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GTXO > SEC Filings for GTXO > Form 10-Q on 19-Nov-2012All Recent SEC Filings

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Form 10-Q for GTX CORP


19-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of Part I of this report include forward-looking statements. These forward looking statements are based on our management's current expectations and beliefs and involve numerous risks and uncertainties that could cause actual results to differ materially from expectations. In some cases, you can identify forward-looking statements by terminology such as "may," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "proposed," "intended," or "continue" or the negative of these terms or other comparable terminology. You should read statements that contain these words carefully, because they discuss our expectations about our future operating results or our future financial condition or state other "forward-looking" information. Many factors could cause our actual results to differ materially from those projected in these forward-looking statements, including but not limited to: variability of our revenues and financial performance; risks associated with product development and technological changes; the acceptance our products in the marketplace by existing and potential future customers; general economic conditions. You should be aware that the occurrence of any of the events described in this Quarterly Report could substantially harm our business, results of operations and financial condition, and that upon the occurrence of any of these events, the trading price of our securities could decline. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, growth rates, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this Quarterly Report to conform these statements to actual results.

Introduction

As used in this Quarterly Report, the terms "GTX Corp", "we", "us", "our", and "the Company" mean GTX Corp and our three wholly-owned subsidiaries.

Operations

We currently conduct our operations through three wholly-owned subsidiaries that operate in various interrelated sectors of the emerging Location-Based Services and Proximity Marketing industry (the emerging industry for localized wireless distribution of advertising associated with a particular place based on the specific location of the person carrying the smartphone). Our subsidiaries are summarized as follows:

ˇ Global Trek Xploration ("GTX California") focuses on hardware and software design and development of GPS monitoring products by offering a GPS and cellular location platform that enables subscribers to track in real time the whereabouts of people, pets or high valued assets. Our GPS device, which consists of a miniature transceiver, antenna, circuitry and battery, can be customized and integrated into numerous products whose location and movement can be monitored in real time over the Internet through our 24x7 location data center ("Location Data Center") tracking portal or on a web enabled cellular telephone. The GTX California business model is to license its technology platforms to branded partners who desire to deliver their own innovative tracking solutions to consumers or their customers in a wide variety of wearable and portable location devices. The GTX California value proposition is its ability to customize, localize and optimize an embedded approach to the tracking and monitoring market. GTX California believes that its ability to customize its products to different form factors for the specific needs of its branded partners sets it apart from its competitors. To date, the Company has created two custom solutions in two separate vertical markets ( the monitoring of seniors and the monitoring of high value assets) and has on-going initiatives to develop and deploy additional custom hardware, software, monitoring and connectivity solutions in other vertical markets.

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ˇ LOCiMOBILE, Inc.,our mobile application subsidiary, has developed and owns LOCiMOBILEŽ a suite of mobile tracking applications that turn the latest smarphones and tables such as iPhoneŽ, iPad, BlackBerry, Google Android and other GPS enabled handsets into a tracking and location based social networking device which can then be viewed through our Location Data Center tracking portal or on any connected device with internet access. As of November 15, 2012, our 18 Apps have experienced over 1.4 million downloads in 160 countries. With our most recent release of our newest App, Track My Work Force, we continue to rollout our development slate of new and innovative products. These will include a series of application that will be geared for the enterprise user, by offering "private label" versions of our popular consumer Apps to companies looking for a more personalized and secure method of keeping track of their employees. In addition, our goal is to expand into the proximity marketing business and begin to leverage our global user base. Our roadmap also consists of additional application for the iPad, other tablets, TVs, and more applications for the iPhone, BlackBerry and Google Android operating systems, all of which are expected to contribute to our user base community, the value of our brand, and revenues from App sales, monthly subscriptions and advertising.

ˇ Code Amber News Service, Inc. ("CANS") is our wholly-owned subsidiary that is the U.S. and Canadian syndicator and content provider of all state Amber Alerts (public notifications of child abductions) and missing person alerts. CANS reaches close to a half a million viewers a day through its widely distributed Code Amber website and desktop tickers, wireless Amber Alerts and Missing Endangered Persons alerts delivered to cell phones and PDAs and support of over 500 local and federal law enforcement agencies. To date, our CANS operations has primarily been used to generate goodwill for our products through its public service announcements. Our goal is to position CANS to generate revenues from brand licensing, sponsorships, and data feeds. In addition CANS plays a significant part in our overall outreach campaign, primarily used to generate awareness of our GPS products and applications. CANS provides website tickers and news feeds to merchants, internet service providers, affiliate partners, corporate sponsors and local, state and federal agencies.

