible notes payable
|
|
|
14,654,594
|
|
|
|
11,000,000
|
|
Unamortized debt discount
|
|
|
(3,085,387
|
)
|
|
|
-
|
|
Convertible notes payable
|
|
|
11,569,207
|
|
|
|
11,000,000
|
|
Less current portion
|
|
|
(569,207
|
)
|
|
|
-
|
|
Convertible notes, long-term portion
|
|
$
|
11,000,000
|
|
|
$
|
11,000,000
|
|
$10,000,000
for GBT Technologies S. A. acquisition
In
accordance with the acquisition of GBT-CR the Company issued a convertible note in the principal amount of $10,000,000. The convertible
note bears interest of 6% per annum and is payable at maturity on December 31, 2021. At the election of the holder, the convertible
note can be converted into a maximum of 20,000 shares of Series H Preferred Stock. Each share of Series H Preferred Stock is convertible,
at the option of the holder but subject to the Company increasing its authorized shares of common stock, into such number of shares
of common stock of the Company as determined by dividing the Stated Value ($500 per share) by the conversion price ($10.00 per
share). The convertible note is convertible into common stock at a fixed price that was higher than the Company’s
common stock on the date of grant, therefore, this convertible note does not contain a beneficial conversion feature.
Glen
Eagles Acquisition LP
On
July 8, 2019, the Company entered a Consulting Agreement with Glen Eagles Acquisition LP (“Glen”) as consultant to
provide services in connection with the Company’s acquisition of 25% of GBT Technologies, S.A., a Costa Rican corporation
(“GBT-CR”). Consultant will provide analysis, interaction with related professional and other services as requested
by the Company to integrate and expand capabilities between GBT-CR and the Company. The Company shall pay Glen $1,000,000 through
the issuance of a 6% Convertible Note. At the election of Glen, the Convertible Note can be converted into a maximum of 2,000
shares of Series H Preferred Stock. Each share of Series H Preferred Stock is convertible, at the option of the holder but subject
to the Company increasing its authorized shares of common stock, into such number of shares of common stock of the Company as
determined by dividing the Stated Value ($500 per share) by the conversion price ($10.00 per share). The Series H Preferred
Stock has no liquidation preference, does not pay dividends and the holder of Series H Preferred Stock shall be entitled to one
vote for each share of common stock that the Series H Preferred Stock may be convertible into. In addition, the Company enter
into an Amendment of a Common Stock Purchase Warrant held by Glen to acquire nine million shares of common stock that had been
assigned to Glen by Guardian Patch LLC. Pursuant to the amendment, the Company agreed to provide that the Common Stock Purchase
Warrant may be exercised on a cashless basis and provided a beneficial ownership limitation of 4.99%.
Power
Up Lending Group Ltd.
On
February 18, 2020, the Company entered into a Securities Purchase Agreement with Power Up Lending Group Ltd., an accredited investor
(“Power Up”) pursuant to which the Company issued to Power Up a Convertible Promissory Note (the “Power Note”)
in the aggregate principal amount of $183,600 for a purchase price of $153,000. The Power Note has a maturity date of May 15,
2021 and the Company has agreed to pay interest on the unpaid principal balance of the Power Note at the rate of six percent (6%)
per annum from the date on which the Power Note is issued (the “Issue Date”) until the same becomes due and payable,
whether at maturity or upon acceleration or by prepayment or otherwise. The Company shall have the right to prepay the Power Note,
provided it makes a payment including a prepayment to Power Up as set forth in the Power Note. The transactions described above
closed on February 19, 2020. The outstanding principal amount of the Power Note may not be converted prior to the period beginning
on the date that is 180 days following the Issue Date. Following the 180th day, Power Up may convert the Power Note into shares
of the Company’s common stock at a conversion price equal to 85% of the lowest trading price with a 15-day
look back immediately preceding the date of conversion. In addition, upon the occurrence and during the continuation of an Event
of Default (as defined in the Power Note), the Power Note shall become immediately due and payable and the Company shall pay to
Power Up, in full satisfaction of its obligations hereunder, additional amounts as set forth in the Power Note.
Stanley
Hills LLC
The
Company entered into a series of loan agreements with Stanley Hills LLC (“Stanley”) pursuant to which it received
more than $1,000,000 in loans (the “Debt”) since May 2019 up to December 2019. On February 26, 2020, in order to induce
Stanley to continue to provide funding, the Company and Stanley entered into a letter agreement providing that the Debt in the
amount of $1,214,900 may be converted into shares of common stock of the Company at a conversion price equal to 85% multiplied
by the lowest one trading price for the common stock during the 20 trading day period ending on the latest complete trading day
prior to the conversion date. Stanley has agreed to restrict its ability to convert the Debt and receive shares of common
stock such that the number of shares of common stock held by it and its affiliates after such conversion or
exercise does not exceed 4.99% of the then issued and outstanding shares of common stock. The Stanley Debt is secured via a pledge
agreement on the SURG shares. On or about January 27, 2020 the Company agreed that Stanley will hold title to the SURG shares
which was completed on or about April 16, 2020 where the 3,333,333 SURG shares have been vested under Stanley’s name.
