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.
The accompanying footnotes are an integral part of these unaudited condensed consolidated financial statements.
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.
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.
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
|
|
|
$
|
—
|
|
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.
|
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
|
|
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
|
)
|
Other
income (expenses)
|
|
|
—
|
|
|
|
—
|
|
|
|
$
|
(201,116
|
)
|
|
$
|
(122,283
|
)
|
GBT
TECHNOLOGIES INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
Revenue
|
|
|
23,901,278
|
|
|
$
|
27,836,706
|
|
Cost of revenue
|
|
|
23,336,163
|
|
|
|
27,179,686
|
|
Gross Profit
|
|
|
565,115
|
|
|
|
657,020
|
|
Operating expenses
|
|
|
1,046,390
|
|
|
|
757,226
|
|
Loss from operations
|
|
|
(481,275
|
)
|
|
|
(100,206
|
)
|
Other income (expenses)
|
|
|
(3
|
)
|
|
|
—
|
|
Net loss
|
|
|
(481,278
|
)
|
|
$
|
(100,206
|
)
|
The assets and liabilities of the discontinued
operations at September 30, 2019 and December 31, 2018 are summarized below:
|
|
September 30,
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
Current assets
|
|
$
|
—
|
|
|
$
|
100,050
|
|
Property and equipment
|
|
|
—
|
|
|
|
47,344
|
|
Intangible assets
|
|
|
—
|
|
|
|
3,149,740
|
|
Goodwill
|
|
|
—
|
|
|
|
925,877
|
|
Total assets
|
|
$
|
—
|
|
|
$
|
4,223,011
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
—
|
|
|
$
|
906,700
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
906,700
|
|
As a result of this transaction, the Company
recognized a gain on the disposition of discontinued operations of $1,381,803.
Note 4 - Property and Equipment, Net
Property and equipment consisted of the following as of September
30, 2019 and December 31, 2018:
|
|
September 30,
|
|
December 31,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
Furniture
|
|
$
|
33,739
|
|
|
$
|
33,739
|
|
Computers and equipment
|
|
|
23,316
|
|
|
|
23,316
|
|
POSA machines
|
|
|
283,745
|
|
|
|
270,424
|
|
|
|
|
340,800
|
|
|
|
327,479
|
|
Less accumulated depreciation
|
|
|
(203,919
|
)
|
|
|
(136,385
|
)
|
Property and equipment, net
|
|
$
|
136,881
|
|
|
$
|
191,094
|
|
Depreciation expense for the nine months ended September 30, 2019
and 2018 was $83,750 and $79,814 respectively.
GBT
TECHNOLOGIES INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)
Note 5 – Investment in Mobiquity Technologies,
Inc. and Surge Holdings, Inc.; Convertible Note Receivable
Mobiquity Technologies, Inc.
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.
GBT
TECHNOLOGIES INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)
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 September 30, 2019, the Company owned no shares of Mobiquity common stock.
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 14 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.
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 accounts for its investment in
GBT-CR using the equity method of accounting.
Information regarding GBT-CR as of and for
the nine months ended September 30, 2019 is below:
Current assets
|
|
$
|
867,189
|
|
Total assets
|
|
|
7,001,481
|
|
Current liabilities
|
|
|
500,813
|
|
Total liabilities
|
|
|
2,825,279
|
|
Total stockholders' equity
|
|
|
4,176,202
|
|
|
|
|
|
|
Revenue
|
|
$
|
3,580,599
|
|
Operating expenses
|
|
|
2,786,929
|
|
Other expenses
|
|
|
349,231
|
|
Net income
|
|
|
444,439
|
|
GBT
TECHNOLOGIES INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)
Note 7 – Convertible Notes Payable
Convertible notes payable at September 30, 2019 and December 31,
2018 consist of the following:
|
|
September 30,
|
|
December 31,
|
|
|
2019
|
|
2018
|
Convertible notes payable to Power Up
|
|
$
|
—
|
|
|
$
|
427,200
|
|
Convertible notes payable to Investor
|
|
|
5,410,000
|
|
|
|
3,004,000
|
|
Convertible note payable to GBT Technologies
|
|
|
10,000,000
|
|
|
|
—
|
|
Convertible note payable to Glen Eagle
|
|
|
1,000,000
|
|
|
|
—
|
|
Total convertible notes payable
|
|
|
16,410,000
|
|
|
|
3,431,200
|
|
Unamortized debt discount
|
|
|
—
|
|
|
|
(3,233,124
|
)
|
Convertible notes payable
|
|
|
16,410,000
|
|
|
|
198,076
|
|
Less current portion
|
|
|
(5,410,000
|
)
|
|
|
(198,076
|
)
|
Convertible notes, long-term portion
|
|
$
|
11,000,000
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Power Up Lending Group Ltd.