Additionally, CANS markets and sells the patent pending electronic medical Code Amber Alertag and has recently signed up dozens of online affiliates and channel partners with nearly 300 affiliates in 61 countries and 25 active fundraising organizations throughout the United States that are selling the Alertag. The Alertag comes with an annual $19.95 subscription based model and compliments the overall GTX business model of providing peace of mind and personal location solutions.

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Results of Operations

The following discussion should be read in conjunction with our interim
consolidated financial statements and the related notes that appear elsewhere in
this Quarterly Report.

    Three Months Ended September 30, 2012 Compared to the Three Months Ended
                               September 30, 2011

                                              Three Months Ended September  30,
                                             2012                           2011
                                        $       % of Revenues         $       % of Revenues

Revenues                                $45,062          100%        $367,960          100%
Cost of goods sold                      23,898            53%        346,688            94%
Net profit                              21,164            47%         21,272             6%

Salaries and professional fees         248,424           551%        322,757            88%
General and administrative              41,222            92%         63,469            17%
Operating expenses                     289,646           643%        386,226           105%

Loss from operations                  (268,482)        (596)%       (364,954)         (99)%
Other income (expense), net             (2,250)          (5)%          5,415            1 %
Net loss                             $(270,732)        (601)%      $(359,539)         (98)%

Revenues

Revenues during the third quarter of 2012 decreased by $322,898 or 88% in comparison to 2011 due primarily to revenues generated from the shipment in 2011 of approximately 3,000 of our GPS devices to Aetrex Worldwide, Inc. ("Aetrex") for use in its Aetrex NavistarTM GPS Shoe (the "NavistarTMGPS Shoe"). No such sale occurred during the third quarter of 2012. Additionally, revenues generated from our Apps decreased by $28,000, or 66%, to approximately $14,000 when compared to the third quarter of 2011. This decrease is attributable to a large portion of subscriber downloads in 2012 relating to upgrades by current subscribers, which upgrades are provided free of charge. These decreases were offset by the sale and renewal of a total of 1,500 Alertags resulting in revenues of approximately $20,000 during the third quarter of 2012.

Cost of goods sold

Cost of goods sold decreased $322,790 or 93% during the third quarter of 2012 in comparison to 2011 due to the cost of the GPS devices we shipped to Aetrex in 2011 (we did not ship any GPS devices to Aetrex in the 2012 quarter). Cost of goods sold during the third quarter of 2012 consists primarily of the commissions paid on the sale of our Apps to our subscribers, the cost of producing the Alertags sold during the period, and depreciation on the capitalized costs of the Apps that we sell.

Salaries and professional fees

Salaries and professional fees during the third quarter of 2012 decreased $74,333 or 23% in comparison to the third quarter of 2011 due primarily to reductions in staff and management positions, as well as, marketing and public relations services. These reductions will remain in place as we maintain a low-overhead approach to operations that will adjust as operations require.

General and administrative

General and administrative expenses consist primarily of corporate administrative costs, depreciation, occupancy costs, insurance, office expenses, website maintenance and travel and entertainment. Such costs during the third quarter of 2012 decreased $22,247 or 35% in comparison to the third quarter of 2011 due primarily to reductions in depreciation expense, insurance, bad debt expense and various cost cutting measures which are expected to continue through 2012.

Other Income (Expense), net

Other income (expense), net for the third quarter of 2012 consists of finance costs charged on advances made on our line of credit. During the third quarter of 2012 we drew $15,000 on the line resulting in finance costs of $2,250. Other income (expense), net for the third quarter of 2011 is primarily attributable to derivative income related to our convertible promissory notes which were paid in full during 2011.