Iliad
Research and Trading, L.P.
On
February 27, 2019, the Company entered into a note purchase agreement with a third party investor - Iliad Research and Trading,
L.P.(“Iliad”), pursuant to which the Company issued a promissory note for the original principal amount of $2,325,000.
The promissory note had an original issue discount of $300,000 and the inventor paid consideration of $2,025,000 to the Company,
of which $25,000 was paid for legal expenses. The outstanding balance of the promissory note is to be paid on the one-year anniversary
of the issuance of the note. Interest on the note accrues at the rate of 10% per annum compounding daily. Subject to the terms
and conditions set forth in the note, the Company may prepay all or any portion of the outstanding balance of the note at any
time in an amount in cash equal to 120% of the amount repaid. In connection with transactions that generate less than $1,000,000
in proceeds, the Company has agreed to not issue any debt instrument or incurrence of any debt other than trade payables in the
ordinary course of business, any securities or agreements to sell common stock with anti-dilution or price reset/reduction features
or any securities that are or may be become convertible or exercisable into common stock with a price that varies with the market
price of the common stock (collectively, “Restricted Issuance Transaction”). The outstanding balance of the Note will
be increased by 5% in the event the Company enters into a Restricted Issuance Transaction that is approved by Iliad. The original
issue discount in being amortized to interest expense over the term of the promissory note.
On
February 27, 2020, the Company and Iliad entered to an Amendment to the Iliad Note pursuant to which the maturity date of the
Iliad Note was extended to August 27, 2020, provided that the Debt may be converted into shares of common stock of the Company
at a conversion price equal to 80% multiplied by the lowest trading daily VWAP for the common stock during the 20 trading day
period ending on the latest complete trading day prior to the conversion date, provided for the payment by the Company to Iliad
of an extension fee equal to 7.5% of the outstanding balance of the Iliad Note resulting in a new balance of the Iliad Note of
$2,765,983 and provided that the Company’s failure to deliver shares of common stock within three trading days of a conversion
would result in an event of default. Iliad has agreed to restrict its ability to convert the Iliad Note and receive shares
of common stock such that the number of shares of common stock held by it and its affiliates after such conversion or
exercise does not exceed 9.99% of the then issued and outstanding shares of common stock.
Discounts
on convertible notes
The
Company recognized interest expense of $1,079,096 and $1,504,178 during the three months ended March 31, 2020 and 2019, respectively,
related to the amortization of the debt discount on convertible notes. The unamortized debt discount at March 31, 2020 was $3,085,387.
A
roll-forward of the convertible note from December 31, 2019 to March 31, 2020 is below:
Convertible notes, December 31, 2019
|
|
$
|
11,000,000
|
|
Issued for cash
|
|
|
153,000
|
|
Notes payable converted to convertible notes
|
|
|
3,980,883
|
|
Original issue discount
|
|
|
30,600
|
|
Conversion to common stock
|
|
|
(509,889
|
)
|
Debt discount related to new convertible notes
|
|
|
(4,164,483
|
)
|
Amortization of debt discounts
|
|
|
1,079,096
|
|
Convertible notes, March 31, 2020
|
|
$
|
11,569,207
|
|
Note
9 - Note Payable
Notes
payable at March 31, 2020 and 2019 consist of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
RWJ acquisition note
|
|
$
|
2,600,000
|
|
|
$
|
2,600,000
|
|
Promissory note to Iliad
|
|
|
-
|
|
|
|
2,325,000
|
|
Promissory note to Stanley Hills
|
|
|
-
|
|
|
|
1,046,261
|
|
Total notes payable
|
|
|
2,600,000
|
|
|
|
5,971,261
|
|
Unamortized debt discount
|
|
|
-
|
|
|
|
(47,671
|
)
|
Notes payable
|
|
$
|
2,600,000
|
|
|
$
|
5,923,590
|
|
RWJ
Acquisition Note
In connection with the acquisition of RWJ in
September 2017, the Company issued a note payable. The note accrues interest at 3.5% per annum, was due on December 31, 2019 and
is secured by the assets purchased in the acquisition. This note has not been repaid (See Note 14).
Iliad
On
February 27, 2019, the Company entered into a note purchase agreement with a third party investor, pursuant to which the Company
issued a promissory note for the original principal amount of $2,325,000. The promissory note had an original issue discount of
$300,000 and the inventor paid consideration of $2,025,000 to the Company, of which $25,000 was paid for legal expenses. The outstanding
balance of the promissory note is to be paid on the one-year anniversary of the issuance of the note. Interest on the note accrues
at the rate of 10% per annum compounding daily. Subject to the terms and conditions set forth in the note, the Company may prepay
all or any portion of the outstanding balance of the note at any time in an amount in cash equal to 120% of the amount repaid.
