Gopher Protocol Inc. (Form: 10-Q, Received: 05/15/2019 13:55:25)

United States

Securities and Exchange Commission

Washington, D.C. 20549

Form 10-Q

(Mark One)
☒	QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended March 31, 2019

☐	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commissions file number: 000-54530

GOPHER PROTOCOL INC.

(Exact name of registrant as specified in its charter)

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

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

Issuer’s telephone number: 424-238-4589

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

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

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

Large accelerated filer ☐

Accelerated filer ☐

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

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

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

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

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

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

Common Stock, $0.00001 par value	209,830,700 Common Shares
(Class)	(Outstanding at May 14, 2019)

GOPHER PROTOCOL, INC.

TABLE OF CONTENTS

PART I.	Financial Information

Item 1.	Condensed Consolidated Financial Statements (Unaudited)

	Condensed Consolidated Balance Sheets as of March 31, 2019 (unaudited) and December 31, 2018	3

	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2018 (unaudited)	4

	Condensed Consolidated Statements of Stockholders’ Deficit for the Three Months Ended March 31, 2019 and 2018 (unaudited)	5

	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 (unaudited)	6

	Notes to Condensed Consolidated Financial Statements (unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	37

Item 4.	Controls and Procedures	38

PART II.	Other Information	38

Signatures		50

Item 1: Condensed consolidated financial statements

GOPHER PROTOCOL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


ASSETS		March 31,			December 31,
		2019			2018
		(unaudited)
Current Assets:
Cash	$	1,168,724		$	1,863,510
Accounts receivable		614,966			152,118
Prepaid expenses and other current assets		93,750			16,000
Marketable equity security		5,400,000			4,200,000
Total current assets		7,277,440			6,231,628

Property and equipment, net		215,136			238,438
Intangible assets, net		3,031,630			3,149,740
Marketable equity security		18,000,000			14,000,000
Acquisition deposit		1,200,000			—
Goodwill		925,877			925,877

Total assets	$	30,650,083		$	24,545,683

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Accounts payable and accrued expenses (including related parties of $579,675 and $460,853)	$	2,281,151		$	2,338,125
Unearned revenue		255,524			257,848
Due to Guardian LLC (related party)		31,939			702,483
Convertible notes payable, net of discount of $5,064,946 and $3,233,124		772,254			198,076
Note payable, net of discount of $273,699 and $744		4,651,301			2,699,256
Derivative liability		10,782,553			3,833,506
Total current liabilities		18,774,722			10,029,294

Contingencies		—			—

Stockholders' Equity:
Series B Preferred stock, $0.00001 par value; 20,000,000 shares authorized;
45,000 and 45,000 shares issued and outstanding at March 31, 2019 and December 31, 2018		—			—
Series C Preferred stock, $0.00001 par value; 10,000 shares authorized;
700 and 700 shares issued and outstanding at March 31, 2019 and December 31, 2018		—			—
Series D Preferred stock, $0.00001 par value; 100,000 shares authorized;
0 and 0 shares issued and outstanding at March 31, 2019 and December 31, 2018		—			—
Series G Preferred stock, $0.00001 par value; 2,000,000 shares authorized;
0 and 0 shares issued and outstanding at March 31, 2019 and December 31, 2018		—			—
Common stock, $0.00001 par value; 500,000,000 shares authorized;
207,709,616 and 182,224,264 shares issued and outstanding at March 31, 2019 and December 31, 2018		4,077			3,822
Treasury stock, at cost; 1,040 shares at March 31, 2019 and December 31, 2018		(643,059	)		(643,059	)
Stock loan receivable		(7,610,147	)		—
Additional paid in capital		94,381,682			81,306,958
Accumulated deficit		(74,257,192	)		(66,151,332	)
Total stockholders' equity		11,875,361			14,516,389
Total liabilities and stockholders' equity	$	30,650,083		$	24,545,683

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

GOPHER PROTOCOL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

	Three Months Ended March 31,
	2019			2018

Sales:
Sales	$	13,348,313		$	7,859,606
Related party sales		45,000			45,000
Total sales		13,393,313			7,904,606

Cost of goods sold		12,973,285			7,704,176

Gross profit		420,028			200,430

Operating expenses:
General and administrative expenses		3,632,181			4,390,107
Marketing expenses		529,390			130,177
Acquisition costs		150,000			9,588,872
Total operating expenses		4,311,571			14,109,156

Loss from operations		(3,891,543	)		(13,908,726	)

Other income (expense):
Amortization of debt discount		(1,530,479	)		(114,130	)
Change in fair value of derivative liability		(3,245,410	)		(18,123	)
Interest expense and financing costs		(4,732,178	)		(67,043	)
Unrealized gain on marketable equity security		5,200,000			—
Interest income		93,750			—
Total other income (expense)		(4,214,317	)		(199,296	)

Loss before income taxes		(8,105,860	)		(14,108,022	)

Income tax expense		—			—

Net loss	$	(8,105,860	)	$	(14,108,022	)


Weighted average common shares outstanding:
Basic and diluted		203,063,732			87,457,999

Net loss per share:
Basic and diluted	$	(0.04	)	$	(0.16	)

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

GOPHER PROTOCOL, INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT

	Series B Convertible Preferred Stock				Series C Convertible Preferred Stock				Series D Convertible Preferred Stock						Series G Convertible Preferred Stock				Common Stock				Treasusy Stock					Stock Loan			Additional Paid-in			Accumulated			Total Stockholders’ Equity/
	Shares		Amount		Shares		Amount		Shares			Amount			Shares		Amount		Shares		Amount		Shares		Amount			Receivable			Capital			Deficit			(Deficit)


Balance, December 31, 2017		45,000	$	—		700	$	—		66,000		$	1			2,000,000	$	20		58,215,406	$	2,582	$	1,040	$	(643,059	)	$	—		$	19,243,959		$	(14,381,662	)	$	4,221,841

Conversion of Series D to common stock		—		—		—		—		(66,000	)		(1	)		—		—		66,000,000		660		—		—			—			(659	)		—			—
Common stock issued for services		—		—		—		—		—			—			—		—		750,000		7		—		—			—			1,133,718						1,133,725
Common stock issued for acquisition		—		—		—		—		—			—			—		—		500,000		5		—		—			—			1,009,995			—			1,010,000
Common stock issued for acquisition services		—		—		—		—		—			—			—		—		4,000,000		40		—		—			—			6,609,960			—			6,610,000
Common stock issued for cash		—		—		—		—		—			—			—		—		666,666		7		—		—			—			499,993			—			500,000
Warrants issued for acquisition		—		—		—		—		—			—			—		—		—		—		—		—			—			992,958			—			992,958
Warrants issued for services		—		—		—		—		—			—			—		—		—		—		—		—			—			1,985,915			—			1,985,915
Warrants issued for acqusition services		—		—		—		—		—			—			—		—		—		—		—		—			—			2,978,873			—			2,978,873
Fair value of beneficial conversion feature of debt repaid		—		—		—		—		—			—			—		—		—		—		—		—			—			113,287			—			113,287
Relative fair value of warrants issued with convertible debt		—		—		—		—		—			—			—		—		—		—		—		—			—			393,407			—			393,407
Fair value of beneficial conversion feature associated with convertible debt		—		—		—		—		—			—			—		—		—		—		—		—			—			356,593			—			356,593
Net loss		—		—		—		—		—			—			—		—		—		—		—		—			—			—			(14,108,022	)		(14,108,022	)

Balance, March 31, 2018		45,000	$	—		700	$	—		—		$	—			2,000,000	$	20		130,132,072	$	3,301	$	1,040	$	(643,059	)	$	—		$	35,317,999		$	(28,489,684	)	$	6,188,577




Balance, December 31, 2018		45,000	$	—		700	$	—		—			—			—	$	—		182,224,264	$	3,822	$	1,040	$	(643,059	)	$	—		$	81,306,958		$	(66,151,332	)	$	14,516,389

Common stock issued for services		—		—		—		—		—			—			—		—		300,000		3		—		—			—			134,697						134,700
Common stock issued for conversion of convertible debt and accrued interest		—		—		—		—		—			—			—		—		5,158,650		52		—		—			—			982,202			—			982,254
Common stock issued for stock loan		—		—		—		—		—			—			—		—		20,026,702		200		—		—			(7,610,147	)		7,609,947			—			—
Stock options issued for services		—		—		—		—		—			—			—		—		—		—		—		—			—			694,816			—			694,816
Fair value of beneficial conversion feature of converted/debt repaid		—		—		—		—		—			—			—		—		—		—		—		—			—			2,018,302			—			2,018,302
Relative fair value of warrants issued with convertible debt		—		—		—		—		—			—			—		—		—		—		—		—			—			1,634,760			—			1,634,760
Net loss		—		—		—		—		—			—			—		—		—		—		—		—			—			—			(8,105,860	)		(8,105,860	)

Balance,March 31, 2019		45,000	$	—		700	$	—		—		$	—			—	$	—		207,709,616	$	4,077	$	1,040	$	(643,059	)	$	(7,610,147	)	$	94,381,682		$	(74,257,192	)	$	11,875,361

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

GOPHER PROTOCOL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)