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Nine Months Ended September 30, 2012 Compared to the Nine Months Ended September 30, 2011

                                        Nine Months Ended September 30,
                                     2012                           2011
                                $       % of Revenues          $        % of Revenues

Revenues                       $309,922          100%          $622,528          100%
Cost of goods sold             256,974            83%          530,024            85%
Net profit                      52,948            17%           92,504            15%

Salaries and
professional fees              808,174           261%        1,042,071           167%
General and
administrative                 253,420            82%          207,455            33%
Operating expenses           1,061,594           343%        1,249,526           201%

Loss from operations        (1,008,646)        (326)%       (1,157,022)        (186)%
Other income (expense),
net                              9,750             3%           (6,781)         (1) %
Net loss                     $(998,896)        (322)%      $(1,163,803)        (187)%

Revenues

Revenues for the nine months ended September 30, 2012 decreased $312,606 or 50% as compared to the same period in 2011 primarily due to a decrease in the number of GPS devices sold to Aetrex for use in their NavistarTM GPS Shoe. During the nine months ended September 30, 2012 and 2011, we sold 1,500 and 3,000 GPS devices, respectively to Aetrex. In addition to revenues being generated from the sale of GPS devices to Aetrex, when the NavistarTM GPS Shoe is sold by Aetrex, and activated by the end user, that customer is required to pay us a monthly service fee, a portion of which is shared with Aetrex. Commercial sales of the NavistarTM GPS Shoe, which began in December 2011, have not been at the levels anticipated by management. Accordingly, Aetrex has not needed to purchase additional GPS devices. Concurrently, because of slow sales and GPS activations during the initial introductory period of this product, we have not generated a material amount of monthly service fees as of September 30, 2012. As news about the NavistarTM GPS Shoe spreads, and with the recent availability of the NavistarTM GPS Shoe in the U.K. and Ireland, management anticipates the sale of the NavistarTM GPS Shoe to increase over the next twelve months. Also contributing to our decrease in revenues was a $98,000 or 59% decrease in our App revenues, to approximately $69,000 when compared to the nine months ended September 30, 2011. This decrease is attributable to a large portion of subscriber downloads in 2012 relating to upgrades by current subscribers, which upgrades are provided free of charge. These decreases were offset by the sale and renewal of a total of 1,500 Alertags, resulting in revenues of approximately $20,000 during the nine months ended September 30, 2012.

Cost of goods sold

Cost of goods sold for the nine months ended September 30, 2012 decreased $273,050 or 51% compared to the nine months ended September 30, 2011 due primarily to the decrease in the number of GPS devices sold to Aetrex as discussed above as well as a reduction in the amount of commissions paid on the sale of our Apps.

Salaries and professional fees

Salaries and professional fees during the nine months ended September 30, 2012 decreased $233,897 or 22% compared to the same 2011 period primarily due to reductions in staff and management positions and marketing and public relations services, all in an effort to cut costs. These reductions will remain in place as we maintain a low-overhead approach to operations that will adjust, as operations require.

General and administrative

General and administrative costs during the nine months ended September 30, 2012 increased $45,965 or 22% in comparison to the nine months ended September 30, 2011 due to the impairment of capitalized software development costs. Management re-assessed the value of our capitalized software development costs and determined that, based on the revenues generated from our Apps, that the capitalized assets had been impaired. Accordingly, we wrote-down the software development costs to the estimated net realizable value of approximately $44,000 and recognized an impairment charge of $103,000 during the nine months ended September 30, 2012. General and administrative expenses also consist of corporate administrative costs, depreciation, occupancy costs, insurance and travel and entertainment which, when excluding the impairment charge, decreased 28% during the nine months ended September 30, 2012 in comparison to the nine months ended September 30, 2011 due primarily to reductions in depreciation expense, insurance and travel, as well as, the implementation of various general cost cutting measures.

Other Income (Expense), net

Other income (expense), net for the nine months ended September 30, 2012 primarily consists of $16,250 of other income recognized from the reversal of a litigation accrual relating to a lawsuit filed against us by a former consultant that was dismissed in May 2012. Also included are finance costs of 15% applied to advances made on a line of credit entered into on June 27, 2012. We drew $30,000 on the line resulting in finance costs of $4,500. Additionally, we paid $2,000 of administrative costs to the Holder of the line of credit. See further discussion in the Liquidity and Capital Resources discussion below. Other income (expense), net for the nine months ended September 30, 2011 is primarily attributable to discount amortization, derivative income and the gain on conversion of our convertible promissory notes which were paid in full during 2011.

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Liquidity and Capital Resources

As of September 30, 2012, we had approximately $15,000 of cash and cash equivalents, and a working capital deficit of approximately $576,000 compared to approximately $92,000 of cash and cash equivalents and a working capital deficit of approximately $190,000 as of December 31, 2011.