In connection with transactions that generate less than $1,000,000 in proceeds, the Company has agreed to not issue any debt instrument
or incurrence of any debt other than trade payables in the ordinary course of business, any securities or agreements to sell common
stock with anti-dilution or price reset/reduction features or any securities that are or may be become convertible or exercisable
into common stock with a price that varies with the market price of the common stock (collectively, “Restricted Issuance
Transaction”). The outstanding balance of the Note will be increased by 5% in the event the Company enters into a Restricted
Issuance Transaction that is approved by Iliad. The original issue discount in being amortized to interest expense over the term
of the promissory note.
On
February 27, 2020, the Company and Iliad entered to an Amendment to the Iliad Note pursuant to which the maturity date of the
Iliad Note was extended to August 27, 2020, provided that the Debt may be converted into shares of common stock of the Company
at a conversion price equal to 80% multiplied by the lowest trading daily VWAP for the common stock during the 20 trading day
period ending on the latest complete trading day prior to the conversion date, provided for the payment by the Company to Iliad
of an extension fee equal to 7.5% of the outstanding balance of the Iliad Note resulting in a new balance of the Iliad Note of
$2,765,983 which has been reclassified to convertible notes payable.
Stanley
Hills
The
Company issued promissory notes with Stanley Hills for funds received as working capital. The notes accrue interest at 10% per
annum and were due on February 9, 2020. On February 26, 2020, in order to induce Stanley to continue to provide funding, the Company
and Stanley entered into a letter agreement providing that the debt in the amount of $1,214,900 may be converted into shares of
common stock of the Company at a conversion price equal to 85% multiplied by the lowest one trading price for the common stock
during the 20 trading day period ending on the latest complete trading day prior to the conversion date.
Discounts
on Promissory Note
The
Company recognized interest expense of $47,671 and $26,301 during the three months ended March 31, 2020 and 2019, respectively,
related to the amortization of the debt discount on promissory notes. The unamortized debt discount at March 31, 2020 was $0.
A
roll-forward of the promissory notes from December 31, 2019 to March 31, 2020 is below:
Notes payable, December 31, 2019
|
|
$
|
5,923,590
|
|
Issued for cash
|
|
|
168,639
|
|
Accrued interest and penalties added to notes payable
|
|
|
440,983
|
|
Notes payable converted to convertible notes
|
|
|
(3,980,883
|
)
|
Amortization of debt discounts
|
|
|
47,671
|
|
Notes payable, March 31, 2020
|
|
$
|
2,600,000
|
|
Note
10 – Accrued Settlement
In
connection with a legal matter filed by the Investor of the $8,340,000 Senior Secured Redeemable Convertible Debenture, on December
23, 2019, in the pending arbitration between the Company and the Investor, an Interim Award was entered in favor of the Investor.
On January 31, 2020, the Company was informed that a final award was entered (the “Final Award”). The Final Award
affirms that certain sections of the Senior Secured Redeemable Convertible Debenture (the “Debenture”) constitute
unenforceable liquidated damages penalties and were stricken. Further, it was determined that the Investor was entitled to recovery
of their attorney’s fees. Consequently, the arbitrator awarded Investor an award of $4,034,444 plus interest of 7.25% accrued
from May 15, 2019 and costs in the amount of $55,613. (See Note 14). In connection with this settlement, the Company recognized
a gain on the settlement of debt of $1,375,556 in 2019 as the difference between the carrying amount of the debt and the amount
awarded by the arbitrator.
Note
11 - Derivative Liability
Certain
of the convertible notes payable discussed in Note 8 have a conversion price that can be adjusted based on the Company’s
stock price which results in the conversion feature being recorded as a derivative liability.
The
fair value of the derivative liability is recorded and shown separately under current liabilities. Changes in the fair value of
the derivative liability is recorded in the statement of operations under other income (expense).
The
Company uses a weighted average Black-Scholes option pricing model with the following assumptions to measure the fair value of
derivative liability at March 31, 2020:
Stock price
|
|
$
|
0.011
|
|
Risk free rate
|
|
|
0.17
|
%
|
Volatility
|
|
|
575
|
%
|
Conversion/ Exercise price
|
|
$
|
.008-.009
|
|
Dividend rate
|
|
|
0
|
%
|
The
following table represents the Company’s derivative liability activity for the three months ended March 31, 2020:
Derivative liability balance, December 31, 2019
|
|
$
|
-
|
|
Issuance of derivative liability during the period
|
|
|
4,936,912
|
|
Fair value of beneficial conversion feature of debt converted
|
|
|
(1,021,001
|
)
|
Change in derivative liability during the period
|
|
|
1,449,932
|
|
Derivative liability balance, March 31, 2020
|
|
$
|
5,365,843
|
|
Note
12- Stockholders’ Equity
Common
Stock
During
the three months ended March 31, 2020, the Company had the following transactions in its common stock:
|
●
|
issued
an aggregate of 45,580,989 for the conversion of convertible notes of $509,889
|
|
●
|
issued
100,000,000 shares to GBT Tokenize for a joint venture agreement. The value of the common
stock of $5,500,000 was determined based on the closing stock price of the Company’s
common stock on the grant date.
