United States

 

Securities and Exchange Commission

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)  
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
   
  For the quarterly period ended September 30, 2019
   
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commissions file number: 000-54530

 

GBT TECHNOLOGIES INC.

(Exact name of registrant as specified in its charter)

 

GOPHER PROTOCOL INC.

(Former name of registrant as specified in its charter)

 

Nevada   27-0603137
State or other jurisdiction of   I.R.S. Employer Identification Number
incorporation or organization    

 

2500 Broadway, Suite F-125, Santa Monica, CA 90404

(Address of principal executive offices)

 

Issuer’s telephone number:          424-238-4589 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes   No 

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes       No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer    

 

Non-accelerated filer        (Do not check if a smaller reporting company)  Smaller reporting company       Emerging growth company  

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of Exchange Act). Yes  No  

 

Securities registered pursuant to Section 12(b) of the Act: Not applicable.

 

Title of each class Trading Symbol Name of each exchange on which registered
Not applicable.    

 

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 

 

Common Stock, $0.00001 par value 14,455,569  Common Shares
(Class) (Outstanding at November 14, 2019)

 

 

  1  

 

GBT TECHNOLOGIES INC.

 

TABLE OF CONTENTS

 

 

PART I. Financial Information    
       
Item 1. Condensed Consolidated Financial Statements (Unaudited)    
       
  Condensed Consolidated Balance Sheets as of September 30, 2019 (unaudited) and December 31, 2018 (audited)   3
       
  Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)   4
       
  Condensed Consolidated Statements of Stockholder’s Equity (Deficit) for the Three and Nine Months Ended September 30, 2019 and 2018 (unaudited)   5
       
  Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018 (unaudited)   6
       
  Notes to Condensed Consolidated Financial Statements (unaudited)   7
       
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   30
       
Item 3. Quantitative and Qualitative Disclosures about Market Risk   36
       
Item 4. Controls and Procedures   36
       
PART II. Other Information   37
       
Signatures   50

 

 

 

 

  2  

 

 

Item 1: Condensed consolidated financial statements

 

GBT TECHNOLOGIES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

ASSETS   September 30   December 31,
    2019   2018
      (unaudited)          
Current Assets:                
   Cash   $ 189,907     $ 1,863,510  
   Accounts receivable     —         40,466  
   Prepaid expenses and other current assets     281,250       27,602  
   Marketable equity security     1,050,000       4,200,000  
   Assets of discontinued operations     —         4,223,011  
      Total current assets     1,521,157       10,354,589  
                 
Property and equipment, net     136,881       191,094  
Convertible note receivable     4,000,000          
Marketable equity security     —         14,000,000  
Equity investment     32,283,568       —    
                 
         Total assets   $ 37,941,606     $ 24,545,683  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)                
                 
Current Liabilities:                
   Accounts payable and accrued expenses (including related parties of $711,042 and $312,052)   $ 2,704,969     $ 1,431,425  
   Unearned revenue     252,309       257,848  
   Due to Guardian LLC (related party)     —         702,483  
   Convertible notes payable, net of discount of $0 and $3,233,124     5,410,000       198,076  
   Note payable, net of discount of $123,287 and $744     5,330,530       2,699,256  
   Derivative liability     20,905,848       3,833,506  
   Liabilities of discontinued operations     —         906,700  
      Total current liabilities     34,603,656       10,029,294  
                 