On October 2, 2017, 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 No. 1”) in the aggregate principal amount
of $80,000. The Power Note No. 1 has a maturity date of July 10, 2018 and the Company has agreed to pay interest on the unpaid
principal balance of the Power Note No. 1 at the rate of ten percent (10%) per annum from the date on which the Power Note No.
1 is issued 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 that it makes a payment to Power Up as set forth in the Power Note
No. 1.
The outstanding principal amount of the Power
Note No. 1 is convertible at any time and from time to time at the election of Power Up during
the period beginning on the date that is 180 days following the issue date into shares of the Company’s
common stock at a conversion price equal to 61% 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 No. 1 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 No. 1.
Due to the variable conversion price associated
with the Power Note No. 1, the Company has determined that the conversion feature is considered a derivative liability. The embedded
conversion feature was initially calculated to be $172,282, which is recorded as a derivative liability as of the date of issuance.
The derivative liability was first recorded as a debt discount up to the face amount of the Power Note No. 1, with the remainder
being charged to financing cost during the period. The debt discount is being amortized over the terms of the Power Note No. 1.
As of March 6, 2018, the Company had paid off
in full all principal, interest and penalties with respect to the Power Note No. 1, and there are no further obligations owed with
respect to such note.
On September 28, 2018, the Company
entered into a Securities Purchase Agreement with Power Up pursuant to which the Company issued to Power Up a Convertible
Promissory Note (the “Power Note No. 2”) in the aggregate principal amount of $243,600 for a purchase price of
$203,000. The Power Note No. 2 has a maturity date of December 24, 2019 and the Company has agreed to pay interest on the
unpaid principal balance of the Power Note No. 2 at the rate of six percent (6%) per annum from the date on which the Power
Note No. 2 is issued 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 No. 2, provided it makes a payment to Power Up as set
forth in the Power Note No. 2.
GBT
TECHNOLOGIES INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)
The outstanding principal amount of the Power
Note No. 2 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 No. 2 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 No. 2), the Power Note No. 2 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 No. 2.
Due to the variable conversion price associated
with the Power Note No. 2, the Company has determined that the conversion feature is considered a derivative liability. The embedded
conversion feature was initially calculated to be $337,669, which is recorded as a derivative liability as of the date of issuance.
The derivative liability was first recorded as a debt discount up to the face amount of the Power Note No. 2, with the remainder
being charged to financing cost during the period. The debt discount is being amortized over the terms of the Power Note No. 2.
At September 30, 2019 and December 31, 2018,
the principal amount outstanding under the Power Note No. 2 was $0 and $243,600. During the nine months ended September 30, 2019,
the entire principal balance of $243,600 and accrued interest of $6,090 was converted into 7,491 shares of common stock.
On November 6, 2018, the Company entered into
a Securities Purchase Agreement with Power Up pursuant to which the Company issued to Power Up a Convertible Promissory Note (the
“Power Note No. 3”) in the aggregate principal amount of $183,600 for a purchase price of $153,000. The Power Note
No. 3 has a maturity date of February 6, 2020 and the Company has agreed to pay interest on the unpaid principal balance of the
Power Note No. 3 at the rate of six percent (6%) per annum from the date on which the Power Note No. 3 is issued 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 No. 3, provided it makes a payment to Power Up as set forth in the Power Note No. 3.
The outstanding principal amount of the Power
Note No. 3 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 No. 3 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 No. 3), the Power Note No. 3 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 No.3.
Due to the variable conversion price associated
with the Power Note No. 3, the Company has determined that the conversion feature is considered a derivative liability. The embedded
conversion feature was initially calculated to be $171,942, which is recorded as a derivative liability as of the date of issuance.
The derivative liability was first recorded as a debt discount up to the face amount of the Power Note No. 3, with the remainder
being charged to financing cost during the period. The debt discount is being amortized over the terms of the Power Note No. 3.
At September 30, 2019 and December 31, 2018,
the principal amount outstanding under the Power Note No. 3 was $0 and $183,600. During the nine months ended September 30, 2019,
the entire principal balance of $183,600 and accrued interest of $4,590 was converted into 15,685 shares of common stock.
$8,340,000 Senior Secured Redeemable Convertible
Debenture
GBT
TECHNOLOGIES INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)
On December 3, 2018, the Company entered
into a Securities Purchase Agreement (the “SPA”) with an otherwise unaffiliated third-party institutional
investor (the “Investor”), pursuant to which the Company issued a Senior Secured Redeemable Convertible Debenture
(the “Debenture”) in the aggregate face value of $8,340,000. The Debenture has a maturity date two years from the
issuance date and the Company has agreed to pay compounded interest on the unpaid principal balance of the Debenture at the
rate equal to the Wall Street Journal Prime Rate plus 2% per annum (Wall Street Journal Prime Rate plus 12% per annum upon
the occurrence of a Triggering Event). Interest is payable on the date the applicable principal is converted or on maturity.