|
During
the three months ended March 31, 2019, the Company had the following transactions in its common stock:
|
●
|
issued
an aggregate of 3,000 shares to employees and board members as part of their compensation
agreements with the Company. The value of the common stock of $134,700 was determined
based on the closing stock price of the Company’s common stock on the grant date;
|
|
●
|
issued
51,587 shares to an investor for the conversion of $930,000 in convertible notes and
$52,254 in accrued interest; and
|
|
●
|
issued
200,267 shares to Latinex in order to provide that Latinex may maintain its required
regulatory capital as required by various regulators. The Company has recorded the value
of these shares of common stock as a stock loan receivable which is presented as a contra-equity
account in the accompanying consolidated balance sheets. The value of the common stock
was determined based on the closing stock price of the Company’s common stock on
the grant date.
|
Series
B Preferred Shares
On
November 1, 2011, the Company and certain creditors entered into a Settlement Agreement (the “Settlement Agreement”)
whereby without admitting any wrongdoing on either part, the parties settled all previous agreements and resolved any existing
disputes. Under the terms of the Settlement Agreement, the Company agreed to issue the creditors 45,000 shares of Series B Preferred
Stock of the Company on a pro-rata basis. Following the issuance and delivery of the shares of Series B Preferred Stock to said
creditors, as well as surrendering the undelivered shares, the Settlement Agreement resulted in the settlement of all debts, liabilities
and obligations between the parties.
The
Series B Preferred Stock has a stated value of $100 per share and is convertible into the Company’s common stock at a conversion
price of $30.00 per share representing 30 posts split common shares. Furthermore, the Series B Preferred Stock votes on an as
converted basis and carries standard anti-dilution rights. These rights were subsequently removed, except in cases of stock dividends
or splits.
As
of March 31, 2020 and December 31, 2019, there were 45,000 Series B Preferred Shares outstanding.
Series
C Preferred Shares
On
April 29, 2011, GV Global Communications, Inc. (“GV”) provided funding to the Company in the aggregate principal amount
of $111,000 (the “Loan”). On September 25, 2012, the Company and GV entered into a Conversion Agreement
pursuant to which the Company agreed to convert the Loan into 10,000 shares of Series C Preferred Stock of the Company, which
was approved by the Board of Directors.
Each
share of Series C Preferred Stock is convertible, at the option of GV, into such number of shares of common stock of the Company
as determined by dividing the Stated Value (as defined below) by the Conversion Price (as defined below). The Conversion
Price for each share is equal to a 50% discount to the average of the lowest three lowest closing bid prices of the Company’s
common stock during the 10-day trading period prior to the conversion with a minimum conversion price of $0.02. The
stated value is $11.00 per share (the “Stated Value”). The Series C Preferred Stock has no liquidation
preference, does not pay dividends and the holder of Series C Preferred Stock shall be entitled to one vote for each share of
common stock that the Series C Preferred Stock shall be convertible into. GV has contractually agreed to restrict its ability
to convert the Series C Preferred Stock and receive shares of the Company’s common stock such that the number of shares
of the Company’s common stock held by it and its affiliates after such conversion does not exceed 4.9% of the then issued
and outstanding shares of the Company’s common stock.
During
the year ended December 31, 2014, GV Global Communications, Inc. converted 7,770 of its Series C Preferred Stock into 120 post-split.
During the third quarter of 2014, the Company received 42 post-split common shares to adjust the shares issued to reflect the
amount that both they and the Company believed that they were owed. At March 31, 2020 and December 31, 2019, GV owns 700 Series
C Preferred Shares.
The
issuance of the Series C Preferred Stock was made in reliance upon exemptions from registration pursuant to Section 4(a)(2) under
the Securities Act of 1933 and Rule 506 promulgated under Regulation D thereunder. GV is an accredited investor as
defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933.
As
of March 31, 2020 and December 31, 2019, there were 700 Series C Preferred Shares outstanding.
Series
D Preferred Shares
As
of March 31, 2020 and December 31, 2019, there are 0 and 0 shares of Series D Preferred Shares outstanding, respectively.
Series
G Preferred Shares
As
of March 31, 2020 and December 31, 2019, there are 0 and 0 shares of Series G Preferred Shares outstanding, respectively.