	Three Months Ended March 31,
	2019			2018

Cash Flows From Operating Activities:
Net loss	$	(8,105,860	)	$	(14,108,022	)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation of property and equipment		27,399			23,993
Amortization of intangible assets		118,110			261,905
Amortization of debt discount		1,530,479			114,130
Change in fair value of derivative liability		3,245,410			18,123
Financing cost		4,356,699			—
Shares issued for services		134,700			7,743,725
Warrants issued for services		694,816			4,964,788
Unrealized gain on market equity security		(5,200,000	)		—
Changes in operating assets and liabilities:
Accounts receivable		(462,848	)		(649,450	)
Inventory		—			(1,796	)
Prepaid expenses		(77,750	)		(56,000	)
Accounts payable and accrued expenses		(4,720	)		267,712
Unearned revenue		(2,324	)		—
Due to Guardian, LLC		(670,544	)		62,363
Net cash used in operating activities		(4,416,433	)		(1,358,529	)

Cash Flows From Investing Activities:
Purchase of property and equipment		(4,097	)		(21,714	)
Cash paid for acquisitions		—			(100,000	)
Cash paid for investment in Spare		—			(100,000	)
Cash paid for acquisition deposit		(1,200,000	)		—
Net cash used in investing activities		(1,204,097	)		(221,714	)

Cash Flows From Financing Activities:
Issuance of convertible notes		3,000,000			750,000
Issuance of note payable		2,025,000			—
Repayment of convertible notes		—			(80,000	)
Payment on note payable		(99,256	)		—
Issuance of common stock		—			500,000
Net cash provided by financing activities		4,925,744			1,170,000

Net decrease in cash		(694,786	)		(410,243	)

Cash, beginning of period		1,863,510			1,305,062

Cash, end of period	$	1,168,724		$	894,819

Cash paid for:
Interest	$	744		$	36,695
Income taxes	$	—		$	—

Supplemental non-cash investing and financing activities
Debt discount	$	3,636,000		$	750,000
Transfer of derivative liability to equity	$	2,018,302		$	113,287

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

GOPHER PROTOCOL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(UNAUDITED)

Note 1 - Organization and Basis of Presentation

Organization and Line of Business

Gopher Protocol Inc. (the “Company”, “Gopher”, “Gopher Protocol” or “GOPH”) was incorporated on July 22, 2009 under the laws of the State of Nevada. Gopher is an emerging growth company that is creating and patenting innovative mobile microchip (ICs) and software technologies based on the GopherInsight ™ technology platform. 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 to Guardian Patch LLC, a related party (“Guardian LLC”); (ii) from the operations of the assets it acquired in the third quarter of 2017 and the first and second quarters of 2018 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 consolidated financial statements are prepared by the Company, pursuant to the rules and regulations of the Securities Exchange Commission (“SEC”). The information furnished herein reflects all adjustments, consisting only of normal recurring adjustments, which in the opinion of management, are necessary to fairly state the Company’s financial position, the results of its operations, and cash flows for the periods presented. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America were omitted pursuant to such rules and regulations. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results expected for the year ending December 31, 2019.

GopherInsight ™ is a patented (with additional patents pending), real time, heuristic (self-learning/artificial intelligence based) global mesh network and asset tracking IoT technology. GopherInsight ™ chip and software technologies, if successfully fully developed, are designed to be installed in mobile devices (smartphones, tablets, laptops, etc.), autonomous vehicles, robots, drones, consumer products, as well as other fixed and mobile stand-alone products. It is intended that GopherInsight™ software applications will work in conjunction with GopherInsight ™ microchips across mobile operating systems, providing computing power, advanced database management/sharing functionalities and more. The technology under development consists of a smart microchip, mobile application software and supporting software. The system contemplates the creation of a global mesh network.

On March 29, 2016, the Company contributed all of its rights relating to its proprietary microchip that is within a sticky patch package (the “Patch”) to Guardian LLC in consideration of 50% of the profit generated by Guardian LLC and a commitment from Guardian LLC that it is responsible for investing all needed funds for the purpose of developing the Patch and related products to the Patch, as well as funding the working capital needs of the Company. On September 25, 2018, the Company entered into an agreement with Guardian LLC pursuant to which the Company purchased Guardian LLC’s 50% interest previously entered between the parties in March 2016 covering the Guardian Patch, Puzpix and Epsilon. In consideration, the Company issued Guardian 12,500,000 shares of common stock.

On September 1, 2017, the Company entered into an Asset Purchase Agreement with a third party, RWJ Advanced Marketing, LLC, a Georgia corporation. The Company entered into this Asset Purchase Agreement to acquire terminals in approximately 15,000 locations by which the Company will deploy its technology. The operations consist primarily of the sale of phones and phone card products, including PINS for cell minutes, SIM cards for cell minutes, as well as gift cards. The Company incorporated a wholly-owned subsidiary, UGopherServices Corp., to operate the acquired assets (See Note 13).

On March 16, 2018, the Company entered into and closed an asset purchase agreement dated March 1, 2018 with ECS Prepaid LLC (“ECS”), a Missouri limited liability company, pursuant to which the Company purchased certain assets from ECS, including, but not limited to, the processing prepaid platform, servers, POS terminals, customer list, and a processing software program.

On April 2, 2018, the Company entered into and closed an asset purchase agreement with Electronic Check Services Inc. (“Electronic Check”), a Missouri corporation, pursuant to which the Company purchased certain assets from Electronic Check, including, but not limited to, assets associated with software that validates written check authenticity.

GOPHER PROTOCOL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(UNAUDITED)

On April 2, 2018, the Company entered into and closed an asset purchase agreement with Central State Legal Services Inc. (“CSLS”), a Missouri corporation, pursuant to which the Company purchased certain assets from CSLS, including, but not limited to, assets associated with a system to recover funds from returned checks.

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”).

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, useful lives of intangible assets, valuation of beneficial conversion feature, debt discounts, valuation of derivatives, and the valuation allowance on deferred tax assets.

Principles of Consolidation

The accompanying 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), and the accounts of ECS, Electronic Check and CSLS since their respective dates of acquisition (March 1, 2018, April 2, 2018 and April 2, 2018). All significant intercompany transactions and balances have been eliminated.

Cash Equivalents

For the purpose of the statement of cash flows, cash equivalents include time deposits, certificate of deposits, and all highly-liquid debt instruments with original maturities of three months or less.

Accounts Receivable

The Company grants credit to establishments (such as convenience stores) that sell the Company’s products under credit terms that it believes are customary in the industry and do not require collateral to support customer receivables. The accounts receivable balances are generally collected within 10 days of the product sale and the Company has minimal bad debts. The Company currently does not provide an allowance for doubtful collections, which is based upon a review of outstanding receivables, historical collection information, and existing economic conditions. Normal receivable terms vary from 7-30 days after the issuance of the invoice and typically would be considered past due when the term expires. Delinquent receivables are written off based on individual credit evaluation and specific circumstances of the customer. The Company’s allowance for doubtful accounts was $0 and $0 at December 31, 2018 and 2017, respectively.

Inventory

The Company’s inventory of phones and phone card products, including PINS for cell minutes, SIM cards for cell minutes, as well as gift cards are generally purchased from vendors electronically at the time a customer purchases the product from a retail location.

GOPHER PROTOCOL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(UNAUDITED)

Property and Equipment

Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to earnings as incurred; additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for substantially all assets with estimated lives as follows:

Furniture	7 years
Computers and equipment	3 years
POSA machines	3 years

Long-Lived Assets

The Company applies the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 360, Property, Plant, and Equipment , which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. ASC 360 requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets’ carrying amounts. In that event, a loss is recognized based on the amount by which the carrying amount exceeds the fair value of the long-lived assets. Loss on long-lived assets to be disposed of is determined in a similar manner, except that fair values are reduced for the cost of disposal. Based on its review at March 31, 2019 and December 31, 2018, the Company believes there was no impairment of its long-lived assets.

Intangible Assets

The Company’s intangible assets were acquired with the acquisition of certain RWJ assets in 2017, and the acquisition of certain ECS, Electronic Check and CSLS assets in 2018 are being amortized over 60-120 months. The Company performs a test for impairment annually. As of March 31, 2019 and December 31, 2018, the Company performed the required impairment analysis. During the year ended December 31, 2018, the Company determined that the intangible assets associated with the acquisition of certain RWJ assets was impaired and took a charge to earnings of $5,916,667.

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.

Goodwill

Goodwill represents the excess of purchase price over the underlying book value of the net assets of the businesses that were acquired. Under accounting requirements, goodwill is not amortized, but is subject to annual impairment tests. The Company recorded goodwill of $950,619 related to its acquisition of certain RWJ assets in 2017, and $646,291, $254,586 and $25,000, respectively, related to its acquisition of certain ECS, Electronic Check and CSLS assets in 2018. During the year ended December 31, 2018, the Company determined that the goodwill associated with the acquisition of certain RWJ assets was impaired and took a charge to earnings of $950,619.

Acquisition Deposit

On March 1, 2019, the Company signed a letter of intent for the potential entry into a joint venture between the Company and Glen Eagles Acquisition LP (“Glen Eagles”) for the development of certain assets currently owned or controlled by Glen Eagles. The Company deposited $1,200,000 into escrow which is shown as an acquisition deposit in the accompanying consolidated balance sheet. If the transaction does not close, the Company can request that the amount deposited in escrow be returned. See Note 13 – Subsequent Events.

GOPHER PROTOCOL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(UNAUDITED)

Derivative Financial Instruments

The Company evaluates all of its agreements to determine if such instruments have derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative financial instruments, the Company uses a weighted-average Black-Scholes-Merton option pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date. As of March 31, 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.