The interest must be paid in cash and, in certain circumstances, may be paid in shares of common stock. 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. Pursuant to the terms of the SPA, the investor agreed to tender to the Company
the sum of $7,500,000, of which the Company received the sum of $4,500,000 as of the closing, $1,000,000 on January 4, 2019,
$1,000,000 on February 5, 2019 and $1,000,000 on March 5, 2019. As of the closing, the face value of the Debenture was
$5,004,000.00; as of the first month’s anniversary of the closing, the face value of the Debenture increased to
$6,116,000; as of the second month’s anniversary of the closing, the face value of the Debenture increased to
$7,228,000; and as of the third month’s anniversary of the closing, the face value of the Debenture increased to
$8,340,000. As of the closing, the number of Warrant Shares was 135,000; as of the first month’s anniversary of the
closing, the number of Warrant Shares increased to 165,000; as of the second month’s anniversary of the closing, the
number of Warrant Shares increased to 195,000; as of the third month’s anniversary of the closing, the number of
Warrant Shares increased to 225,000.
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 $0.05 (The conversion price is lowered by 10% upon the occurrence of each Triggering Event). The Market Price is the average
of the 5 lowest individual daily volume weighted average prices during the period the Debenture is outstanding.
In connection with the Debenture, the Company
issued 225,000 warrants to purchase shares of the Company’s common stock with an exercise prices ranging from $50.00 to $100.00.
The Company first determined the value of the convertible note and the fair value of the detachable warrants issued in connection
with this transaction. The estimated value of the warrants of $7,832,697 and was determined using the Black-Scholes option pricing
model with the following assumptions:
|
·
|
Expected life of 3.0 years
|
|
·
|
Risk free interest rate of 2.47% to 2.84%
|
The face amount of the convertible note of
$8,340,000 was proportionately allocated to the convertible note and the warrant in the amount of $4,310,085 and $4,029,915, respectively.
The amount allocated to the warrants of $4,029,915 was recorded as a discount to the convertible note and as additional paid in
capital. The value of the convertible note was then allocated between the convertible note and the beneficial conversion feature.
Due to the variable conversion price associated with the Debenture, the Company has determined that the conversion feature is considered
derivative liabilities. The embedded conversion feature was initially calculated to be $11,212,573, which is recorded as a derivative
liability as of the dates of issuance. The derivative liability was first recorded as a debt discount up to value allocated to
the convertible note, with the remainder being charged to financing cost during the period. The combined total discount is $8,340,000
and will be amortized over the year life of the convertible note.
In December 2018, the investor converted $2,000,000
in principal and $6,616 in accrued interest into 94,993 shares of common stock. In January 2019, the investor converted $350,000
in principal and $1,158 in accrued interest into 16,624 shares of common stock. In March 2019, the investor converted $580,000
in principal and $51,096 in accrued interest into 34,963 shares of common stock.
At September 30, 2019 and December 31, 2018,
the principal amount outstanding under the Debenture was $5,410,000 and $3,004,000, respectively.
On May 28, 2019, the Investor delivered to
the Company a “Notice of Default and Notice of Sale of Collateral” (the “Notice”). In the Notice, the Investor
declared that the Company was in default of the terms of the SPA. Specifically, the Investor claimed multiple “Trigger Events”
had occurred under the Debenture which constituted an Event of Default. On May 30, 2019, in a letter to the Investor the Company
disputed each of the purported “Trigger Events” and demanded the Investor retract the Notice. It is the Company’s
position that the Notice is a further attempt by the Investor to mask its issues surrounding its recent conversion notice and resulting
affiliate status as previously reported by the Company. The Investor responded that the Notice will not be withdrawn. In the Notice,
the Investor declared all obligations under the SPA immediately due and payable. (See Note 12 for further discussions of this matter)
GBT
TECHNOLOGIES INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)
$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 Glen Eagles Acquisition LP
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 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%.
Discounts on convertible notes
The Company recognized interest expense of
$6,569,124 and $849,802 during the nine months ended September 30, 2019 and 2018, respectively, related to the amortization of
the debt discount on convertible notes. The unamortized debt discount at September 30, 2019 was $0.