Series
H Preferred Shares
On
June 17, 2019, the Company, Altcorp Trading LLC, a Costa Rica company and a wholly-owned subsidiary of the Company (“Altcorp”),
GBT Technologies, S.A., a Costa Rica company (“GBT-CR”) and Pablo Gonzalez, a shareholder’s representative of
GBT-CR (“Gonzalez”), entered into and closed an Exchange Agreement (the “GBT Exchange Agreement”) pursuant
to which the parties exchanged certain securities. In accordance with the Exchange Agreement, Altcorp acquired 625,000 shares
of GBT-CR representing 25% of its issued and outstanding shares of common stock from Gonzalez in exchange for the issuance of
20,000 shares of Series H Convertible Preferred Stock of the Company and a Convertible Note in the principal amount of $10,000,000
issued by the Company (the “Gopher Convertible Note”) as well as additional consideration. The Gopher Convertible
Note bears interest of 6% per annum and is payable at maturity on December 31, 2021. At the election of Gonzalez, the Gopher Convertible
Note can be converted into a maximum of 20,000 shares of Series H Preferred Stock. Each share of Series H Preferred Stock is convertible,
at the option of the holder but subject to the Company increasing its authorized shares of common stock, into such number of shares
of common stock of the Company as determined by dividing the Stated Value ($500 per share) by the conversion price ($10.00 per
share). The Series H Preferred Stock has no liquidation preference, does not pay dividends and the holder of Series
H Preferred Stock shall be entitled to one vote for each share of common stock that the Series H Preferred Stock may be convertible
into. On July 8, 2019, the Company entered a Consulting Agreement with Glen Eagles Glen Eagles Acquisition LP (“Glen”)
as consultant to provide services in connection with the Company’s acquisition of 25% of GBT-CR. Consultant will provide
analysis, interaction with related professional and other services as requested by the Company to integrate and expand capabilities
between GBT-CR and the Company. (See Note 14 for further details.)
As
of March 31, 2020 and December 31, 2019, there are 20,000 shares of Series H Preferred Shares outstanding.
Warrants
The
following is a summary of warrant activity.
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Warrants
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Outstanding
|
|
|
Price
|
|
|
Life
|
|
|
Value
|
|
Outstanding, December 31, 2019
|
|
|
19,654,167
|
|
|
$
|
1.57
|
|
|
|
2.76
|
|
|
$
|
1,111,600
|
|
Granted
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(4,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2020
|
|
|
19,650,167
|
|
|
$
|
1.57
|
|
|
|
2.51
|
|
|
$
|
-
|
|
Exercisable, March 31, 2020
|
|
|
19,650,167
|
|
|
$
|
1.57
|
|
|
|
2.51
|
|
|
$
|
-
|
|
The
exercise price for warrants outstanding and exercisable at March 31, 2020:
Outstanding
|
|
|
Exercisable
|
|
Number of
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
Warrants
|
|
|
Price
|
|
|
Warrants
|
|
|
Price
|
|
|
15,880,000
|
|
|
$
|
0.50
|
|
|
|
15,880,000
|
|
|
$
|
0.50
|
|
|
3,000,000
|
|
|
|
1.85
|
|
|
|
3,000,000
|
|
|
|
1.85
|
|
|
500,000
|
|
|
|
2.70
|
|
|
|
500,000
|
|
|
|
2.70
|
|
|
20,000
|
|
|
|
31.90
|
|
|
|
20,000
|
|
|
|
31.90
|
|
|
100,000
|
|
|
|
50.00
|
|
|
|
100,000
|
|
|
|
50.00
|
|
|
75,000
|
|
|
|
75.00
|
|
|
|
75,000
|
|
|
|
75.00
|
|
|
50,000
|
|
|
|
100.00
|
|
|
|
50,000
|
|
|
|
100.00
|
|
|
6,667
|
|
|
|
200.00
|
|
|
|
6,667
|
|
|
|
200.00
|
|
|
10,000
|
|
|
|
235.00
|
|
|
|
10,000
|
|
|
|
235.00
|
|
|
7,500
|
|
|
|
250.00
|
|
|
|
7,500
|
|
|
|
250.00
|
|
|
1,000
|
|
|
|
280.00
|
|
|
|
1,000
|
|
|
|
280.00
|
|
|
19,650,167
|
|
|
|
|
|
|
|
19,650,167
|
|
|
|
|
|
Note
13 - Related Parties
Related
parties are natural persons or other entities that have the ability, directly or indirectly, to control another party or exercise
significant influence over the party in making financial and operating decisions. Related parties include other parties that are
subject to common control or that are subject to common significant influences.
For
the three months ended March 31, 2020 and 2019, the Company paid a law firm owned by the Company’s chairman $0 and $90,000,
respectively, for legal services. On June 5, 2019, said chairman Mr. Robert Yaspan resigned as Director of the Company to pursue
other interests.
On
April 6, 2018, the Company and Danny Rittman, Chief Technology Officer and a Director of the Company, agreed to amend his employment
agreement pursuant to which he will receive salary at the rate of $250,000 annually payable in equal increments of $15,000 per
month with an additional $70,000 to be paid within 15 days of the end of the calendar year.