Convertible notes payable     11,000,000       —    
                 
         Total liabilities     45,603,656       10,029,294  
                 
Contingencies     —         —    
                 
Stockholders' Equity (Deficit):                
  Series B Preferred stock, $0.00001 par value; 20,000,000 shares authorized;                
    45,000 and 45,000 shares issued and outstanding at September 30, 2019 and December 31, 2018     —         —    
  Series C Preferred stock, $0.00001 par value; 10,000 shares authorized;                
    700 and 700 shares issued and outstanding at September 30, 2019 and December 31, 2018     —         —    
  Series D Preferred stock, $0.00001 par value; 100,000 shares authorized;                
    0 and 0 shares issued and outstanding at September 30, 2019 and December 31, 2018     —         —    
  Series G Preferred stock, $0.00001 par value; 2,000,000 shares authorized;                
    0 and 0 shares issued and outstanding at September 30, 2019 and December 31, 2018     —         —    
  Series H Preferred stock, $0.00001 par value ($500.00 stated value); 40,000 shares authorized;                
    20,000 shares issued and outstanding at September 30, 2019     —         —    
  Common stock, $0.00001 par value; 100,000,000,000 shares authorized;                
    1,970,137 and 1,822,243 shares issued and outstanding at September 30, 2019 and December 31, 2018     4,164       3,822  
   Treasury stock, at cost; 1,040 shares at September 30, 2019 and December 31, 2018     (643,059 )     (643,059 )
   Stock loan receivable     (7,610,147 )     —    
   Additional paid in capital     225,892,607       81,306,958  
   Accumulated deficit     (225,305,615 )     (66,151,332 )
      Total stockholders' equity (deficit)     (7,662,050 )     14,516,389  
         Total liabilities and stockholders' equity (deficit)   $ 37,941,606     $ 24,545,683  

 

The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.

 

 

  3  

 

 

GBT TECHNOLOGIES INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

 

    Three Months Ended September 30,   Nine Months Ended September 30,
    2019   2018   2019   2018
                 
                 
Sales:                                
   Sales   $ 4,422,800     $ 3,727,041     $ 14,180,761     $ 8,935,506  
   Related party sales     45,000       90,000       135,000       135,000  
      Total sales     4,467,800       3,817,041       14,315,761       9,070,506  
                                 
Cost of goods sold     4,220,843       3,291,800       13,569,709       8,136,517  
                                 
Gross profit     246,957       525,241       746,052       933,989  
                                 
Operating expenses:                                
   General and administrative expenses     122,615,570       3,099,671       127,373,766       13,278,674  
   Marketing expenses     82,770       106,305       800,594       376,806  
   Acquisition costs     —         —         150,000       10,966,791  
   Buyout of joint venture agreement (related party)     —         11,750,000               11,750,000  
   Impairment of assets     —         7,132,286               7,132,286  
      Total operating expenses     122,698,340       22,088,262       128,324,360       43,504,557  
                                 
Loss from operations     (122,451,383 )     (21,563,021 )     (127,578,308 )     (42,570,568 )
                                 
Other income (expense):                                
   Amortization of debt discount     (4,165,716 )     (379,679 )     (6,745,837 )     (849,802 )
   Change in fair value of derivative liability     88,275,752       (2,440,383 )     (13,614,981 )     (2,458,506 )
   Interest expense and financing costs     (490,265 )     (160,726 )     (6,414,500 )     (289,737 )
   Unrealized loss on marketable equity security     (792,405 )     —         (6,475,317 )     —    
   Realized gain (loss) on disposal of marketable equity security     (3,673,595 )     —         (90,683 )     —    
   Equity income (loss) in investment     620,127       (173,648 )     583,568       (173,648 )
   Interest income     93,750       —         281,250       —    
      Total other income (expense)     79,867,648       (3,154,436 )     (32,476,500 )     (3,771,693 )
                                 
Loss before income taxes     (42,583,735 )     (24,717,457 )     (160,054,808 )     (46,342,261 )
                                 
Income tax expense     —         —         —         —    
                                 
Loss from continuing operations     (42,583,735 )     (24,717,457 )     (160,054,808 )     (46,342,261 )
                                 
Discontinued operations:                                
   Loss from operations of discontinued operations     (201,116 )     (122,283 )     (481,278 )     (100,206 )
   Gain on disposition of discontinued operations     1,381,803       —         1,381,803       —    
      1,180,687       (122,283 )     900,525       (100,206 )
                                 
                                 
Net loss   $ (41,403,048 )   $ (24,839,740 )   $ (159,154,283 )   $ (46,442,467 )
                                 
                                 
Weighted average common shares outstanding:                                
   Basic and diluted     2,126,620       1,363,479       2,093,473       1,185,878  
                                 
Net loss per share (basic and diluted):                                
   Continuing operations   $ (20.02 )   $ (18.13 )   $ (76.45 )   $ (39.08 )
   Discontinued operations     0.56       (0.09 )     0.43       (0.08 )
    $ (19.47 )   $ (18.22 )   $ (76.02 )   $ (39.16 )

 

The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.