A roll-forward of the convertible note from December 31, 2018 to
September 30, 2019 is below:
Convertible notes, December 31, 2018
|
|
$
|
198,076
|
|
Issued for cash
|
|
|
3,000,000
|
|
Issued for acquisition
|
|
|
10,000,000
|
|
Issued for services
|
|
|
1,000,000
|
|
Original issue discount
|
|
|
336,000
|
|
Conversion to common stock
|
|
|
(1,357,200
|
)
|
Debt discount related to new convertible notes
|
|
|
(3,336,000
|
)
|
Amortization of debt discounts
|
|
|
6,569,124
|
|
Convertible notes, September 30, 2019
|
|
$
|
16,410,000
|
|
|
|
|
|
|
Note 8- Notes Payable
Notes payable at September 30, 2019 and December 31, 2018 consist
of the following:
|
|
September 30,
|
|
December 31,
|
|
|
2019
|
|
2018
|
RWJ acquisition note
|
|
$
|
2,600,000
|
|
|
$
|
2,600,000
|
|
ECS acquisition note
|
|
|
—
|
|
|
|
100,000
|
|
Promissory note to investor
|
|
|
2,325,000
|
|
|
|
—
|
|
Promissory notes to investor
|
|
|
528,817
|
|
|
|
—
|
|
Total notes payable
|
|
|
5,453,817
|
|
|
|
2,700,000
|
|
Unamortized debt discount
|
|
|
(123,287
|
)
|
|
|
(744
|
)
|
Notes payable
|
|
$
|
5,330,530
|
|
|
$
|
2,699,256
|
|
|
|
|
|
|
|
|
|
|
GBT
TECHNOLOGIES INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)
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, is due on December 31, 2019 and
is secured by the assets purchased in the acquisition. (See Note 12)
ECS Acquisition Note
In connection with the acquisition of ECS,
the Company issued a note payable. The note is to be repaid in monthly installment payments of $100,000 with the final payment
due on January 15, 2019. The Company imputed interest of 9% on this note payable. The balance of this note payable was paid in
full in January 2019.
Promissory Notes
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. 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.
The Company issued promissory notes for $528,817
to a third party for funds received as working capital during the nine months ended September 30, 2019. The notes accrues interest
at 10% per annum, are due on February 9, 2020 and are unsecured. (See Note 14 for stock pledge securing this note).
Discounts on Promissory Note
The Company recognized interest expense of
$176,712 and $0 during the nine months ended September 30, 2019 and 2018, respectively, related to the amortization of the debt
discount on promissory notes. The unamortized debt discount at September 30, 2019 was $123,287.
A roll-forward of the promissory notes from December 31, 2018 to
September 30, 2019 is below:
Notes payable, December 31, 2018
|
|
$
|
2,699,256
|
|
Issued for cash
|
|
|
2,553,818
|
|
Original issue discount
|
|
|
300,000
|
|
Repayment of note payable
|
|
|
(99,256
|
)
|
Debt discount related to new promissory notes
|
|
|
(300,000
|
)
|
Amortization of debt discounts
|
|
|
176,712
|
|
Notes payable, September 30, 2019
|
|
$
|
5,330,530
|
|
|
|
|
|
|
GBT
TECHNOLOGIES INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)
Note 9 - Derivative Liability
Certain of the convertible notes payable discussed
in Note 7 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-Merton
option pricing model with the following assumptions to measure the fair value of derivative liability at September 30, 2019 and
December 31, 2018:
|
September 30,
|
|
December 31,
|
|
2019
|
|
2018
|
|
|
|
|
Stock price
|
$
|
3.08
|
|
|
$
|
32.00
|
|
Risk free rate
|
|
1.75
|
%
|
|
|
2.63
|
%
|
Volatility
|
|
650
|
%
|
|
|
150
|
%
|
Conversion/ Exercise price
|
$
|
0.80
|
*
|
|
$
|
21.00 to 25.00
|
|
Dividend rate
|
|
0
|
%
|
|
|
0
|
%
|
|
|
|
|
|
|
|
|
* the conversion price used to calculate the
derivative liability at September 30, 2019 is the same conversion price used at June 30, 2019 since the calculated conversion price,
as specified in the convertible note agreement, would result in a negative conversion price at September 30, 2019.
The following table represents the Company’s
derivative liability activity for the nine months ended September 30, 2019:
Derivative liability balance, December 31, 2018
|
|
$
|
3,833,506
|
|
Issuance of derivative liability during the period
|
|
|
5,721,939
|
|
Fair value of beneficial conversion feature of debt converted
|
|
|
(2,264,578
|
)
|
Change in derivative liability during the period
|
|
|
13,614,981
|
|
Derivative liability balance, September 30, 2019
|
|
$
|
20,905,848
|
|
Note 10- Stockholders’ Equity
Common Stock
On September 24, 2019, the “Company amended
its articles of incorporation to increase its authorized shares of common stock to 100,000,000,000 (the “Increase Amendment”).
