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GTXO > SEC Filings for GTXO > Form 10-K on 16-Apr-2013All Recent SEC Filings

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Form 10-K for GTX CORP


16-Apr-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Overview

Business. GTX Corp and its subsidiaries, (GTX California, LOCiMOBILE, Inc. and CANS) are engaged in businesses that design, develop and sell various interrelated and complementary products and services in the Personal Location Services marketplace. GTX California focuses on hardware and software design and development of products and services by offering a Global Positioning System ("GPS") and cellular location platform that enables subscribers to track in real time the whereabouts of people, pets or high valued assets through a miniaturized transceiver module, wireless connectivity gateway, middleware and viewing portal. LOCiMOBILE, Inc. has developed and owns LOCiMobileTM, a suite of mobile tracking applications that turn the iPhone, Android, BlackBerry and other GPS enabled handsets into a tracking device which can then be tracked from handset to handset or through our Location Data Center tracking portal and which allows the user to send a map to the recipient's phone showing the user's location. CANS is a U.S. and Canadian syndicator of all state Amber Alerts providing website tickers and news feeds to merchants, internet service providers, affiliate partners, corporate sponsors and local, state and federal agencies, as well as, marketing and selling the patent pending electronic medical health record Code Amber Alertag.

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Results of Operations

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

Revenues for the fiscal year ended December 31, 2012 ("fiscal 2012") decreased by 45% compared to the fiscal year ended December 31, 2011 ("fiscal 2011"), and operating expenses in fiscal 2012 decreased by 17%. Our fiscal 2012 net loss is approximately 17% lower than it was in fiscal 2011 and our fiscal 2011 net loss is approximately 13% lower than it was in fiscal 2010.

The following table represents our statement of operations for the years ended December 31, 2012 and 2011:

                                                Year ended December 31,
                                         2012                             2011
                                   $       % of Revenues            $       % of Revenues
Revenues                          $367,114          100%           $663,835          100%
Cost of goods sold                 291,388           79%            562,475           85%
Gross margin                        75,726           21%            101,360           15%
Operating expenses
  Wages and benefits               635,622          173%            768,651          116%
  Professional fees                366,330          100%            510,785           77%
  General and
administrative and
   impairment                      292,112           80%            281,798           42%
Total operating expenses         1,294,064          353%          1,561,234          235%
Loss from operations           (1,218,338)        (332)%        (1,459,874)        (220)%
Other income (expense),                829            0%            (6,869)          (1)%
net
Net loss                      $(1,217,509)        (332)%       $(1,466,743)        (221)%

Revenues

Revenues decreased 45% during fiscal 2012 as compared to last year due to a decrease in the number of GPS devices sold to Aetrex for use in their NavistarTM GPS Shoe and to a decrease in revenues generated from App sales. During fiscal 2012 and 2011, we sold 1,500 and 3,000 GPS devices, respectively, to Aetrex generating revenues of approximately $157,000 and $314,000, respectively. 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. 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 for the GPS tracking service on the shoe. A portion of the monthly service fee is shared with Aetrex. Because of slow sales and GPS activations of this product, we have not generated a material amount of monthly service fees during fiscal 2012. We are exploring multiple avenues in which the NavistarTM GPS Shoe can be marketed both domestically and internationally. As news about the NavistarTM GPS Shoe spreads, and with the recent availability of the NavistarTM GPS Shoe in the U.K., Canada, Australia and Ireland, management anticipates the sale of the NavistarTM GPS Shoe will increase over the next twelve months. Also contributing to our decrease in revenues was a $126,000 or 62% decrease in our App revenues, to approximately $76,000 when compared to fiscal 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. In addition to revenues generated through the shipment of the Aetrex shoes, monthly service fees on the shoes and from the sale of our Apps, we generate revenues from the sales of our portal services, hardware product, portal software licensing, platform testing, monthly subscriptions, online advertising revenue, Code Amber annual news feed subscriptions, points of display sponsorships and the sale of Code Amber Alertags.

Cost of goods sold

Cost of goods sold for fiscal 2012 decreased 48% compared to fiscal 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.