 

  4  

 

 

GBT TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)

 

    Series B Convertible Preferred Stock   Series C Convertible Preferred Stock   Series D Convertible Preferred Stock   Series G Convertible Preferred Stock   Series H Convertible Preferred Stock   Common Stock   Treasury Stock   Loan   Additional
Paid-in
  Accumulated   Equity/
    Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Receivable   Capital   Deficit   (Deficit)
                                                                         
Balance, December 31, 2018     45,000     $ —         700     $ —         —         —         —       $ —         —       $ —         1,822,243     $ 3,822     $ 1,040     $ (643,059 )   $ —       $ 81,306,958     $ (66,151,332 )   $ 14,516,389  
                                                                                                                                                 
Common stock issued for services     —         —         —         —         —         —         —         —         —         —         3,000       3       —         —         —         134,697               134,700  
Common stock issued for conversion of convertible debt and accrued interest     —         —         —         —         —         —         —         —         —         —         51,586       52       —         —         —         982,202       —         982,254  
Common stock issued for stock loan     —         —         —         —         —         —         —         —         —         —         200,267       200       —         —         (7,610,147 )     7,609,947       —         —    
Stock options issued for services     —         —         —         —         —         —         —         —         —         —         —         —         —         —         —         694,816       —         694,816  
Fair value of beneficial conversion feature of converted/debt repaid     —         —         —         —         —         —         —         —         —         —         —         —         —         —         —         2,018,302       —         2,018,302  
Relative fair value of warrants issued with convertible debt     —         —         —         —         —         —         —         —         —         —         —         —         —         —         —         1,634,760       —         1,634,760  
Net loss     —         —         —         —         —         —         —         —         —         —         —         —         —         —         —         —         (8,105,860 )     (8,105,860 )
                                                                                                                                                 
Balance, March 31, 2019     45,000       —         700       —         —         —         —         —         —         —         2,077,096       4,077       1,040       (643,059 )     (7,610,147 )     94,381,682       (74,257,192 )     11,875,361  
                                                                                                                                                 
Common stock issued for services     —         —         —         —         —         —         —         —         —         —         6,500       7       —         —         —         101,193               101,200  
Common stock issued for penalty     —         —         —         —         —         —         —         —         —         —         59,820       59       —         —         —         975,006               975,065  
Common stock issued for conversion of convertible debt and accrued interest     —         —         —         —         —         —         —         —         —         —         23,176       23       —         —         —         437,857       —         437,880  
Series H preferred stock issued for acquisition     —         —         —         —         —         —         —         —         20,000       —         —         —         —         —         —         10,000,000       —         10,000,000  
Stock options issued for services     —         —         —         —         —         —         —         —         —         —         —         —         —         —         —         71,988       —         71,988  
Fair value of beneficial conversion feature of converted/debt repaid     —         —         —         —         —         —         —         —         —         —         —         —         —         —         —         246,276       —         246,276  
Net loss     —         —         —         —         —         —         —         —         —         —         —         —         —         —         —         —         (109,645,375 )     (109,645,375 )
                                                                                                                                                 
Balance, June 30, 2019     45,000       —         700       —         —         —         —         —         20,000       —         2,166,592       4,166       1,040       (643,059 )     (7,610,147 )     106,214,002       (183,902,567 )     (85,937,605 )
                                                                                                                                                 
Rounding of shares due to stock split     —         —         —         —         —         —         —         —         —         —         3,545       —         —         —         —         —                 —    
Cancellation of shares for exchange of Mobiquity shares     —         —         —         —         —         —         —         —         —         —         (200,000 )     (2 )     —         —         —         (797,998 )             (798,000 )
Fair value of warrants issued     —         —         —         —         —         —         —         —         —         —         —         —         —         —         —         120,476,603       —         120,476,603  
Net loss     —         —         —         —         —         —         —         —         —         —         —         —         —         —         —         —         (41,403,048 )     (41,403,048 )
                                                                                                                                                 