Fair Value of Financial Instruments

For certain of the Company’s financial instruments, including cash and equivalents, restricted cash, accounts receivable, advances to suppliers, accounts payable, accrued liabilities and short-term debt, the carrying amounts approximate their fair values due to their short maturities.

FASB ASC Topic 820, Fair Value Measurements and Disclosures , requires disclosure of the fair value of financial instruments held by the Company. FASB ASC Topic 825, Financial Instruments , defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the consolidated balance sheets for receivables and current liabilities each qualify as financial instruments and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:

Level 1 inputs to the valuation methodology are quoted prices for identical assets or liabilities in active markets.

Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in inactive markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3 inputs to the valuation methodology us one or more unobservable inputs which are significant to the fair value measurement.

The Company analyzes all financial instruments with features of both liabilities and equity under FASB ASC Topic 480, Distinguishing Liabilities from Equity , and FASB ASC Topic 815, Derivatives and Hedging .

For certain financial instruments, the carrying amounts reported in the balance sheets for cash and current liabilities, including convertible notes payable, each qualify as a financial instrument, and are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest.

The Company uses Level 2 inputs for its valuation methodology for derivative liabilities as their fair values were determined by using the Black-Scholes-Merton pricing model based on various assumptions. The Company’s derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to fair value of derivatives.

GOPHER PROTOCOL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(UNAUDITED)

At March 31, 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		March 31, 2019
Description		March 31, 2019		Using Fair Value Hierarchy
				Level 1		Level 2		Level 3
Marketable equity security - Mobiquity Technologies, Inc.	$	23,400,000	$	-	$	23,400,000	$	-

Conversion feature on convertible notes	$	10,782,553	$	-	$	10,782,553	$	-

		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”). Latinex is a fully-licensed and Central Bank regulated “Currency Exchange” in Costa Rica. To provide that Latinex may maintain its required regulatory capital as required by various regulators, the Company has pledged 20,026,702 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 .

GOPHER PROTOCOL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(UNAUDITED)

Revenue from providing IT services, sale of phones, phone card products, prepaid cellular phone minutes and cellular activation services are recognized under Topic 606 in a manner that reasonably reflects the delivery of its services and products to customers in return for expected consideration and includes the following elements:

executed contracts with the Company’s customers that it believes are legally enforceable;

identification of performance obligations in the respective contract;

determination of the transaction price for each performance obligation in the respective contract;

allocation the transaction price to each performance obligation; and

recognition of revenue only when the Company satisfies each performance obligation.

These five elements, as applied to each of the Company’s revenue category, is summarized below:

IT services - revenue is recorded on a monthly basis as services are provided;

Sale of phones, phone card products, prepaid cellular phone minutes and cellular activation – revenue is recognized at the time of sale to the customer; and

License fees and Royalties – revenue is recognized based on the terms of the agreement with its customer.

Cost of Goods Sold

Cost of goods sold represents the cost of the phone, phone card products and prepaid cellular phone minutes sold by the Company. Cost of goods sold relates to products sold by the Company’s newly- acquired acquisitions in September 2017, March 2018 and April 2018.

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 a pre-sales campaign for its pet tracker product and received prepayments for its product. As of March 31, 2019 and December 31, 2018 unearned revenue related to this pre-sales campaign was $55,524 and $57,848, respectively. In addition, during 2018, the Company received $200,000 in connection with an intellectual property license and royalty agreement (See Note 13).

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.

GOPHER PROTOCOL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(UNAUDITED)

	March 31,	March 31,
	2019	2018
Series B preferred stock	3,000	3,000
Series C preferred stock	770	770
Series G preferred stock	-	2,000,000
Warrants	52,916,666	26,260,416
Convertible notes	29,972,299	833,333
Total	82,892,735	29,097,519

Management’s Evaluation of Subsequent Events

The Company evaluates events that have occurred after the balance sheet date of December 31, 2018, 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 lease arrangements that were subject to this new pronouncement.

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 - Property and Equipment, Net

Property and equipment consisted of the following as of March 31, 2019 and December 31, 2018:

	March 31,			December 31,
	2019			2018

Furniture	$	33,739		$	33,739
Computers and equipment		48,316			48,316
POSA machines		314,521			310,424
		396,576			392,479
Less accumulated depreciation		(181,440	)		(154,041	)
Property and equipment, net	$	215,136		$	238,438

GOPHER PROTOCOL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(UNAUDITED)

Depreciation expense for the three months ended March 31, 2019 and 2018 was $27,399 and $23,993 respectively.

Note 4 – Intangible Assets, Net

The following are the intangible assets at March 31, 2019 and December 31, 2018:

	March 31,			December 31,
	2019			2018
Technology	$	1,240,000		$	1,240,000
Tradename		820,000			820,000
Customer relationships		1,490,000			1,490,000
		3,550,000			3,550,000
Less accumulated amortization		(518,370	)		(400,260	)
Intangible assets, net	$	3,031,630		$	3,149,740

Intangible assets are being amortized as follows: Technology – 60 months; and Tradename and Customer relationships – 120 months.

Amortization expense for the three months ended March 31, 2019 and 2018 was $118,110 and $261,905, respectively.

During 2018, the Company determined that the intangible assets associated with the acquisition of certain RWJ assets was impaired and took a charge to earnings of $5,916,667.

The estimated future amortization expense related to intangible assets is as follows:

Twelve months ending March 31,
	2020	$	479,000
	2021		479,000
	2022		479,000
	2023		479,000
	2024		479,000
	Thereafter		636,630
		$	3,031,630

Note 5 – Investment in Mobiquity Technologies, Inc.

GOPHER PROTOCOL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(UNAUDITED)

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 2,000,000 shares of common stock to Glen Eagles Acquisition LP 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. See Not 13 – Subsequent Events.

Note 6 – Convertible Notes Payable

Convertible notes payable at March 31, 2019 and December 31, 2018 consist of the following:

	March 31,			December 31,
	2019			2018
Convertible notes payable to Power Up	$	427,200		$	427,200
Convertible notes payable to Discover Growth Fund		5,410,000			3,004,000
Total convertible notes payable		5,837,200			3,431,200
Unamortized debt discount		(5,064,946	)		(3,233,124	)
Convertible notes payable	$	772,254		$	198,076

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.

GOPHER PROTOCOL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(UNAUDITED)

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 has 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.

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 180 ^th 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 March 31, 2019 and December 31, 2018, the principal amount outstanding under the Power Note No. 2 was $243,600.

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 180 ^th 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 March 31, 2019 and December 31, 2018, the principal amount outstanding under the Power Note No. 2 was $183,600.

GOPHER PROTOCOL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(UNAUDITED)

$8,340,000 Senior Secured Redeemable Convertible Debenture

On December 3, 2018, the Company entered into a Securities Purchase Agreement (the “SPA”) with an otherwise unaffiliated third-party institutional 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 22,500,000 shares of common stock for a term of three years (the “Warrant”) on a cash-only basis at an exercise price of $1.00 per share with respect to 5,000,000 Warrant Shares, $0.75 with respect to 7,500,000 Warrant Shares and $0.50 with respect to 10,000,000 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 $6,116,000.00; as of the second month’s anniversary of the closing, the face value of the Debenture increased to $7,228,000.00; and as of the third month’s anniversary of the closing, the face value of the Debenture increased to $8,340,000.00. As of the closing, the number of Warrant Shares was 13,500,000; as of the first month’s anniversary of the closing, the number of Warrant Shares increased to 16,500,000; as of the second month’s anniversary of the closing, the number of Warrant Shares increased to 19,500,000; as of the third month’s anniversary of the closing, the number of Warrant Shares increased to 22,500,000. As of March 31, 2019, the Company had issued a Debenture for $8,340,000 and had issued 22,500,000 Warrant Shares.

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 current conversion price is 75% of the Market Price less $0.05). 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 22,500,000 warrants to purchase shares of the Company’s common stock with an exercise prices ranging from $0.50 to $1.00. 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

Volatility of 190%;

Dividend yield of 0%;

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 9,499,271 shares of common stock. In January 2019, the investor converted $350,000 in principal and $1,158 in accrued interest into 1,662,372 shares of common stock. In March 2019, the investor converted $580,000 in principal and $51,096 in accrued interest into 3,496,278 shares of common stock.

At March 31, 2019 and December 31, 2018, the principal amount outstanding under the Debenture was $5,410,000 and $3,004,000, respectively.

GOPHER PROTOCOL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(UNAUDITED)

Discounts on convertible notes

The Company recognized interest expense of $1,504,178 and $114,130 during the three months ended March 31, 2019 and 2018, respectively, related to the amortization of the debt discount. The unamortized debt discount at March 31, 2019 was $5,064,946.

A roll-forward of the convertible note from December 31, 2018 to March 31, 2019 is below:

Convertible notes, December 31, 2018	$	198,076
Issued for cash		3,000,000
Original issue discount		336,000
Conversion to common stock		(930,000	)
Debt discount related to new convertible notes		(3,336,000	)
Amortization of debt discounts		1,504,178
Convertible notes, March 31, 2019	$	772,254

Note 7- Notes Payable

Notes payable at March 31, 2019 and December 31, 2018 consist of the following:

	March 31,			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			—
Total notes payable		4,925,000			2,700,000
Unamortized debt discount		(273,699	)		(744	)
Notes payable	$	4,651,301		$	2,699,256

RWJ Acquisition Note

In connection with the acquisition 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 – Contingencies.

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.

$2,325,000 Promissory Note

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.