During the nine months ended September 30, 2012, our net loss decreased 14% to approximately $999,000 compared to a net loss of approximately $1,164,000 for the same 2011 period. Net cash used in operating activities was approximately $240,000 for the nine months ended September 30, 2012 compared to $640,000 during the same 2011 period. The decrease was primarily due to the impairment of capitalized software development costs, a reduction in stock based compensation, reductions in accounts receivable, the shipment of GPS devices to Aetrex, and the continued accrual of portions of wages payable to members of management and various officers in an effort to preserve cash for working capital needs.

Net cash used in investing activities during the nine months ended September 30, 2012 and 2011 was approximately $15,000 and $39,000, respectively and consisted primarily of payments for the development of our LOCiMOBILEŽ products, which payments were capitalized.

Net cash provided by financing activities during the nine months ended September 30, 2012 was approximately $178,000 and primarily consists of proceeds received from the sale of shares under an equity line of financing (the "Equity Line") that we have established with Dutchess Equity Fund, L.P. (now known as Dutchess Opportunity Fund, II, LP) in 2009. During the nine months ended September 30, 2012, we sold 2,115,497 shares of common stock to Dutchess resulting in proceeds of approximately $152,000.Additionally, we entered into a $55,000 line of credit on June 27, 2012 upon which we have drawn $30,000 and made payments totalling $14,375 as of September 30, 2012. Additionally, Aetrex provided us with a $10,000 short-term loan for working capital purposes. Net cash provided by financing activities during the nine months ended September 30, 2011 was approximately $635,000 and consists primarily of proceeds received from the sale of 5,000,803 shares of common stock from the Equity Line financing agreement, resulting in proceeds of $328,000 and $297,500 from stock subscription agreements.

Because revenues from our operations have, to date, been insufficient to fund our working capital needs, we have had to rely on the cash we receive from our financing activities, as well as, the Equity Line with Dutchess to fund our capital expenditures and to support our working capital requirements. Although we anticipate (i) that revenues from the NavistarTM GPS Shoe that was released at the end of fiscal 2011 will increase during the remainder of 2012 and in 2013, and (ii) that we will receive additional revenues under our other licenses, the amount and timing of such revenues is unknown. For our internal budgeting purposes, we have assumed that such revenues will not be sufficient to fund all of our planned operating and other expenditure. In addition, our actual cash expenditures may exceed our planned expenditures, particularly if we invest in the development of improved versions of our existing products and technologies, and if we increase our marketing expenses.

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On June 27, 2012, the Company entered into an agreement with an unrelated third party (the "Holder") for a $55,000 line of credit (the "Line Agreement"). In accordance with the Line Agreement, the Company is required to repay 115% of each amount advanced (the "Advance Amount") and must make mandatory payments on each Advance Amount every 30 days from the date the Advance Amount is requested in an amount equal to 1/3 of the Advance Amount. All Advance Amounts are required to be repaid in full by the maturity date, November 27, 2012. The Company issued the Holder 250,000 shares of its common stock as an incentive for entering into the Line Agreement. The stock was valued at the current market price of $0.04 per share or $10,000. The Company paid the Holder administrative fees totalling $2,000 for due diligence, document creation expense, closing costs, and transaction administration expenses. In the event the Company raises in excess of $25,000 from a financing, and there are unpaid Advance Amounts under the Line Agreement, the Company shall use any funds in excess of the $25,000 to repay the Holder any amounts outstanding. In the event the volume weighted average price of the Company's common stock is below $.025 for a period of five days, no further advance requests can be submitted by the Company. In accordance with the Line Agreement, the Company is obligated to issue up to 640,645 shares to secure the re-payment of the Advance Amounts.

As of September 30, 2012, we had borrowed $30,000 under the Line Agreement, recognized an additional $4,500 in finance costs and made payments to the Holder totalling $14,375 resulting in a net amount owed under the Line Agreement of $20,125 at September 30, 2012. The Company has not made the mandatory payments on the Advance Amounts in accordance with the Line Agreement as of September 30, 2012.

On September 19, 2012, Aetrex loaned the Company $10,000 to fund working capital needs as the initial sales of the NavistarTM GPS Shoes have been slow. The loan is non-interest bearing and is due on November 30, 2012. In addition to the Aetrex Loan, as of September 30, 2012 the Company owes Aetrex approximately $8,500 primarily related to payments received by the GTX for sales of the NavistarTM GPS Shoes, as well as, Aetrex's portion of monthly service fees related to the NavistarTM GPS Shoes.