Balance, September 30, 2019     45,000     $ —         700     $ —         —       $ —         —       $ —         20,000     $ —         1,970,137     $ 4,164     $ 1,040     $ (643,059 )   $ (7,610,147 )   $ 225,892,607     $ (225,305,615 )   $ (7,662,050 )
                                                                                                                                                 
Balance, December 31, 2017     45,000     $ —         700     $ —         66,000     $ 1       2,000,000     $ 20       —       $ —         582,154     $ 2,582     $ 1,040     $ (643,059 )   $ —       $ 19,243,959     $ (14,381,662 )   $ 4,221,841  
                                                                                                                                                 
Conversion of Series D to common stock     —         —         —         —         (66,000 )     (1 )     —         —         —         —         660,000       660       —         —         —         (659 )     —         —    
Common stock issued for services     —         —         —         —         —         —         —         —         —         —         7,500       7       —         —         —         1,133,718               1,133,725  
Common stock issued for acquisition     —         —         —         —         —         —         —         —         —         —         5,000       5       —         —         —         1,009,995       —         1,010,000  
Common stock issued for acquisition services     —         —         —         —         —         —         —         —         —         —         40,000       40       —         —         —         6,609,960       —         6,610,000  
Common stock issued for cash     —         —         —         —         —         —         —         —         —         —         6,667       7       —         —         —         499,993       —         500,000  
Warrants issued for acquisition     —         —         —         —         —         —         —         —         —         —         —         —         —         —         —         992,958       —         992,958  
Warrants issued for services     —         —         —         —         —         —         —         —         —         —         —         —         —         —         —         1,985,915       —         1,985,915  
Warrants issued for acqusition services     —         —         —         —         —         —         —         —         —         —         —         —         —         —         —         2,978,873       —         2,978,873  
Fair value of beneficial conversion feature of debt repaid     —         —         —         —         —         —         —         —         —         —         —         —         —         —         —         113,287       —         113,287  
Relative fair value of warrants issued with convertible debt     —         —         —         —         —         —         —         —         —         —         —         —         —         —         —         393,407       —         393,407  
Fair value of beneficial conversion feature associated with convertible debt     —         —         —         —         —         —         —         —         —         —         —         —         —         —         —         356,593       —         356,593  
Net loss     —         —         —         —         —         —         —         —         —         —         —         —         —         —         —         —         (14,108,022 )     (14,108,022 )
                                                                                                                                                 
Balance, March 31, 2018     45,000       —         700       —         —         —         2,000,000       20       —         —         1,301,321       3,301       1,040       (643,059 )   $ —         35,317,999       (28,489,684 )     6,188,577  
                                                                                                                                                 
Common stock issued for services     —         —         —         —         —         —         —         —         —         —         9,000       9       —         —         —         2,613,991               2,614,000  
Common stock issued for acquisition     —         —         —         —         —         —         —         —         —         —         2,500       2       —         —         —         694,998       —         695,000  
Common stock issued for acquisition services     —         —         —         —         —         —         —         —         —         —         2,500       3       —         —         —         694,997       —         695,000  
Common stock issued for cash     —         —         —         —         —         —         —         —         —         —         6,060       6       —         —         —         999,994       —         1,000,000  
Warrants issued for acquisition     —         —         —         —         —         —         —         —         —         —         —         —         —         —         —         682,919       —         682,919  
Warrants issued for services     —         —         —         —         —         —         —         —         —         —         —         —         —         —         —         1,922,962       —         1,922,962  
Warrants issued for acqusition services     —         —         —         —         —         —         —         —         —         —         —         —         —         —         —         682,918       —         682,918  
Relative fair value of warrants issued with convertible debt     —         —         —         —         —         —         —         —         —         —         —         —         —         —         —         548,222       —         548,222  
Fair value of beneficial conversion feature associated with convertible debt     —         —         —         —         —         —         —         —         —         —         —         —         —         —         —         201,778       —         201,778  
Net loss     —         —         —         —         —         —         —         —         —         —         —         —         —         —         —         —         (7,494,705 )     (7,494,705 )
                                                                                                                                                 