GOPHER PROTOCOL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(UNAUDITED)

Discounts on promissory note

The Company recognized interest expense of $26,301 and $0 during the three months ended March 31, 2019 and 2018, respectively, related to the amortization of the debt discount. The unamortized debt discount at March 31, 2019 was $273,699.

A roll-forward of the convertible note from December 31, 2018 to March 31, 2019 is below:

Notes payable, December 31, 2018	$	2,699,256
Issued for cash		2,025,000
Original issue discount		300,000
Repayment of note payable		(99,256	)
Debt discount related to new convertible notes		(300,000	)
Amortization of debt discounts		26,301
Notes payable, March 31, 2019	$	4,651,301

Note 8 - Derivative Liability

Certain of the convertible notes payable discussed in Note 6 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 March 31, 2019 and December 31, 2018:

	March 31,			December 31,
	2019			2018

Stock price	$	0.45		$	0.32
Risk free rate		2.40	%		2.63	%
Volatility		135	%		150	%
Conversion/ Exercise price	$	.018 to 0.34		$	0.21 to 0.25
Dividend rate		0	%		0	%

The following table represents the Company’s derivative liability activity for the three months ended March 31, 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		(2,018,302	)
Change in derivative liability during the period		3,245,410
Derivative liability balance, March 31, 2019	$	10,782,553

GOPHER PROTOCOL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(UNAUDITED)

Note 9- Stockholders’ Equity

Common Stock

During the three months ended March 31, 2019, the Company had the following transactions in its common stock:

issued an aggregate of 300,000 shares to employees and board members as part of their compensation agreements with the Company. The value of the common stock of $134,700 was determined based on the closing stock price of the Company’s common stock on the grant date;

issued 5,158,650 shares to an investor for the conversion of $930,000 in convertible notes and $52,254 in accrued interest; and

GOPHER PROTOCOL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(UNAUDITED)

issued 20,026,702 shares to Latinex in order to provide that Latinex may maintain its required regulatory capital as required by various regulators The Company has recorded the value of these shares of common stock as a stock loan receivable which is presented as a contra-equity account in the accompanying consolidated balance sheets. The value of the common stock was determined based on the closing stock price of the Company’s common stock on the grant date.

Series B Preferred Shares

On November 1, 2011, the Company and certain creditors entered into a Settlement Agreement (the “Settlement Agreement”) whereby without admitting any wrongdoing on either part, the parties settled all previous agreements and resolved any existing disputes. Under the terms of the Settlement Agreement, the Company agreed to issue the creditors 45,000 shares of Series B Preferred Stock of the Company on a pro-rata basis. Following the issuance and delivery of the shares of Series B Preferred Stock to said creditors, as well as surrendering the undelivered shares, the Settlement Agreement resulted in the settlement of all debts, liabilities and obligations between the parties.

The Series B Preferred Stock has a stated value of $100 per share and is convertible into the Company’s common stock at a conversion price of $0.30 per share representing 3,000 posts split (15,000,000 pre-split) common shares. Furthermore, the Series B Preferred Stock votes on an as converted basis and carries standard anti-dilution rights. These rights were subsequently removed, except in cases of stock dividends or splits.

As of March 31, 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 $0.002. 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 12,010 post-split (64,551,667 common shares pre-split). During the third quarter of 2014, the Company received 4,204 post-split (21,021,900 pre-split) common shares to adjust the shares issued to reflect the amount that both they and the Company believed that they were owed. At December 31, 2016, and at December 31, 2015, GV owns 700 Series C Preferred Shares.

The issuance of the Series C Preferred Stock was made in reliance upon exemptions from registration pursuant to Section 4(a)(2) under the Securities Act of 1933 and Rule 506 promulgated under Regulation D thereunder. GV is an accredited investor as defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933.

As of March 31, 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.

GOPHER PROTOCOL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(UNAUDITED)

On January 23, 2018, Reko Holdings, LLC converted 66,000 shares of its Series D Preferred Stock into 66,000,000 restricted common shares.

As of March 31, 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 2,000,000 shares of common stock.

As of March 31, 2019 and December 31, 2018, there are 0 and 0 shares of Series G Preferred Shares outstanding, respectively.

Warrants

The following is a summary of warrant activity since December 31, 2018:

					Weighted
			Weighted		Average
			Average		Remaining		Aggregate
	Warrants		Exercise		Contractual		Intrinsic
	Outstanding		Price		Life		Value
Outstanding, December 31, 2018		41,916,666	$	0.61		3.48	$	—
Granted		11,000,000		0.63
Forfeited		—
Exercised		—
Outstanding, March 31, 2019		52,916,666	$	0.61		3.23	$	260,000
Exercisable, March 31, 2019		52,416,666	$	0.62		3.22	$	260,000

The exercise price for warrant outstanding and exercisable at March 31, 2019:

Outstanding				Exercisable

	Number of		Exercise		Number of		Exercise
	Warrants		Price		Warrants		Price
	2,000,000	$	0.32		2,000,000	$	0.32
	32,000,000	$	0.50		32,000,000	$	0.50
	7,500,000		0.75		7,500,000		0.75
	5,000,000		1.00		5,000,000		1.00
	3,000,000		1.85		3,000,000		1.85
	666,666		2.00		666,666		2.00
	1,000,000		2.35		1,000,000		2.35
	750,000		2.50		750,000		2.50
	500,000		2.70		500,000		2.70
	500,000		2.80		—		2.80
	52,916,666				52,416,666

GOPHER PROTOCOL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(UNAUDITED)

The fair value of the warrants listed above was determined using the Black-Scholes option pricing model with the following assumptions:

	March 31,			December 31,
	2019			2018
Risk-free interest rate		2.49	%		2.65	%
Expected life of the options		5 years			5 years
Expected volatility		200	%		210	%
Expected dividend yield		0	%		0	%

Note 10 - Related Parties

Related parties are natural persons or other entities that have the ability, directly or indirectly, to control another party or exercise significant influence over the party in making financial and operating decisions. Related parties include other parties that are subject to common control or that are subject to common significant influences. For the three months ended March 31, 2019 and 2018, $45,000 and $45,000, respectively of the Company’s revenue is from IT services delivered to Guardian LLC, which is 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. All expenses in the Company’s operations were incurred as a consequence of delivering Company’s obligations under the joint venture agreement between the parties to commercialize the technology that is being developed by the LLC.

For the three months ended March 31, 2019 and 2018, the Company paid a law firm owned by the Company’s chairman $90,000 and $0, respectively, for legal services.

On April 22, 2015, Michael Murray was appointed by the Company as the Chairman of the Board, CEO, and President of the Company. Mr. Murray resigned as an executive officer on September 1, 2017. On March 4, 2015, the Company entered into a Territorial License Agreement with Hermes Roll, LLC (“Hermes”), which is the basis for the Company’s current operations. Mr. Murray was the owner of 9,900 shares of Series D Preferred Stock of the Company that was convertible at Mr. Murray’s election into 9,900,000 shares of common stock. To date, Mr. Murray has converted all of his Series D Preferred Stock into common shares of the Company.

On June 30, 2015, the Company appointed Dr. Danny Rittman as Chief Technical Officer and a board member. On August 20, 2015, the Company entered into an agreement with Dr. Rittman pursuant to which the parties agreed that (i) all inventions, improvements and developments made or conceived by Dr. Rittman, either solely or in collaboration with others pertaining to Company’s business, will be the property of Company, and (ii) Dr. Rittman will assign to the Company any and all intellectual property related to the Company’s consumer heuristic technology platform. The agreement with Dr. Rittman was contingent upon the Company funding its commitments per the June 16, 2015 - Amended and Restated Territorial License Agreement. Failure of the Company providing this funding, in full, or partially, will automatically terminate any GOPH ownership of the intellectual properties. Dr. Rittman is the Chief Technology Officer and a director of the Company as well as the Chairman of the Company’s Advisory Board, which is in formation. Dr. Rittman and Mr. Murray jointly own 9,900 shares of Series D Preferred Stock of the Company that is convertible at Dr. Rittman’s or Mr. Murray’s election into 9,900,000 shares of common stock. To date, Mr. Rittman has converted all of his Series D Preferred Stock into common shares of the Company.

GOPHER PROTOCOL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(UNAUDITED)

On August 20, 2015, the Company entered into an agreement with Dr. Rittman pursuant to which the parties agreed that (i) all inventions, improvements and developments made or conceived by Dr. Rittman, either solely or in collaboration with others pertaining to Company’s business, will be the property of Company, and (ii) Dr. Rittman agreed to assign to the Company any and all intellectual property related to the Company’s consumer heuristic technology platform, subject to certain conditions. The Company has expensed the stated value of that intellectual property in these financial statements.