On
September 14, 2018, the Company and Dr. Rittman entered into a letter agreement confirming that the Company is the owner of all
intellectual property developed by Dr. Rittman relating to the Internet of Things (IoT) and Artificial Intelligence enabled mobile
technologies, including a global platform with both mobile and fixed solutions, commencing June 16, 2015 and continuing until
Dr. Rittman’s employment agreement is terminated.
On September 1, 2017, the Company entered into
and closed an Asset Purchase Agreement with a third party, RWJ Advanced Marketing, LLC (“RWJ”), a Georgia corporation,
pursuant to which the Company purchased certain assets from RWJ, including inventory, terminals, licenses and permits and intangible
assets. At closing, the Company and Mr. Greg Bauer entered into an Employment Agreement pursuant to which Mr. Bauer was retained
as Chief Executive Officer for a term of one year, subject to an automatic extension, unless terminated, in consideration of a
base salary of $250,000 and a bonus of 10% of net profit generated by the assets acquired. Mr. Bauer was also appointed to the
Board of Directors of the Company. As of the closing date, Mr. Murray resigned as Chief Executive Officer of the Company but will
remain as a director of the Company. Mr. Bauer, since 2004 through present, has served as executive director with W.L. Petrey Wholesale,
Inc. where he was in charge of the UGO/Preway operations. The Company is in litigation in connection with RWJ transaction –
See Note 14 - Contingencies.
On
January 1, 2019, the Company and Douglas Davis entered into an Amended and Restated Employment Agreement pursuant to which Mr.
Davis was retained as Chief Executive Officer. Mr. Davis has served as Interim Chief Executive Officer since July 2018. The term
of Mr. Davis’ employment is for two years through January 1, 2021. Mr. Davis will be entitled to an annual base salary of
$250,000, which shall be increased to $400,000 upon the Company uplisting to a national exchange. Mr. Davis is also be entitled
to the issuance of Stock Options to acquire an aggregate of 50,000 shares of common stock of the Company, exercisable for five
years, subject to vesting. The options will be earned and vested (i) with respect to 20,000 shares of common stock on the date
hereof, (ii) 5,000 shares of common stock upon the successful dual list of the Company on an international exchange such as SIX
Zurich Stock Exchange or Euronext, (iii) 15,000 shares of common stock upon the successful up listing to a national exchange such
as the Nasdaq, NYSE Euronext, TSX, AMEX or other, and (iv) with respect to 5,000 shares of common stock at each of the six (6)
month anniversaries (July 1, 2019 and January 1, 2020). The exercise price of such options shall be the closing price of the Company
on the date prior to such event. (See Note 16)
On
October 10, 2019, the Company entered into a Joint Venture Agreement (the “BitSpeed Agreement”) with BitSpeed LLC,
which is owned by Douglas Davis, the Company’s Chief Executive Officer, to form GBT BitSpeed Corp., a Nevada company (“GBT
BitSpeed”). The purpose of GBT BitSpeed is to develop, maintain and support its proprietary Extreme Transfer Software Application
Concurrency, a software application to transfer secure, accelerated transmission of large file data over networks, and connection
to cloud storage, Network-Attached Storage (NAS) and Storage Area Networks (SANs) (“Concurrency”). BitSpeed shall
contribute the services and resources for the development of Concurrency to GBT BitSpeed. The Company shall contribute 10 million
shares of common stock (valued at $17,900,000) of the Company to GBT BitSpeed. BitSpeed and the Company will each own 50% of GBT
BitSpeed. The Company shall appoint two directors and BitSpeed shall appoint one director of GBT BitSpeed. In addition, GBT BitSpeed
and Mr. Davis entered into a Consulting Agreement in which Mr. Davis is engaged to provide services in consideration of $10,000
per month payable quarterly which may be paid in shares of common stock calculated by the amount owed divided by the Company’s
20-day VWAP. Mr. Davis will provide services in connection with the development of the business as well as GBT BitSpeed’s
capital raising efforts. The term of the Consulting Agreement is two years. The closing of the BitSpeed Agreement occurred on
October 14, 2019.
Note
14 - Contingencies
Legal
Proceedings
From
time to time, the Company may be involved in various litigation matters, which arise in the ordinary course of business. There
is currently no litigation that management believes will have a material impact on the financial position of the Company.
On
or around January 30, 2019, RWJ Advanced Marketing, LLC, Greg Bauer, and Warren Jackson sued the Company and multiple third and
related parties in Superior Court of the State of California - County of Los Angeles, General District in connection with the
acquisition of UGopherServices in September 2017. The case number is 19STCV03320. The lawsuit alleges breach of contract, among
other causes of action. The Company answered the complaint and filed a cross-complaint against the plaintiffs in the case and
third parties on or around February 15, 2019.