Balance, June 30, 2018     45,000       —         700       —         —         —         2,000,000       20       —         —         1,321,381       3,321       1,040       (643,059 )     —         44,360,778       (35,984,389 )     7,736,671  
                                                                                                                                                 
Common stock issued for services     —         —         —         —         —         —         —         —         —         —         14,000       14       —         —         —         1,778,486               1,778,500  
Common stock issued for equity interest in Mobiquity Technologies, Inc.     —         —         —         —         —         —         —         —         —         —         100,000       100       —         —         —         9,979,900       —         9,980,000  
Common stock issued to Guardian LLC for termination of agreement     —         —         —         —         —         —         —         —         —         —         125,000       125       —         —         —         11,749,875       —         11,750,000  
Conversion of Series G to common stock     —         —         —         —         —         —         (2,000,000 )     (20 )     —         —         20,000       20       —         —         —         —         —         —    
Net loss     —         —         —         —         —         —         —         —         —         —         —         —         —         —         —         —         (24,839,740 )     (24,839,740 )
                                                                                                                                                 
Balance, September 30, 2018     45,000     $ —         700     $ —         —       $ —         —       $ —         —       $ —         1,580,381     $ 3,580     $ 1,040     $ (643,059 )   $ —       $ 67,869,039     $ (60,824,129 )   $ 6,405,431  

 

The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.

 

  5  

 

 

GBT TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

    Nine Months Ended September 30,
    2019   2018
         
         
Cash Flows From Operating Activities:                
   Net loss   $ (159,154,283 )   $ (46,442,467 )
   Adjustments to reconcile net loss to                
      net cash used in operating activities:                
         Depreciation of property and equipment     83,750       79,814  
         Amortization of intangible assets     358,266       1,029,526  
         Amortization of debt discount     6,745,837       849,802  
         Change in fair value of derivative liability     13,614,981       2,458,506  
         Financing cost     4,356,699       134,669  
         Shares issued for services     235,900       12,831,225  
         Shares issued for buyout of joint venture agreement     —         11,750,000  
         Shares issued for penalty     975,065       —    
         Warrants issued for services     766,804       7,570,668  
         Fair value of warrants issued in accordance with anit-dilution     120,476,603          
         Impairment of assets     —         7,132,286  
         Unrealized loss on market equity security     6,475,317       —    
         Realized loss on disposal of market equity security     90,683       —    
         Equity (income) loss in investment     (583,568 )     173,648  
         Gain on disposition of discontinued operations     (1,381,803 )     —    
         Convertible note issued for services     1,000,000       —    
         Changes in operating assets and liabilities:                
            Accounts receivable     (526,961 )     (814,297 )
            Inventory     —         (25,226 )
            Prepaid expenses     (265,250 )     (49,000 )
            Accounts payable and accrued expenses     1,460,086       830,045  
            Unearned revenue     (5,539 )     261,726  
            Due to Guardian, LLC     (702,483 )     (612,932 )
Net cash used in operating activities     (5,979,896 )     (2,842,007 )
                 
Cash Flows From Investing Activities:                
   Purchase of property and equipment     (13,321 )     (33,208 )
   Cash paid for acquisitions     —         (200,000 )
   Cash paid for investment in Spare     —         (265,000 )
   Cash paid for investment     (1,200,000 )     —    
   Cash of discontinued operations     (270,947 )     —    
   Cash from the sale of marketable equity security     336,000       —    
   Other     —         1,979  
Net cash used in investing activities     (1,148,268 )     (496,229 )
                 
Cash Flows From Financing Activities:                
   Issuance of convertible notes     3,000,000       1,703,000  
   Issuance of note payable     2,553,817       —    
   Repayment of convertible notes     —         (80,000 )
   Payment on note payable     (99,256 )     (567,381 )
   Issuance of common stock     —         1,500,000  
Net cash provided by financing activities     5,454,561       2,555,619  
                 
Net decrease in cash     (1,673,603 )     (782,617 )
                 
Cash, beginning of period     1,863,510       1,305,062  
                 
Cash, end of period   $ 189,907     $ 522,445  
                 
Cash paid for:                
   Interest   $ 744     $ 36,695  
   Income taxes   $ —       $ —    
                 
Supplemental non-cash investing and financing activities                
   Debt discount   $ 3,636,000     $ 1,743,600  
   Transfer of derivative liability to equity   $ 2,264,578     $ 113,287  
   Shares issued for equity interest in Mobiquity Technologies, Inc.   $ —       $ 9,980,000  

 

The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.