On or around March 18, 2016 the Company and Dr. Danny Rittman entered into an agreement intended to clarify the relationship between Dr. Rittman and the Company and the ownership of certain technology in connection with certain agreements previously entered into between Company and Dr. Rittman and with third parties. Specifically, the Company entered into that certain Territorial License Agreement with Hermes dated March 4, 2015, which such agreement was amended to expand the related territorial license to a worldwide license pursuant to that certain Amended and Restated Territorial License Agreement dated June 16, 2015 (the “Amended and Restated Territorial License Agreement”), and that certain Letter Agreement (the “Letter Agreement”) entered into between Dr. Rittman and the Company dated August 20, 2015. The aforementioned agreements were tied to the funding of the Company in the minimum amount of $5,000,000 (the “Required Funding”) and the assignment to the Company and/or ownership by the Company of all past, present and future technology in the form of intellectual property, including, but not limited to patents, trademarks, domains, applications, social media pages (e.g. Twitter, LinkedIn and landing pages) (collectively, the “IP”), which such IP was paid for exclusively by Dr. Rittman and/or his affiliated companies, was contingent upon the Company obtaining the Required Funding by no later than October 30, 2015 (the “Contingency”). Accordingly, it was agreed to by the parties that all inventions, improvements and developments made or conceived by the Dr. Rittman, either solely or in collaboration with others pertaining to Company’s business, would be the property of the Company subject to the Contingency. In the event the Contingency was not met, the Letter Agreement would be cancelled and rendered null and void. The Company acknowledged that the Company did not meet the Contingency, technically resulting in the cancellation of the Letter Agreement and rendering the Letter Agreement null and void. Moreover, the Company failed to meet its obligations under the Amended and Restated Territorial License Agreement, including the further development of the consumer heuristic technology platform, thereby creating a vacuum in its development in all aspects, including the ability to obtain funding, resulting in the need for Dr. Rittman’s partners to perform the necessary development work related to the above agreements.

In March 2016, the Company and Dr. Danny Rittman, Co-Chairman, CTO and a shareholder, entered into an agreement intended to clarify the relationship between Dr. Rittman and the Company and the ownership of certain technology in connection with certain agreements previously entered into between Company and Dr. Rittman and with third parties. Prior to these agreements, the Company is the exclusive license holder for certain intellectual property relating to Hermes’ system and method for scheduling categorized deliverables, according to demand, at the customer’s location based on smartphone application and/or via the internet. As a result of these agreements, the Company shall remain an exclusive licensee per the terms of the original License Agreement and will develop the first products with Dr. Rittman and his partners.

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. An additional $70,000 shall be payable within 15 days of the end of the calendar year.

On March 29, 2016, Gopher contributed all of its rights relating to its proprietary microchip that is within a sticky patch package (the “Patch”) to Guardian LLC in consideration of 50% of the profit generated by Guardian LLC (the “Joint Venture”). Guardian LLC is responsible for investing all needed funds for the purpose of developing the Patch and related products to the Patch. In addition, Guardian LLC is required to provide short term loans to Gopher on an as needed basis secured by Gopher’s economic interest in the Joint Venture. The Company will provide IT services to Guardian LLC for a monthly fee. Dr. Rittman has signed an amendment employment agreement with the Company.

The Company is the exclusive license holder for certain intellectual property relating to GopherInsight technology. The Company has assigned all its rights as they relate to the Guardian Patch to Guardian LLC as consideration for the JV. Guardian LLC has commenced development of the products. Certain private investors will provide all initial funding to the Company via the LLC for product development. Guardian LLC will fund the development, and the Company will provide IT services via Dr. Rittman for a monthly fee. Dr. Rittman has signed an amendment employment agreement with the Company. As the Company is not a member of Guardian LLC, the Company and Guardian LLC have formed a Joint Venture (“JV”) for the purposes of developing and marketing the Patch. Guardian LLC will be responsible for funding the development of the Patch. The Company will not need be required to invest funds in said JV. The Company responsibilities will be limited to the marketing of the product, where the marketing budget will be funded by Guardian LLC. Moreover, Guardian LLC has committed to provide the Company with working capital as needed. The Company has assigned and pledged to the LLC all its license derivative rights as they pertain to the Patch only. Dr. Rittman may be offered membership rights at some point in the future with Guardian LLC, with which the Company is a JV partner, but is not equity member. The Company has agreed with Guardian LLC that the same JV principles of the Guardian LLC for the patch will apply for the other two products (Epsilon and Puzpix) which will be vested under designated LLCs that will be incorporated by the LLC members. During the three months ended March 31, 2019 and 2018, $45,000 and $45,000, respectively, of the Company’s revenue was related to IT service provided to the LLC for Dr. Rittman services, in connection with the development of the Patch.

GOPHER PROTOCOL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(UNAUDITED)

On July 21, 2016 members of the Guardian LLC, together with Dr. Rittman, incorporated Alpha EDA, LLC (“Alpha”). The members of the LLC appointed Dr. Rittman as the manager of Alpha. The Company, the LLC and Alpha have agreed that all Epsilon Rights, as well as Puzpix rights, will be assigned to Alpha. Alpha and the Company entered into a JV agreement similar to the Patch Joint Venture agreement (as described above), whereby Alpha will fund all of its operational and developmental needs (software development, support, marketing and administrative), and the profits of Alpha will be distributed equally to the two equal Joint venture partners, Guardian LLC and the Company. Alpha will hold all intellectual property rights related to software. Currently, three products will be owned by Alpha – the Epsilon software, the Puzpix social game and the Guardian Pack application. The Company and its technology licensing partners, Guardian LLC and Alpha, are preparing to introduce said new products (Epsilon, Guardian Pack & PuzPix) to the market beginning in 2018, and the Sphere during the second half of fiscal 2017. Certain problems caused by the need to miniaturize both the chip design and the battery caused a delay in the rollout from its planned launch during the first half of the year. The Epsilon product will be presented for time-based license agreements utilizing a designated website on top of customary distributing channels for the product. Epsilon is under confidential evaluation agreement with third party.

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 12,500,000 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.

During 2016, the Company relocated its headquarters to 2500 Broadway, Suite F-125, Santa Monica, California. The Company paid approximately $5,000 per month in rent for this office space, and paid a $1,979 security deposit that is classified in our financial statements contained herein as a prepaid expense. The lease is being paid for by the Guardian LLC via reimbursement. The Company moved into smaller office space during the quarter, and its security deposit was adjusted downward to cover the smaller space in April 2016. The Company believes its current facilities will be adequate for the foreseeable future.

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 and its technology licensing partner, Guardian LLC, successfully completed thorough research that involved security, performance and FCC regulations compliance. Based on this research, a set of particular frequencies was chosen to be used by Guardian LLC. By the end of this year, 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. On December 1, 2016, Guardian LLC issued Statement of Work for the Placement and Development of Guardian Sphere and its Base System. For this project, Guardian LLC has assembled a team of eight, including a Project Manager, CTO, digital and software engineers, a specialist algorithm mathematician and project leader. This team was assembled by Guardian LLC, and is based in the USA, Europe and Asia. Per the Joint Venture agreement, Guardian LLC is funding the SOW project through its sources, while the Company’s portion of the cost is $67,000 and due to the vendor on August 15, 2017. Guardian took full responsibility for all amounts due to this vendor. The Company intends to enter a new SOW for the purpose of creating fully-commercial products utilizing the manufacturers that it has identified.

GOPHER PROTOCOL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(UNAUDITED)

On June 20, 2016, two holders (the “Preferred Stock Holders”) of an aggregate of 2,400 shares of Series D Preferred Stock (the “Preferred Shares”) of the Company converted the Preferred Shares into an aggregate of 2,400,000 shares of common stock of the Company at $0.01 per share. The Preferred Stock Holders are executive officers and directors of the Company.

On August 9, 2016, two holders (the “Preferred Stock Holders”) of an aggregate of 17,400 shares of Series D Preferred Stock (the “Preferred Shares”) of the Company executed conversion notices to convert the Preferred Shares into an aggregate of 17,400,000 shares of common stock of the Company at $0.01 per share. The Preferred Stock Holders are executive officers and directors of the Company.

Effective August 15, 2016, the Employment Agreement of Mansour Khatib, our CMO, was amended and restated as follows: Upon the Company generating $1,000,000 in revenue during any three (3) month period (the “Threshold Requirement”), the Executive will receive salary at the rate of $100,000 annually (the “Base Salary”); provided, however, that that Company shall pay to Executive $5,000 per month (the “Monthly Salary Advance”) commencing on August 15, 2016, which such Monthly Salary Advance shall be an advance on the Base Salary and shall continue to be paid to Executive until such time that the Company launches its GopherInsight™ technology into the consumer markets. Once the Threshold Requirement is met, the Base Salary will be payable in equal increments not less often than monthly in arrears and in any event consistent with the Company’s payroll policy and practices. The Base Salary of the Executive may from time to time be increased, but not decreased, by the Board, in its absolute discretion, including potential bonuses.”

Since April 2016, Guardian LLC has provided loans to the Company for the Company’s working capital purposes, outside of its commitment to develop the Patch, in the aggregate amount of $660,132 (the “Loans”). On May 23, 2017, the Company entered into a Conversion Agreement with Guardian LLC pursuant to which the parties agreed to convert the Loans provided by Guardian LLC to the Company into a Convertible Promissory Note in the principal amount of $660,132 (the “Note”).

The Note bears interest at 6%, matures May 30, 2019 and is convertible into the Company’s common stock, at Guardian LLC’s option, at a conversion price equal to 50% of the lowest closing price for the common stock on the principal market during the ten consecutive trading days immediately preceding the conversion date, which, in no event, will be less than $0.01 per share. Guardian LLC has agreed to restrict their ability to convert the Note and receive shares of common stock such that the number of shares of common stock held by them in the aggregate and their affiliates after such conversion or exercise does not exceed 4.9% of the then issued and outstanding shares of common stock.