On
December 3, 2018, the Company entered into a Securities Purchase Agreement (the “SPA”) with Discover Growth Fund,
LLC pursuant to which the Company issued a Senior Secured Redeemable Convertible Debenture (the “Debenture”) in the
aggregate face value of $8,340,000. In connection with the issuance of the Debenture and pursuant to the terms of the SPA, the
Company issued a Common Stock Purchase Warrant to acquire up to 225,000 shares of common stock for a term of three years (the
“Warrant”) on a cash-only basis at an exercise price of $100.00 per share with respect to 50,000 Warrant Shares, $75.00
with respect to 75,000 Warrant Shares and $50.00 with respect to 100,000 Warrant Shares. The holder may not exercise any portion
of the Warrants to the extent that the holder would own more than 4.99% of the Company’s outstanding common stock immediately
after exercise. The outstanding principal amount may be converted at any time into shares of the Company’s common
stock at a conversion price equal to 95% of the Market Price less $5.00 (The conversion price is lowered by 10% upon the
occurrence of each Triggering Event – the current conversion price is 75% of the Market Price less $5.00). The Market Price
is the average of the 5 lowest individual daily volume weighted average prices during the period the Debenture is outstanding.
On May 28, 2019, the Investor delivered to the Company a “Notice of Default and Notice of Sale of Collateral” (the
“Notice”). On December 23, 2019, in the pending arbitration between the Company and the Investor, an Interim Award
was entered in favor of the Investor. On January 31, 2020, the Company was informed that a final award was entered (the “Final
Award”). The Final Award affirms that certain sections of the Senior Secured Redeemable Convertible Debenture (the “Debenture”) constitute
unenforceable liquidated damages penalties and were stricken. Further, it was determined that the Investor was entitled to recovery
of their attorney’s fees. Consequently, the arbitrator awarded Investor an award of $4,034,444 plus interest of 7.25% accrued
from May 15, 2019 and costs in the amount of $55,613.
On
February 18, 2020, the Company filed a motion with the United States District Court District of Nevada (the “Nevada Court”)
to confirm the Final Award and a motion to consolidate Discover’s application to confirm the Final Award filed in the U.S.
District Court of the Virgin Islands (Case No: 3 :20-cv-00012-CVG-RM) (the “Virgin Island Court”). On February 27,
2020, the Nevada Court denied the Company’s motion to confirm the Final Award and motion to consolidate and further decided
that the confirmation of the Final Award should be litigated in the Virgin Island Court. As such, on February 27, 2020, the Company
filed a Notice of Entry of Order as well as a Motion to Confirm the Arbitration Award; Address the Outstanding issue regarding
whether Discover’s rights are subordinated to other creditors and, thereafter, oversee a commercially reasonable foreclosure
sale (Case No: 3 :20-cv-00012-CVG-RM). It is the Company’s position that the Final Award must first be confirmed and all
questions regarding the rights of Discover relative to those of other creditors must be determined before any foreclosure sale
can proceed. It is further the position of the Company that the previously disclosed foreclosure sale scheduled by Discover is
being conducted in a commercially unreasonable manner and that if Discover proceeded forward with the foreclosure sale it did
so at its own risk. Nevertheless, on February 28, 2020, Discover advised that it conducted a sale of the Company’s assets.
As the date of this report Discover failed to present a deed of sale for the alleged sale that allegedly took place as noticed.
The Company filed with Virgin Island Court the motions disputing the validity of said alleged sale.
GBT
Technologies, S.A.
On
September 14, 2018, the Company entered into an Exclusive Intellectual Property License and Royalty Agreement (the “GBT
License Agreement”) with GBT-CR, a fully compliant and regulated cryptocurrency exchange platform that currently operates
in Costa Rica as a decentralized cryptocurrency platform, pursuant to which, among other things, the Company granted to GBT-CR
an exclusive, royalty-bearing right and license relating intellectual property relating to systems and methods of converting electronic
transmissions into digital currency as reflected in that certain patent filed with the United Stated Patent and Trademark Office
on or about June 14, 2018 (EFS ID: 32893586; Application Number: 16008069; Type: Utility under 35 USC 111(a); Confirmation Number:
6787)(collectively, the “Digital Currently Technology”). Pursuant to the GBT License Agreement, the Company granted
GBT-CR an exclusive worldwide license to use the Digital Currency Technology to make, use, sell, lease or otherwise commercialize
and dispose of products and devices utilizing the Digital Currently Technology.
Under
the terms of the GBT License Agreement, the Company is entitled to receive a royalty payment of 2% of gross revenue of each licensed
product sold by GBT-CR during the period starting in which revenue is first generated using the licensed products and continuing
for five years thereafter. Upon signing the GBT-CR License Agreement, GBT-CR paid the Company $300,000 which is nonrefundable.