The Increase Amendment was approved by the board of directors as well as the shareholders holding in excess of a majority of the
issued and outstanding shares of common stock.
During the nine months ended September 30,
2019, the Company had the following transactions in its common stock:
|
·
|
issued an aggregate of 9,500 shares to employees and board members as part of their compensation
agreements with the Company. The value of the common stock of $235,900 was determined based on the closing stock price of the Company’s
common stock on the grant date;
|
|
·
|
issued 74,762 shares to an investor for the conversion of $1,357,200 in convertible notes and $62,934
in accrued interest;
|
|
·
|
issued 59,820 shares to an investor for disputed penalties on a convertible debenture. The value
of the common stock of $975,065 was determined based on the closing stock price of the Company’s common stock on the grant
date;
|
|
·
|
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; and
|
GBT
TECHNOLOGIES INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)
|
·
|
canceled 200,000 shares that were returned in connection with the
Company’s sale of its investment with Mobiquity. (See Note 5). The shares were valued based on the Company’s stock
price on the date of the agreement.
|
During the nine months ended September 30,
2018, the Company had the following transactions in its common stock:
|
·
|
issued 660,000 shares in connection with the conversion of 66,000 shares of Series D Preferred
Stock;
|
|
·
|
issued 20,000 shares in connection with the conversion of 2,000,000 shares of Series G Preferred
Stock;
|
|
·
|
issued 2,500 shares to a consultant for professional services rendered valued at $123,725. The
value of the common stock was determined based on the closing stock price of the Company’s common stock on the dates that
the shares earned based on the agreement;
|
|
·
|
issued an aggregate of 18,000 shares to employees and board members as part of their agreements
with the Company. The value of the common stock of $4,404,500 was determined based on the closing stock price of the Company’s
common stock on the date of the respective agreements;
|
|
·
|
issued 30,000 to a consultant for services related to assisting the Company with the acquisition
of the RWJ assets. The 30,000 shares were earned when the operations of the RWJ assets produced revenue in excess of $10,000,000.
The value of the common stock of $4,590,000 was determined based on the closing stock price of the Company’s common stock
on the date of the shares were earned.
|
|
·
|
issued aggregate of 12,500 shares to a consultant for services rendered valued at $2,715,000. The
services, which include business development, analysis, and interaction with professionals, were principally related to assisting
the Company with the acquisition of the ECS and Electronic Check assets (see Note 3). The value of the common stock was determined
based on the closing stock price of the Company’s common stock on the closing date of acquisition of ECS and Electronic Check;
|
|
·
|
issued 5,000 shares for the acquisition of the ECS assets valued at $1,010,000. The value of the
common stock was determined based on the closing stock price of the Company’s common stock on the acquisition date;
|
|
·
|
issued ,2500 shares for the acquisition of the Electronic Check valued at $695,000. The value of
the common stock was determined based on the closing stock price of the Company’s common stock on the acquisition date;
|
|
·
|
issued aggregate of 100,000 shares in connection with its equity interest in Mobiquity valued at
$9,980,000 (See Note 6). The value of the common stock was determined based on the closing stock price of the Company’s common
stock on the closing date of the Mobiquity transaction;
|
|
·
|
issued aggregate of 10,000 shares to a consultant for services rendered valued at $998,000. The
services, which include business development, analysis, and interaction with professionals, were principally related to assisting
the Company with the acquisition of its equity interest in Mobiquity. The value of the common stock was determined based on the
closing stock price of the Company’s common stock on the closing date of Mobiquity transaction;
|
|
·
|
issued aggregate of 125,000 shares to Guardian LLC in connection the termination of its 50% interest
in the profits of certain of the Company’s products (See Note 11). The shares were valued at $11,750,000 which was determined
based on the closing stock price of the Company’s common stock at the date of the agreement; and
|
|
·
|
issued 12,727 shares of common stock to an investor for cash proceeds of $1,500,000.
|
GBT
TECHNOLOGIES INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)
The Company created with its transfer agent a 66,616,129,323 reserve
of the Company’s common shares for potential future issuance to meet the Company obligations (which include issuance per
Warrants, as well as other potential commitments) toward thirds parties, if any.
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 September 30, 2019 and December 31, 2018,
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 September 30, 2019 and December 31, 2018, 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 September 30, 2019 and December 31, 2018,
there were 700 Series C Preferred Shares outstanding.