Guardian LLC (the “Note Holder”) understands that the Company may be seeking additional capital or funding and believes that the lock-up and leak-out restrictions and provisions, as further described herein, will improve the Company’s prospects for obtaining additional financing and thus improving the overall financial condition of the Company. As such on or around June 26, 2017 the Company and the Note Holder entered into a lock-up and leak-out:

Subject to the terms of this Agreement, the Note Holder agrees that for a period of nine (9) months from the Effective Date of this Agreement (the “Lock-Up Period”), the Note Holder shall not convert the Note into Common Stock for safe keeping or, directly or indirectly, sell, offer to sell, contract to sell, assign, pledge, hypothecate, encumber or otherwise transfer, or enter into any contract, option or other arrangement or understanding with respect to the sale, assignment, pledge or other disposition of (each a “Transfer”) any beneficial rights with respect to the Note.

Leak-Out Provisions. Subject to the terms of this Agreement, the Note Holder agrees that for a period beginning immediately upon the end of the Lock-Up Period and ending fifteen (15) months from the Effective Date of this Agreement (the “Leak-Out Period”), the Note Holder shall have the right to sell the lessor of (i) five (5%) percent of the previous day’s traded volume of the Company’s Common Stock, or (ii) Five Thousand (5,000) shares of the Common Stock on a per daily basis.

On December 29, 2017, all the principal and accrued interest were converted into 2,000,000 share of Series G preferred stock.

GOPHER PROTOCOL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(UNAUDITED)

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. The Company is in litigation in connection with RWJ transaction – See Note 12 - Contingencies.

The Company and Guardian LLC, which assisted structuring and negotiating the Purchase Agreement and related asset purchase, entered into a Consulting Agreement dated September 1, 2017. In consideration for the services, the Company issued Guardian 2,000,000 shares of common stock and warrants to purchase 9,000,000 shares of common stock. The warrants contain identical terms to the RJW Warrants. If and when the assets acquired under the Purchase Agreement generate revenues of $10,000,000, the Company shall issue Guardian an additional 3,000,000 shares of common stock. The consulting agreement was effective August 1, 2017 and terminates November 30, 2017. Guardian, pursuant to its existing joint venture agreement, agreed to provide the $400,000 in funding needed for the cash purchase price under the Purchase Agreement. Guardian also agreed to provide the needed $100,000 working capital designated to UGopherServices Corp.

In order to facilitate the transition of the Company, the Company and Michael Murray have agreed to enter into an employment agreement in which Mr. Murray will serve as Executive Vice President in charge of business development. As consideration, the Company issued a warrant to acquire 4,000,000 shares of common stock to Mr. Murray. The warrants contain identical terms to the RJW Warrants.

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 5,000,000 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 2,000,000 shares of common stock on the date hereof, (ii) 500,000 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) 1,500,000 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 500,000 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

GOPHER PROTOCOL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(UNAUDITED)

Note 11 - Contingencies

Legal Proceedings

From time to time, the Company may be involved in various litigation matters, which arise in the ordinary course of business. There is currently no litigation that management believes will have a material impact on the financial position of the Company.

On or around January 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 50,000 shares that it received in connection with signing the Agreement; (y) selling the 50,000 shares to another party; and, (z) from exercising the warrant on 93,750 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 93,750 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 93,750 warrants and the cancelation of 50,000 shares of the Company’s common stock owned by Waterford.

On or around April 10, 2017, the Company was billed by its transfer agent (“TA”) for approximately $11,500 for legal fees (“TA Charges”) in connection with a lawsuit brought by one of the Company’s shareholders against the TA. The Company is not a named party in this litigation. The Company disputes the TA Charges, as the Company’s position is that the TA Charges are not covered under the indemnification section of the Company’s agreement with its TA. As the TA refused to provide further services, the Company paid the fees, and booked it as an expense in 2017. This matter has been resolved amicably, and the Company continues its relationship with the TA.

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 on or around February 15, 2019.

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 in included as part of the impairment of assets in the accompanying consolidated statement of operations for the year ended December 31, 2018.

GOPHER PROTOCOL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(UNAUDITED)

GBT Technologies, S.A.

On June 12, 2018, the Company entered into a Letter of Intent (the “LOI”) with Gopher Protocol Costa Rica, S.R.L. (“Gopher CR”), a partially owned subsidiary of the Company, GBT Technologies, S.A., a Costa Rican company (“GBT”) and Tokenize-IT, S.A. (“Tokenize”). The LOI contemplates the acquisition of Tokenize by Gopher CR and the issuance of 20 million shares of common stock of the Company (the “GOPH Shares”) to Tokenize. Concurrent with the acquisition, Tokenize will enter into a joint venture agreement with GBT pursuant to which Tokenize will transfer and assign the GOPH Shares to GBT and issue equity securities of Tokenize providing GBT with 50% equity ownership in Tokenize with the balance owned by Gopher CR in consideration of GBT providing Tokenize with access to its currency trading platform that is a fully licensed and Central Bank regulated “Currency Exchange” in Costa Rica.

No assurance can be given that a definitive agreement will be entered into, that the appropriate governing bodies including the Company’s board of directors will approve such transactions, that the proposed transactions contemplated above will be consummated, or that Tokenize will be able to obtain adequate funds needed to fund its business plan.

On September 14, 2018, the Company entered into an Exclusive Intellectual Property License and Royalty Agreement (the “GBT License Agreement”) with GBT, 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 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 an exclusive worldwide license to use the Digital Currency Technology to make, use, sell, lease or otherwise commercialize and dispose of products and devices utilizing the Digital Currently Technology.

Under the terms of the GBT License Agreement, the Company is entitled to receive a royalty payment of 2% of gross revenue of each licensed product sold by GBT during the period starting in which revenue is first generated using the licensed products and continuing for five years thereafter. Upon signing the GBT License Agreement, GBT 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 making available for sale (the “Commercial Event”) an ICO (Initial Coin Offering) (the “Coin”), GBT will make a payment to the Company in the amount of $5,000,000. Further, upon the Commercial Event, GBT 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 advanced $200,000 to the Company, which the parties have agreed will be applied toward the $5,000,000 fee when it becomes due. The $200,000 is recorded as unearned revenue at December 31, 2018 in the accompanying consolidated balance sheet.

On March 9, 2019, the Company entered into a Non-Binding Letter of Intent (“LOI”)for general terms upon which our respective Board of Directors or similar governing body will adopt a definitive share exchange agreement (the “Agreement”), and recommend that the GBT Shareholders enter into the Agreement whereby Gopher will purchase all of the outstanding securities of GBT Technologies (the “GBT Securities”) from the GBT Shareholders for consideration consisting of shares of the Company. This LOI sets forth the basic terms of the share purchase transaction and reflects the current, good faith intentions of Gopher, GBT Technologies and the GBT Shareholders with respect thereto. No assurance can be given that a definitive agreement will be entered into, that the appropriate governing bodies including the Company’s Board of Directors will approve such transactions, that the proposed transactions contemplated above will be consummated, or that GBT will be able to obtain adequate funds needed to fund its business plan

GOPHER PROTOCOL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTHS ENDED MARCH 31, 2019 AND 2018

(UNAUDITED)

On April 24, 2019, the Company and GBT agreed that the aggregate purchase price to be paid by Company on the Closing Date (if it takes place) shall be 156,000 shares of Series H Convertible Preferred Stock of Gopher (the “GOPH Preferred Shares”) and 100,000,000 shares of common stock of Gopher (the “GOPH Common Shares” and together with the GOPH Preferred Shares, the “Securities”). The GOPH Preferred Shares shall (i) have a stated value of $500 per share, (ii) shall having voting rights on an as converted basis, (iii) liquidation rights at 100% of the stated value, (iv) be convertible into common stock at a conversion price of $0.50 per share and (v) shall be convertible to the extent that the Company has available authorized, unissued shares of common stock and thereafter upon the Company either implementing a reverse split or increasing its authorized shares of common stock. The number of shares of common stock to be issued upon conversion of the GOPH Preferred Shares will be determined by multiplying the number of GOPH Preferred Shares to be converted by the stated value and dividing such product by the conversion price. For example, if all of the GOPH Shares are to be converted, the number of shares of common stock to be issued shall be equal to 156,000 multiplied by $500 which product is divided by $0.50 resulting in 156,000,000 shares of common stock to be issued. The issuance of the Securities will be exempt from the registration requirements of the Securities Act of 1933, as amended (the “1933 Act”), pursuant to an exemption provided by Section 4(a)(2) thereunder, and/or Regulation D promulgated under the 1933 Act.

GBT agrees as part of the LOI to table/pend its ICO efforts of WISE, until closing or until Gopher’s board will obtain a legal opinion about the implication on Gopher and GBT Technologies post-closing in lieu of US regulator opinion or position about ICO’s.

Note 12 – 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 December 31, 2018.

Note 13 - Subsequent Events

Management has evaluated events that occurred subsequent to the end of the reporting period shown herein:

In April and May 2019, the Company issued 2,121,084 shares of common stock for the conversion of $427,200 of convertible debt.

On September 4, 2018, the Company and Mobiquity Technologies, Inc., a New York corporation (OTCQB: MOBQ”) (“Mobiquity”) entered an Agreement (the “MOBQ 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 million shares of Company’s restricted Common Stock (the “Gopher Common Stock”). The shares of Mobiquity Preferred Stock are convertible into an aggregate of up to 100 million shares of Mobiquity common stock (the “Mobiquity Common Stock”) and 150 million common stock purchase warrants (the “Mobiquity Warrants”). The Mobiquity Warrants have a term of 5-years from the date of grant and are exercisable at a price of $0.12 per share. The Mobiquity Preferred Stock 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 (the “Mobiquity Warrant Shares”). The closing occurred on September 4, 2018.