The Company has recognized the $300,000 as revenue during the years ended December 31, 2018. Upon GBT-CR making available for
sale (the “Commercial Event”) an ICO (Initial Coin Offering) (the “Coin”), GBT-CR will make a payment
to the Company in the amount of $5,000,000. Further, upon the Commercial Event, GBT-CR will grant the Company the ability to acquire
30% of the Coin at a 30% discount of such offering price of the Coin. The GBT License Agreement commenced as of the signing date
and, unless terminated in accordance with the termination provisions of the GBT License Agreement, shall remain in force until
the expiration of the patent pertaining to the Digital Currency Technology; provided that the right to use trade secrets shall
survive the expiration of the GBT License Agreement provided the Company has not terminated. Prior to the signing of the GBT License
Agreement, GBT-CR advanced $200,000 to the Company, which the parties have agreed will be applied toward the $5,000,000 fee when
it becomes due. The $200,000 is recorded as unearned revenue at December 31, 2018 and reclassified to accrued expense at December
31, 2019.
On
February 27, 2020 GBT Technologies, S.A., as successor in interest to Hermes Roll, LLC had notified the Company that it was in
default on its Amended and Restated Territorial License Agreement (“ARTLA”) dated June 15, 2015 and that the ARTLA
had been cancelled and rescinded.
Note
15 – Concentrations
Concentration
of Credit Risk
Financial
instruments, which potentially subject the Company to a concentration of credit risk, consist principally of temporary cash investments.
There have been no losses in these accounts through March 31, 2020.
Note
16 - Subsequent Events
Management
has evaluated events that occurred subsequent to the end of the reporting period shown herein:
Subsequent
to March 31, 2020, the Company issued 14,873,256 shares of common stock for the conversion of $115,000 of convertible notes payable.
On
April 11, 2020, Douglas Davis resigned as Chief Executive Officer of the Company so that he may fully devote all of his efforts
to GBT Tokenize Corp., the Company’s joint venture, which intends to develop a new product. Mr. Davis’ resignation
was not the result of any disagreements with management or board of directors of the Company.
The
Board of Directors of the Company approved, on April 13, 2020, a reverse stock split of all of the Company’s Common Stock,
pursuant to which every 50 shares of Common Stock of the Company shall be reverse split, reconstituted and converted into one
(1) share of Common Stock of the Company (the “Reverse Stock Split”). The Company submitted an Issuer Company Related
Action Notification regarding the Reverse Stock Split to FINRA on April 14, 2020. To effectuate the Reverse Stock Split,
the Company filed on April 21, 2020 a Certificate of Change Pursuant to Nevada Revised Statutes (“NRS”) Section 78.209
(the “Certificate of Change”) with the Secretary of State of the State of Nevada subject to FINRA approval. Since
this reverse stock split has not yet been approved by the State of Nevada, the financial statements have not been retroactively
restated to reflect this reverse stock split. On June 8, 2020 FINRA advised the Company that such request is deficient due to
the fact that a holder of an outstanding convertible note of the Company had entered into two settlements with the Securities
and Exchange Commission that related to securities laws violations but were in no way related to the Company. As a result, FINRA
advised that it is necessary for the protection of investors, the public interest, and to maintain fair and orderly markets that
documentation related to the Reverse Stock Split not be processed. The Company appealed the decision made by FINRA on June 15,
2020.
On
April 13, 2020, the Company’s Board of Directors appointed Mansour Khatib, who has served as the Chief Marketing Officer
and a director of the Company as Chief Executive Officer. Mr. Khatib has also previously served as Interim Chief Executive Officer
from May 2018 to July 2018.
On
June 17, 2020 the Company was approved for a long term loan of $150,000 by SBA - Economic Injury Disaster Loan. The loan was
funded on June 22, 2020. Installment payments, including monthly principal and interest of $731.00, will begin Twelve (12) months
from the date of the promissory Note. The balance of principal and interest will be payable Thirty (30) years from the date of
the promissory Note. Interest will accrue at the rate of 3.75% per annum.
On September 27, 2019, Surge Holdings, Inc.
(“SURG”) issued a Convertible Promissory Note issued by SURG in the principal amount of $4,000,000 (the “SURG
Note”), which was assigned to AltCorp Trading LLC., a subsidiary of the Company (“AltCorp”). On June 23, 2020,
AltCorp and SURG entered into an Exchange Agreement whereby AltCorp exchanged $2,750,000 of the SURG Note for 5,500,000 shares
of SURG’s common stock. On June 23, 2020, SURG, AltCorp and Glen Eagles Acquisition LP (“Glen”) entered into
an Exchange and Assignment Agreement pursuant to which $1,250,000 of the SURG Note was converted into 2,500,000 shares of common
stock of SURG and assigned to Glen.
On or about June 23, 2020 Stanley which holds
a pledge of 3,333,333 shares of SURG common stock (See Note 8) via its manager/member (“Stanley’s Member”) entered
into an agreement with SURG, its transfer agent and an escrow officer for which Stanley’s Member agreed that 3,333,333 SURG
shares will be cancelled for consideration of up to $700,000. The amount of $500,000 was paid on June 23, 2020 into a lawyer’s
trust account, and 2,380,952 of SURG shares have been sent for cancelation. The remaining shares may be sent to cancelation upon
receiving the remaining $200,000.