In connection with the Equity Line with Dutchess, as of September 30, 2012 we had sold 11,359,355 shares of our common stock (at prices ranging from $0.176 - $0.050 per share) for net proceeds of approximately $919,000. The remaining 640,645 shares of common stock available under the Equity Line were sold to Dutchess on November 12, 2012 at a price of $0.022 per share resulting in proceeds of approximately $14,000. The foregoing proceeds will be used to pay off the remaining balance owed on the Advance Amounts in accordance with the Line Agreement.

On November 14, 2012, (the "Effective Date") the Company entered into a convertible promissory note in the principal amount of $200,000 with an independent third party (the "Lender"), (the "Note"). The Note contains a 10% original issue discount (the "OID") and accordingly a maximum of $180,000 of consideration ("Consideration") can be advanced under the Note. Upon closing of the Note, the Lender made an initial $25,000 advance of Consideration to the Company; the Lender may pay additional Consideration to the Company as loan advances in such amounts and at such dates as the Lender may choose in its sole discretion. The principal sum due to the Lender is prorated based on the Consideration actually paid by the Lender plus the OID. The maturity date of the Note is one year from the Effective Date and is the date upon which the principal sum of the Note, as well as any unpaid interest and other fees, is due and payable. The conversion price is the lesser of $0.025 or 70% of the lowest trade price in the 25 trading days previous to the conversion. Unless otherwise agreed in writing by both parties, at no time will the Lender convert any amount of the Note into common stock that would result in the Lender owning more than 4.99% of the common stock outstanding. The Company may repay each loan advance at any time on or before 180 days from the date that the advance is received, after which we may not make further payment on that advance amount without written approval from the Lender. If the Company repays the amount advanced on or before 90 days from the date received, the Interest Rate shall be 0%. If the Company does not repay the advance amount on or before 90 days from the date received, a one-time interest charge of 10% shall be applied to the advance amount, which interest charge is in addition to the OID.

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Because the 2009 Investment Agreement with Dutchess was expiring, on June 27, 2012, the Company entered into a second Investment Agreement ("2012 Investment Agreement") with Dutchess pursuant to which, Dutchess committed to purchase up to $5,000,000 of the Company's common stock, over the course of thirty-six months (the "Equity Line Financing"). The aggregate number of shares issuable by the Company and purchasable by Dutchess under the 2012 Investment Agreement is 15,000,000. Concurrently, the Company entered into a Registration Rights Agreement ("Registration Rights Agreement") with Dutchess, whereby the Company was obligated to file a registration statement with the Securities and Exchange Commission to register the resale by Dutchess of 15,000,000 shares of the common stock underlying the 2012 Investment Agreement by or before September 10, 2012. As of November 15, 2012, the Company had not filed the registration statement and not registered the resale of the 15,000,000 shares of common stock for resale by Dutchess. Funding under the Equity Line Financing is not available to the Company until the 15,000,000 shares of common stock have been registered for resale with the Securities and Exchange Commission. Accordingly, the 2012 Investment Agreement is not currently available to the Company and cannot be used to provide working capital.

We are currently a party to two licensing agreements (with Aetrex and MNX) and three international distributor agreements. During September 2012, MNX renewed its licensing agreement for an additional $25,000. Additionally, during August 2012, we entered into a mobile to mobile services agreement with a service provider located in the United Kingdom. This agreement enables the Company to provide greater GPS services in the U.K. and throughout the world. We anticipate that we will generate increased revenues from these agreements and from our current and international distributors. For example, as a result of our mobile to mobile services agreement, Aetrex began offering the NavistarTM GPS Shoe for commercial sale in Ireland during October 2012. However, we expect to incur continued losses until these and our other revenue initiatives collectively generate substantial revenues. No assurance can be given that our current contractual arrangements and the revenues from the NavistarTM GPS Shoes, device sales, subscriptions, Alertags, software licensing, or our smart phone or tablet Apps will be sufficient to fund our anticipated working capital needs by the end of calendar year 2012.

In addition to continuing to incur normal operating expenses, we intend to continue our research and development efforts for our various technologies and products, including hardware, software, interface customization, and website development, and we also expect to further develop our sales, marketing and manufacturing programs associated with the commercialization, licensing and sales of our GPS devices and technology, and the commercialization of the LOCiMOBILEŽ applications for GPS enabled handsets.

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