On November 19, 2018, the Company converted 200 shares of Mobiquity Preferred Stock resulting in the issuance to the Company by Mobiquity of 20 million shares of Mobiquity Common Stock and 30 million Mobiquity Warrants. The Company exercised the 30 million Mobiquity Warrants at an exercise price of $0.12 per share of common stock, payable through of the issuance to Mobiquity of 10 million shares of common stock of the Company and continued to hold 800 shares of Mobiquity Preferred Stock, which is convertible into 80,000,000 shares of Mobiquity Stock and Mobiquity Warrants to purchase 120,000,000 shares of Mobiquity Stock (the “Remaining Mobiquity Warrant”).

On May 10, 2019, the Company entered into a Membership Interest Purchase Agreement with Glen Eagles Acquisition LP (“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.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following discussion should be read in conjunction with our financial statements and related notes included elsewhere in this report. In addition to historical information, this discussion includes forward-looking information that involves risks and assumptions, which could cause actual results to differ materially from management’s expectations. See “Forward-Looking Statements” included in this report.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward looking statements, including without limitation, statements related to our plans, strategies, objectives, expectations, intentions and adequacy of resources. Investors are cautioned that such forward-looking statements involve risks and uncertainties including without limitation the following: (i) our plans, strategies, objectives, expectations and intentions are subject to change at any time at our discretion; (ii) our plans and results of operations will be affected by our ability to manage growth; and (iii) other risks and uncertainties indicated from time to time in our filings with the Securities and Exchange Commission.

In some cases, you can identify forward-looking statements by terminology such as ‘‘may,’’ ‘‘will,’’ ‘‘should,’’ ‘‘could,’’ ‘‘expects,’’ ‘‘plans,’’ ‘‘intends,’’ ‘‘anticipates,’’ ‘‘believes,’’ ‘‘estimates,’’ ‘‘predicts,’’ ‘‘potential,’’ or ‘‘continue’’ or the negative of such terms or other comparable terminology. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We are under no duty to update any of the forward-looking statements after the date of this Report.

This section of the report should be read together with Footnotes of the Company audited financials for the year ended December 31, 2018. The unaudited statements of operations for the three months ended March 31, 2019 and 2018 are compared in the sections below.

General Overview

Gopher Protocol Inc. (the “Company”, “we”, “us”, “our”, “Gopher”, “Gopher Protocol” or “GOPH”) was incorporated on July 22, 2009 under the laws of the State of Nevada and is headquartered in Santa Monica, California. Gopher is an emerging growth company which considers itself a Native IoT solutions creator, developing Internet of Things (IoT) and Artificial Intelligence enabled mesh network and asset tracking IoT mobile technology. Gopher has a portfolio of Intellectual Property that when commercialized will include smart microchips, mobile application software and supporting cloud software. The system contemplates the creation of a global mesh network. The core of the system will be its advanced microchip technology that can be installed in any mobile or fixed device worldwide. Gopher envisions this system as a low-cost, private and secure network between all enabled mobile devices providing shared processing, advanced mobile database management/sharing and enhanced mobile features.

Recent Developments

On March 16, 2018 ( “Closing Date”), the Company entered into and closed an Asset Purchase Agreement dated March 1, 2018 (the “ECS Purchase Agreement”) with ECS Prepaid LLC (“ECS”), a Missouri limited liability company, pursuant to which the Company purchased certain assets from ECS, including, but not limited to, the processing prepaid platform, servers, POS terminals, customer list, a processing software program and goodwill, in consideration of $1,100,000 of which $100,000 was paid on the Closing Date and the balance is to be paid pursuant to a secured promissory note in the amount of $1,000,000 (the “ECS Note”). In addition, the Company issued 500,000 shares of common stock of the Company (the “ECS Shares”) and warrants to purchase 500,000 shares of common stock (the “ECS Warrants”). The ECS Warrants were assigned by ECS to Dennis Winfrey. The ECS Warrants are exercisable for a period of five years at a fixed exercise price of $1.85 per share and contain standard anti-dilution protection. Under the ESC Note, which is secured by the assets acquired by the Company from ECS, the Company is required to make ten equal payments of $100,000 commencing on April 15, 2018. The Company may prepay the ECS Note at any time without penalty. The ECS Note is a short-term debt obligation that is material to the Company.

On April 2, 2018 (“Closing Date”), the Company entered into and closed an Asset Purchase Agreement (the “Electronic Purchase Agreement”) with Electronic Check Services Inc. (“Electronic Check”), a Missouri corporation, pursuant to which the Company purchased certain assets from Electronic Check, including, but not limited to, assets associated with software that validates written check authenticity, in consideration of $75,000 paid on the Closing Date. In addition, the Company issued 250,000 shares of common stock of the Company (the “Electronic Shares”) and warrants to purchase 250,000 shares of common stock (the “Electronic Warrants”). The Electronic Warrants were assigned by Electronic Check to Dennis Winfrey, the shareholder of Electronic Check. The Electronic Warrants are exercisable for a period of five years at a fixed exercise price of $2.70 per share and contain standard anti-dilution protection.

On April 2, 2018, the Company entered into and closed an Asset Purchase Agreement (the “Central Purchase Agreement”) with Central State Legal Services Inc. (“Central”), a Missouri corporation, pursuant to which the Company purchased certain assets from Central, including, but not limited to, assets associated with the a system to recover funds from returned checks, in consideration of $25,000 paid on the Closing Date. Derron Winfrey, the COO of the Company, is a director and President of Electronic Check and Central. Derron Winfrey’s parents are the shareholders of Check and Central.

On or around November 10, 2017, UGopherServices experienced a suspension of operations on the terminals that the Company acquired in its acquisition on September 1, 2017 from RWJ Advanced Marketing LLC. Management of the Company believes that this shutdown came as a result of the decision of Paypal Holdings Inc. (“Paypal”) decision to suspend operations of TIO Networks (“TIO”), and appears to have affected all of TIO’s customers. TIO was acquired by Paypal in or around July 2017. Prior to the suspension, the Company received no notice from TIO, or from RWJ Advanced Marketing LLC, which sold the assets to UGopherServices, that the suspension would be taking place. Although the Company worked diligently to contain the fallout from the suspension of operations by TIO, the vast majority of the customers that were acquired as part of the transaction defected as a result. The subsequent acquisition of ECS was done partly to stem the customer defections, as many of the customers of UgopherServices sought the services of ECS. In doing so, the Company got many, though not all, of the customers back. On a combined basis, there are approximately 9,400 points of sale as a result of acquiring certain assets from both RWJ Advanced Marketing LLC and ECS.

The Company is currently in litigation with RWJ Advanced Marketing, LLC, its executives and other third parties, and wrote off a substantial portion of its investment in UgopherServices from September 1, 2017. The Company’s position is that it was defrauded by the Seller and certain third parties due to the lack of disclosure of TIO’s decision to suspend operations.

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. As a result of this transaction, the Company has an approximate 21% interest in Mobiquity. On May 10, 2019, the Company entered into a Membership Interest Purchase Agreement with Glen Eagles Acquisition LP (“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.

On February 6, 2019, the Company entered into a letter agreement with Gopher Protocol Costa Rica Sociedad De Responsabilidad Limitada, a Costa Rican company (“Gopher CR”) and a 50% owned subsidiary of the Company, pursuant to which the Company sold 30,000,000 shares of Mobiquity Technologies, Inc., a New York corporation (“Mobiquity”) to Gopher CR in the principal amount of $5,000,000 secured by all of the assets of Gopher CR payable with 10% interest on the two year anniversary.

GBT Technologies, S.A. (“GBT”)

On September 14, 2018, the Company entered into an Exclusive Intellectual Property License and Royalty Agreement (the “GBT License Agreement”) with GBT, 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 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; collectively, the “Digital Currently Technology”). Pursuant to the GBT License Agreement, the Company granted GBT an exclusive worldwide license to use the Digital Currency Technology to make, use, sell, lease or otherwise commercialize and dispose of products and devices utilizing the Digital Currently Technology.

Under the terms of the GBT License Agreement, the Company is entitled to receive a royalty payment of 2% of gross revenue of each licensed product sold by GBT during the period starting in which revenue is first generated using the licensed products and continuing for five years thereafter. Upon signing the GBT License Agreement, GBT paid the Company $300,000, which is nonrefundable. The Company has recognized the $300,000 as revenue during the year ended December 31, 2018. Upon GBT making available for sale (the “Commercial Event”) an ICO (Initial Coin Offering) (the “Coin”), GBT will make a payment to the Company in the amount of $5,000,000. Further, upon the Commercial Event, GBT 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 advanced $200,000 to the Company, which the parties have agreed will be applied toward the $5,000,000 fee when it becomes due. The $200,000 is recorded as unearned revenue at December 31, 2018 in the accompanying consolidated balance sheet. As of the date of this filing, the Commercial Event has not yet occurred.

On March 9, 2019, the Company entered into a Non-Binding Letter of Intent for general terms upon which our respective Board of Directors or similar governing body will adopt a definitive share exchange agreement (the “Agreement”), and recommend that the GBT Shareholders enter into the Agreement whereby Gopher will purchase all of the outstanding securities of GBT Technologies (the “GBT Securities”) from the GBT Shareholders for consideration consisting of shares of the Company. This LOI sets forth the basic terms of the share purchase transaction and reflects the current, good faith intentions of Gopher, GBT Technologies and the GBT Shareholders with respect thereto. No assurance can be given that a definitive agreement will be entered into, that the appropriate governing bodies including the Company’s Board of Directors will approve such transactions, that the proposed transactions contemplated above will be consummated, or that GBT will be able to obtain adequate funds needed to fund its business plan.