 

 

  6  

 

GBT TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018  

(UNAUDITED)

 

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 creating and patenting innovative mobile microchip (ICs) and software technologies based on the GopherInsight technology platform. 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 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 nine months ended September 30, 2019 are not necessarily indicative of the results expected for the year ending December 31, 2019.

 

Basis of Presentation

 

The accompanying 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.

 

 

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. and Gopher Protocol UK Limited (currently inactive); the Company’s 50% owned subsidiary, Gopher Protocol Costa Rica Sociedad De Responabilidad Limitada (currently inactive), Altcorp Trading LLC, a Costa Rica company. All significant intercompany transactions and balances have been eliminated.

 

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GBT TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018  

(UNAUDITED)

 

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 did not have an allowance for doubtful accounts at September 30, 2019 and December 31, 2018.

 

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 September 30, 2019 and December 31, 2018, 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.

 

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 September 30, 2019 and December 31, 2018, 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.

 

  8  

 

GBT TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018  

(UNAUDITED)

 

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 use 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 September 30, 2019 and December 31, 2018, the Company identified the following liabilities that are required to be presented on the balance sheet at fair value:

 

    Fair Value   Fair Value Measurements at
    As of   September 30, 2019
Description   September 30, 2019   Using Fair Value Hierarchy
        Level 1   Level 2   Level 3
Marketable equity security - Surge Holdings, Inc.   $ 1,050,000     $ —       $ 1,050,000     $ —    
                                 
Conversion feature on convertible notes   $ 20,905,848     $ —       $ 20,905,848     $ —    

 

  9  

 

GBT TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018  

(UNAUDITED)

 

    Fair Value   Fair Value Measurements at
    As of   December 31, 2018
Description   December 31, 2018   Using Fair Value Hierarchy
        Level 1   Level 2   Level 3
Marketable equity security - Mobiquity Technologies, Inc.   $ 18,200,000     $ —       $ 18,200,000     $ —    
                                 
Conversion feature on convertible notes   $ 3,833,506     $ —       $ 3,833,506     $ —    

 

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.

 

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.

 

  10  

 

GBT TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018  

(UNAUDITED)

 

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 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. As of September 30, 2019 and December 31, 2018, unearned revenue related to this pre-sales campaign was $52,309 and $57,848, respectively. In addition, during 2018, the Company received $200,000 in connection with an intellectual property license and royalty agreement.

 

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.

 

    September 30,   September 30,
    2019   2018
Series B preferred stock     30       30  
Series C preferred stock     8       8  
Series G preferred stock     —         20,000  
Series H preferred stock     1,100,000       —    
Warrants     25,774,167       419,167  
Convertible notes     7,887,955       43,166  
Total     34,762,160       482,371  

 

  11  

 

GBT TECHNOLOGIES INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS  

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018  

(UNAUDITED)

 

Management’s Evaluation of Subsequent Events

 

The Company evaluates events that have occurred after the balance sheet date of September 30, 2019, through the date which the consolidated financial statements are issued. Based upon the review, other than described in Note 14 – 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 October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfer of Assets Other than Inventory, which requires the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. ASU 2016-16 is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires lessees to recognize lease assets and lease liabilities on the balance sheet and requires expanded disclosures about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 and interim periods in fiscal years beginning after December 15, 2018, with early adoption permitted. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements as the Company did not have any leases covered by this new ASU.

 

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 14).

 

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 and nine months ended September 30, 2019 and 2018 as discontinued operations and are summarized below:

 

    Three Months Ended September 30,
    2019   2018
Revenue   $ 7,924,152     $ 11,719,155  
Cost of revenue     7,774,888       11,400,450  
Gross Profit     149,264       318,705  
Operating expenses     350,380       440,988  
Loss from operations     (201,116 )     (122,283