Series D Preferred Shares
Per the terms of the Exclusive License
Agreement and in consideration of the licensing agreement signed between the Company and Hermes Roll LLC, the Company issued
100,000 shares of Series D Preferred Stock of the Company (the “Preferred Shares”). The preferred stock has a
value of $ 1,000 based upon the cost of the license; due to the holder of license is the related party of the Company. The
Preferred Shares have no liquidation rights. The Holder of the Preferred Shares will be entitled to vote on all matters
submitted to shareholders of the Company on an as-converted basis. The Preferred Shares have a conversion price of $0.01 (the
“Conversion Price”) and a stated value of $10.00 per share (the “Stated Value”). Each Preferred Share
is convertible, at the option of the Holder, into such number of shares of common stock of the Company as determined by
dividing the Stated Value by the Conversion Price.
GBT
TECHNOLOGIES INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)
On January 23, 2018, Reko Holdings, LLC converted
66,000 shares of its Series D Preferred Stock into 660,000 restricted common shares.
As of September 30, 2019 and December 31, 2018,
there are 0 and 0 shares of Series D Preferred Shares outstanding, respectively.
Series G Preferred Shares
On December 29, 2017, Guardian LLC converted
all of the principal and interest of the Note, into 2,000,000 shares of Series G Preferred Stock. The Series G Preferred Stock
is entitled to vote on an as-converted basis, automatically converts to common stock upon any liquidation, dissolution or winding
up and the Company may not declare a dividend until the Series G Preferred Stock has received a dividend. Each share of Series
G Preferred Stock is convertible into one shares of common stock of the Company and contain standard anti-dilution rights.
On August 30, 2018, Guardian LLC converted
the 2,000,000 shares of Series G Preferred Stock into 20,000 shares of common stock.
As of September 30, 2019 and December 31, 2018,
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 September 30, 2019, there are 20,000
shares of Series H Preferred Shares outstanding.
GBT
TECHNOLOGIES INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)
Warrants
The following is a summary of warrant
activity from December 31, 2018 to September 30, 2019:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
Warrants
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
|
Outstanding
|
|
Price
|
|
Life
|
|
Value
|
|
Outstanding, December 31, 2018
|
|
|
|
419,167
|
|
|
$
|
61.00
|
|
|
|
3.48
|
|
|
$
|
—
|
|
|
Granted
|
|
|
|
25,355,000
|
|
|
|
0.97
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2019
|
|
|
|
25,774,167
|
|
|
$
|
1.31
|
|
|
|
3.24
|
|
|
$
|
60,640,000
|
|
|
Exercisable, September 30, 2019
|
|
|
|
25,770,167
|
|
|
$
|
1.31
|
|
|
|
3.24
|
|
|
$
|
60,640,000
|
|
The exercise price for warrant outstanding
and exercisable at September 30, 2019:
Outstanding
|
|
Exercisable
|
|
|
|
|
|
|
|
Number of
|
|
Exercise
|
|
Number of
|
|
Exercise
|
Warrants
|
|
Price
|
|
Warrants
|
|
Price
|
22,000,000
|
$
|
0.50
|
|
22,000,000
|
$
|
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
|
5,000
|
|
280.00
|
|
1,000
|
|
280.00
|
25,774,167
|
|
|
|
25,770,167
|
|
|
The fair value of the warrants listed above
was determined using the Black-Scholes option pricing model with the following assumptions:
|
|
September 30,
|
|
December 31,
|
|
|
2019
|
|
2018
|
Risk-free interest rate
|
|
1.55% to 2.49%
|
|
2.65%
|
Expected life of the options
|
|
3.1 to 5 years
|
|
5 years
|
Expected volatility
|
|
185% - 200%
|
|
210%
|
Expected dividend yield
|
|
0%
|
|
0%
|
As a result of the above mentioned reverse
stock split, the Company issued 25,245,000 warrants to purchase shares of the Company’s common stock with exercise prices
ranging from $0.50 to $2.70 per share as a result of an anti-dilutive clause in certain of the Company’s outstanding warrants.
The fair value of these warrants was $120,476,603 which is shown as a charge to earnings on the accompanying financial statements.
Note 11 - 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 nine months ended September 30, 2019 and 2018, $135,000 and $135,000, respectively
of the Company’s revenue is from IT services delivered to Guardian Patch LLC (“Guardian LLC”), which was previously
a related party to the Company. The revenue generated from Guardian LLC was paid to the Company via a reduction in the amount that
the Company owes Guardian LLC that is classified as Due to Guardian LLC in the accompanying consolidated balance sheet.