On April 24, 2019, the Company and GBT agreed that the aggregate purchase price to be paid by Company on the Closing Date (if will take place) shall be 156,000 shares of Series H Convertible Preferred Stock of Gopher (the “GOPH Preferred Shares”) and 100,000,000 shares of common stock of Gopher (the “GOPH Common Shares” and together with the GOPH Preferred Shares, the “Securities”). The GOPH Preferred Shares shall (i) have a stated value of $500 per share, (ii) shall having voting rights on an as converted basis, (iii) liquidation rights at 100% of the stated value, (iv) be convertible into common stock at a conversion price of $0.50 per share and (v) shall be convertible to the extent that the Company has available authorized, unissued shares of common stock and thereafter upon the Company either implementing a reverse split or increasing its authorized shares of common stock. The number of shares of common stock to be issued upon conversion of the GOPH Preferred Shares will be determined by multiplying the number of GOPH Preferred Shares to be converted by the stated value and dividing such product by the conversion price. For example, if all of the GOPH Shares are to be converted, the number of shares of common stock to be issued shall be equal to 156,000 multiplied by $500 which product is divided by $0.50 resulting in 156,000,000 shares of common stock to be issued. The issuance of the Securities will be exempt from the registration requirements of the Securities Act of 1933, as amended (the “1933 Act”), pursuant to an exemption provided by Section 4(a)(2) thereunder, and/or Regulation D promulgated under the 1933 Act.

GBT agrees as part of the LOI to table/pend its ICO efforts of WISE, until closing or until Gopher’s board will obtain a legal opinion about the implication on Gopher and GBT Technologies post closing in lieu of US regulator opinion or position about ICO’s.

Latinex

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”). Latinex is a fully licensed and Central Bank regulated “Currency Exchange” in Costa Rica. In order to provide that Latinex may maintain its required regulatory capital as required by various regulators, the Company has pledged restricted shares of its common stock valued at $7.5 million 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 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, if at all, 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.

Results of Operations:

Three Months Ended March 31, 2019 and March 31, 2018

A comparison of the statements of operations for the three months ended March 31, 2019 and 2018 is as follows:

	Three Months Ended March 31,						Change
	2018			2017			$			%

Sales	$	13,393,313		$	7,904,606		$	5,488,707			69.4	%
Cost of goods sold		12,973,285			7,704,176			5,269,109			68.4	%
Gross profit		420,028			200,430			219,598			109.6	%
Operating expenses		4,311,571			14,109,156			(9,797,585	)		-69.4	%
Loss from operations		(3,891,543	)		(13,908,726	)		10,017,183			-72.0	%
Other expense		(4,214,317	)		(199,296	)		(4,015,021	)		2014.6	%
Loss before provision for income taxes		(8,105,860	)		(14,108,022	)		6,002,162			-42.5	%
Provision for income taxes		—			—			—
Net loss	$	(8,105,860	)	$	(14,108,022	)	$	6,002,162			-42.5	%

Sales for the three months ended March 31, 2019 were $13,393,313, compared to $7,904,606 for the three months ended March 31, 2018. The increase of $5,488,707 or 69.4% is a result of only one month of sales from ECS during the 2018 period compared to three months of sales from ECS during the 2019 period. ECS was purchased in March 2018 and sale were included from the acquisition date.

Our gross margins for the three months ended March 31, 2019 were 3.1%, compared to 2.5% for the same period in 2018. The increase in due to an increase in sales from higher margin products.

Operating expenses for the three months ended March 31, 2019 were $4,311,571, compared to $14,109,156 for the same period in 2018. The decrease of $9,797,585 or 69.4% is due to i) a decrease in common stock issued for services that went from $7,743,725 for the three months ended March 31, 2018 to $134,700 for the same period in 2019; ii) a decrease in warrants issued for services that went from $4,964,788 for the three months ended March 31, 2018 to $694,816 for the same period in 2019; iii) offset by a general increase in overhead due to the acquisitions of ECS and the hiring of senior level management personnel.

Other expense for the three months ended March 31, 2019 was $4,214,317, an increase of $4,015,021 from $199,296 for the same period in 2018. The increase is principally due to an increase in amortization of debt discounts, and interest and financing costs due to the increase in new convertible notes in late 2018 and 2019, as well as an increase in the change in fair value of the derivative liability, offset by unrealized gains on a marketable equity security.

Net loss for the three months ended March 31, 2019 was $8,105,860 compared to $14,108,022 for the same period in 2018 due to the factors described above.

Liquidity and Capital Resources

Our cash was $1,168,724 and $1,863,510 at March 31, 2019 and December 31, 2018, respectively. Cash used in operating activities during the three months ended March 31, 2019 was $4,416,433, compared to $1,358,529 during the same period in 2018. Significant differences exist between the periods, including common stock and warrants issued for services, amortization of intangible assets, amortization of debt discount, financing costs, and unrealized gain on marketable equity securities. Our working capital position worsened going from a working capital deficit of $3,797,666 at December 31, 2018 to a working capital deficit of $11,497,282 at March 31, 2019, principally as a result of the increase in the derivative liability, and the increase in convertible notes and notes payable. Cash flows used in investing activities were $1,204,097 during the three months ended March 31, 2019, compared to $221,714 for the same period in 2018. The increase is due to the amount paid for an acquisition deposit during the three months ended March 31, 2019. Cash from financing activities for the three months ended March 31, 2019 was $4,925,744, compared to $1,170,000 for the same period in 2018. The increase is due to the issuance of a convertible notes and notes payable during the three months ended March 31, 2019.

We sustained net losses of $8,105,860 for the three months ended March 31, 2019. In addition, we had a working capital deficit of $11,497,282 and accumulated deficit of $74,257,192 at March 31, 2019. We recently purchased the assets of RWJ Advanced Marketing, LLC in 2017, and ECS Prepaid LLC, Electronic Check Services, Inc. and Central States Legal Services, Inc. in 2018. RWJ and ECS have historically generated significant revenues which we expect to continue in the future. In addition, during the last half of 2018 and the first few months of 2019, the Company has raised approximately $9,500,000 of net proceeds through the issuance of convertible debt and notes payable (see discussion below). The Company will need to raise additional capital in the future of which there is no guarantee that the Company will be able to successfully raise such capital on acceptable terms. With the cash flow from operations from the recent acquisitions, the cash received from recent convertible debt and notes payable, the sale of marketable equity securities and additional cash anticipated to be raised in the near future, we believe we will have sufficient cash to meet our obligations for the next 12 months.

On December 3, 2018, the Company entered into a Securities Purchase Agreement (the “SPA”) with an unaffiliated third-party institutional 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 22,500,000 shares of common stock for a term of three years (the “Warrant”) on a cash-only basis at an exercise price of $1.00 per share with respect to 5,000,000 Warrant Shares, $0.75 with respect to 7,500,000 Warrant Shares and $0.50 with respect to 10,000,000 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 $6,116,000.00; as of the second month’s anniversary of the closing, the face value of the Debenture increased to $7,228,000.00; and as of the third month’s anniversary of the closing, the face value of the Debenture increased to $8,340,000.00. As of the closing, the number of Warrant Shares was 13,500,000; as of the first month’s anniversary of the closing, the number of Warrant Shares increased to 16,500,000; as of the second month’s anniversary of the closing, the number of Warrant Shares increased to 19,500,000; as of the third month’s anniversary of the closing, the number of Warrant Shares increased to 22,500,000.

On February 27, 2019, the Company entered into a note purchase agreement (the “Note Purchase Agreement”) with Iliad Research and Trading, L.P. (“Iliad”), pursuant to which the Company issued a promissory note for the original principal amount of $2,325,000 (the “Note”). Iliad gave consideration of $2,025,000 for the Note. The outstanding balance of the 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.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

Critical Accounting Policies and Use of Estimates

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The preparation of our financial statements in accordance with U.S. GAAP requires us to make certain estimates, judgments and assumptions that affect the reported amount of assets and liabilities as of the date of the financial statements, the reported amounts and classification of revenues and expenses during the periods presented, and the disclosure of contingent assets and liabilities. We evaluate our estimates and assumptions on an ongoing basis and material changes in these estimates or assumptions could occur in the future. Changes in estimates are recorded on the period in which they become known. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances and at that time, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily-apparent from other sources. Actual results may differ materially from these estimates if past experience or other assumptions do not turn out to be substantially accurate.

We believe that the accounting policies described below are critical to understanding our business, results of operations, and financial condition because they involve significant judgments and estimates used in the preparation of our financial statements. An accounting is deemed to be critical if it requires a judgment or accounting estimate to be made based on assumptions about matters that are highly uncertain, and if different estimates that could have been used, or if changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact our financial statements. Other significant accounting policies, primarily those with lower levels of uncertainty than those discussed below, are also critical to understanding our financial statements. The notes to our financial statements contain additional information related to our accounting policies and should be read in conjunction with this discussion.

Presentation of Financial Statements

The accompanying financial statements include the accounts of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Accounts Receivable

The Company grants credit to establishments (such as convenient stores) who sell the Company’s products under credit terms that it believes are customary in the industry and does not require collateral to support customer receivables. 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.

Marketable Equity Securities

Revenue Recognition

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 .