GBT
TECHNOLOGIES INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)
For the nine months ended September 30, 2019 and 2018, the Company
paid a law firm owned by the Company’s chairman $90,000 and $0, 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 25, 2018, the Company entered
into a Joint Venture Interest Purchase Agreement with Guardian, LLC pursuant to which the Company purchased Guardian LLC’s
50% interest in a joint venture (the “JV Interest”) previously entered between the parties in March 2016 covering the
Guardian Patch, Puzpix and Epsilon. In consideration for the JV Interest, the Company issued Guardian 125,000 shares of common
stock. During the year ended December 31, 2018, the Company took a charge to earnings of $11,750,000 related to the purchase of
Guardian LLC’s 50% JV Interest.
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. Mr. Bauer holds a Bachelor of Science degree from University of Maryland
College Park. Mr. Bauer is veteran of the United States Navy and was honorably discharged in 1983. He held the title of United
States Navy Surface Warfare Qualified. In May 2018, Mr. Bauer’s resigned as Chief Executive Officer and director of the Company
and entered into a consulting agreement with the Company. The Company is in litigation in connection with RWJ transaction –
See Note 12 - 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.
Regulatory
The Company has commenced development,
and the Company has completed the Statement of Work (SOW) for the Federal Communications Commission (“FCC”)
survey to deploy the Company’s Guardian Global Tracking Device within the continental US. The Company has also
completed their transmitters/transceivers modules feasibility research. Although the Company can use open channels, and
therefore is not required to comply with various FCC regulations relevant to the system, the
Company has chosen to comply, and is complying with FCC regulations. The FCC regulates the limits of potentially harmful
interference to licensed transmitters due to low power unlicensed transmitters. The Guardian Patch/Sphere
system consists of advanced security protocols in order to maintain the global, private, fully-secured network. In
addition, the Guardian Patch device needs to perform communication tasks across the globe providing breakthrough tracking
features. The Company successfully completed thorough research that involved security, performance and FCC
regulations compliance. The Company completed the design and construction of the Guardian Patch/Sphere circuit prototype
device. The Company has completed the construction of 10 prototype units, and performed intensive testing program to be
tested as a complete system in designated areas by the Company.
GBT
TECHNOLOGIES INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)
Note 12 - 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 June 10, 2016, the Company entered into
a consulting agreement with Waterford Group LLC (“Waterford”) pursuant to which the Company engaged Waterford to provide
sales and marketing consulting and advisory services to the Company in consideration of 1,000 shares of restricted common stock
of the Company (the “Shares”) and a common stock purchase warrant (the “Warrant”) to acquire 7,500 shares
of restricted common stock of the Company at an exercise price of $225.00 per share for a period of five (5) years. 500 of the
Shares were issued to Waterford upon the execution of the Agreement. The Warrant vested on a quarterly basis in eight (8) equal
quarterly installments each in the amount of 938 shares each quarter during the term of the Agreement. The first quarterly installment
vested upon the execution of the Agreement and each subsequent quarterly installment was to vest each quarter thereafter. The Company
believes that Waterford is in default of its agreement, as it failed to perform or provide any services under the agreement. As
such, the Company put Waterford on notice in writing that the Company did not issue shares or warrants during the third or fourth
fiscal quarters of 2016 due to the default.
On or around January 23, 2017, the Company
filed a complaint against Waterford and the Company’s Transfer Agent, in Superior Court of the State of California, County
of Riverside. On February 1, 2017, the Company obtained a temporary restraining order that prohibits Waterford from (x) lifting
the restricted legend from the 500 shares that it received in connection with signing the Agreement; (y) selling the 500 shares
to another party; and, (z) from exercising the warrant on 938 shares that was issued and vested upon the execution of the Agreement.
As ordered by the court, on February 9, 2017, the Company deposited a Corporate Surety Bond in the amount of $42,875 to secure
the temporary restraining order. The Company agreed with Waterford to go to binding arbitration, which is currently being scheduled.
On or around February 27, 2017, the Company
was issued a stay of the temporary restraining order barring its transfer agent from providing shares in connection with the exercise
of the first Waterford warrant on 938 shares that was provided to Waterford in connection with the execution of the engagement
letter that was executed by the parties on or around June 10, 2016. On October 12, 2018, the Waterford legal matter was settled
in favor of the Company that resulted in the cancelation of Waterford’s 938 warrants and the cancelation of 500 shares of
the Company’s common stock owned by Waterford.
On or around January 30, 2019, RWJ Advanced
Marketing, LLC, Greg Bauer, and Warren Jackson sued the Company 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”). In the Notice, the Investor declared that the
Company was in default of the terms of the SPA. On May 30, 2019, in a letter to the Investor the Company disputed each of the
purported “Trigger Events” and demanded the Investor retract the Notice. It is the Company’s position that
the Notice is a further attempt by the Investor to mask its issues surrounding its recent conversion notice and resulting
affiliate status and the investors ownership position in the Company as set forth above. The Investor responded that the
Notice will not be withdrawn. In the Notice, the Investor declared all obligations under the SPA immediately due and
payable. In the Notice, the Investor purported to establish 10:00 a.m. Eastern Time on Monday, June 24, 2019, as the date on
which it intended to sell and dispose of the collateral securing the Debentures and said the sale would take place in St.
Thomas, The Virgin Islands. On June 20, 2019, the United States District Court District of Nevada (the “Court”)
granted an Order Granting Ex Parte Application for Temporary Restraining Order (Case Number: 2:19-cv-01039) in favor of the
Company temporarily restraining the Investor from selling, foreclosing upon, encumbering, dissipating, or otherwise
transferring any of the collateral referenced in the Notice and from conducting the sale currently referenced in the
Notice.
GBT
TECHNOLOGIES INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)
The Company obtained injunction restraining
the Investor from proceeding with the Sale of Collateral, (District Court District of Nevada - Case Number: 2:19-cv-01039) and
filed its arbitration demand on Friday, June 7, 2019. On July 2, 2019, Honorable Philip Pro (Ret.) was appointed as Arbitrator
in Gopher Protocol, Inc. vs. Discover Growth Fund, LLC (JAMS Ref# 1260005395).
The United States District Court for the District
of Nevada (Gopher Protocol, Inc, a Nevada corporation, Plaintiff, vs. Discover Growth Fund, LLC, a US Virgin Islands limited
liability company, Defendant; Case Number: 2:19-cv-01039) granted the motion of GBT Technologies Inc. (the “Company”)
for a Preliminary Injunction against Discover Growth Fund, LLC (“DGF”), continuing in effect the Court’s previously
granted Temporary Restraining Order that enjoined DGF from selling, foreclosing upon, encumbering, dissipating, or otherwise transferring
any of the Company’s assets (the “Preliminary Injunction”).
Since the issuance of the Preliminary Injunction,
the Company believes that DGF (in a series of its own actions that included Notices to increase reserves and a Notice of Conversion)
has again violated the Preliminary Injunction. The most recent example is DGF’s October 24, 2019 delivery to the Company
of a purported “Notice of Default and Notice of Sale of Collateral” (the “Most Recent Notice”). In the
Most Recent Notice, DGF again declared that the Company was in default of the terms of the December 3, 2018 Securities Purchase
Agreement (“SPA”) between the Company and DGF. In the Most Recent Notice, DGF purported to declare all of the Company’s
obligations under the SPA immediately due and payable. In the Most Recent Notice, DGF purported to establish 10:00 a.m. Eastern
Time on Monday, December 2, 2019, as the date on which DGF intended to sell and dispose of the collateral securing the Senior Secured
Redeemable Convertible Debenture that were the subject of the SPA and that the sale would take place in St. Thomas, The Virgin
Islands.
The Company disputes the fundamental basis
for any such sale as set forth in the Most Recent Notice, including the purported basis for DGF’s claims that the Company
is in default under the SPA. Among other issues, the Company continues to maintain that the SPA is void and that DGF’s
actions thereunder are legally unsupportable. The Company will seek to have the purported sale terminated and to have DGF held
in contempt by the United States District Court for the District of Nevada. The Company will also seek to recover all of
its associated fees and costs relative to its pursuit of this matter.
Spare CS, Inc.
On January 14, 2018, the Company entered into
an Initial Term Agreement (the “ITA”) with Spare CS Inc. (“Spare”), a Delaware corporation, pursuant to
which the Company agreed to acquire 50% of the equity of Spare. Spare is a mobile banking app that allows customers to access cash
with no ATM, no debit or credit card, and no purchase required from participating merchants. During the years ended December 31,
2018, the Company terminated the ITA with Spare and wrote off the $265,000 that has been advanced to Spare. The $265,000 is included
as part of the impairment of assets in the accompanying consolidated statement of operations for the year ended December 31, 2018.
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.
GBT
TECHNOLOGIES INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2019 AND 2018
(UNAUDITED)
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 September 30, 2019 and December 31, 2018 in the accompanying consolidated balance sheet.
Note 13 – 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 September 30, 2019.
Note 14 - Subsequent Events
Management has evaluated events that occurred
subsequent to the end of the reporting period shown herein:
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 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.
Subsequent to September 30, 2019, the Company
issued $105,000 in promissory notes to an investor.
On October 15, 2019 holders of cashless warrants
exercised 1,440,000 warrants for 1,193,840 common shares of the Company.
On November 1, 2019 holder of cashless warrants
exercised 1,800,000 warrants for 1,291,592 common shares of the Company.
On November 14,2019, the Company pledged its 3,333,333 shares in
SURG to a third party to secure working capital of up to $500,000 which has been provided.