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Wages and benefits

Wages and benefits decreased 17% for fiscal 2012 in comparison to fiscal 2011 due to continued cost cutting efforts, which included reductions in management positions. These reductions in overhead will remain in place as we maintain a low-overhead approach to operations that will scale as operations require.

Professional fees

Professional fees consist of costs attributable to consultants and contractors who primarily spend their time on sales, marketing and the development of technology; investor relations; legal fees relating to general corporate matters and our patent applications; and accounting expenses. Such costs decreased 28% in fiscal 2012 compared to fiscal 2011 due primarily to reductions in marketing and public relations services.

General and administrative and impairment

General and administrative costs during fiscal 2012 increased 4% in comparison to fiscal 2011 due to the impairment of capitalized software development costs. Management re-assessed the value of our capitalized App 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 fiscal 2012. General and administrative expenses also consist of corporate administrative costs, depreciation, occupancy costs, insurance, website development, trade shows and travel which, when excluding the impairment charge, decreased 33% during fiscal 2012 in comparison to fiscal 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 fiscal 2012 consists primarily of costs associated with our debt financing during the year. We incurred finance costs totaling $6,500 resulting from our line of credit entered into on June 27, 2012. In accordance with the line of credit agreement, a 15% finance charge is applied to each advance. We drew $30,000 on the line resulting in finance costs of $4,500 and paid $2,000 of administrative costs to the lender of the line of credit (see further discussion in the Liquidity and Capital Resources discussion below). The accounting treatment for the bifurcation of the derivative liability embedded in our Convertible Note resulted in interest expense of approximately $23,000, derivative income of approximately $17,000 and discount amortization of approximately $4,000. The derivative income represents the net unrealized change during the period in the fair value of the derivative liability. Also included is $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.

Other income (expense), net for fiscal 2011 is primarily attributable to discount amortization, derivative income and the gain on conversion of our convertible promissory notes. As of December 31, 2011, all the then convertible promissory notes were extinguished in full, leaving the Company with no outstanding debt.

Net loss

Net loss during fiscal 2012 decreased approximately 17% in comparison to the net loss incurred during fiscal 2011. The decrease is primarily due to our efforts to maintain and/or cut costs in regards to wages, professional fees and general and administrative expenses.

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Liquidity and Capital Resources

As of December 31, 2012, we had approximately $31,000 in cash, $15,000 of other current assets and $710,000 of current liabilities, resulting in a working capital deficit of approximately $664,000 compared to approximately $92,000 in cash and a working capital deficit of approximately $190,000 as of December 31, 2011.

Our net loss decreased to $1,218,000 for fiscal 2012 compared to a net loss of $1,467,000 for fiscal 2011. Net cash used in operating activities was approximately $254,000 for fiscal 2012 compared to approximately $666,000 for fiscal 2011. The resulting decrease of approximately $412,000 is due to the decrease in our net loss, as well as the impairment charge related to capitalized software development costs, a reduction 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 fiscal 2012 and 2011 was approximately $15,000 and $68,000, respectively and consisted primarily of payments for the purchase of equipment.

Net cash provided by financing activities during fiscal 2012 and 2011 was approximately $208,000 and $759,000, respectively, and primarily consists of proceeds received from the sale of shares from the equity line financing agreement that we had with Dutchess Equity Fund, L.P. (now known as Dutchess Opportunity Fund, II, L.P.). During fiscal 2012 and 2011, we sold 2,756,142 and 6,905,022 shares of common stock, respectively to Dutchess resulting in proceeds of approximately $164,000 and $472,000, respectively. The equity line expired in November 2012 and accordingly is not longer available for our use. The remaining net cash provided by financing activities in fiscal 2012 relates to proceeds from our $200,000 Convertible Note, a $55,000 line of credit and a $10,000 short-term loan from Aetrex as discussed below. During 2011 we also received proceeds totaling $297,500 from the sale of 5,950,000 units in a private placement. The units consisted of 5,950,000 shares of our common stock and 5,720,000 warrants to purchase additional shares of common stock, exercisable at $0.08 per warrant. In October 2011, we registered the resale by the investors of the foregoing securities that were sold in the private placement.

Because revenues from our operations have, to date, been insufficient to fund our working capital needs, we currently rely on the cash we receive from our financing activities 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 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. Accordingly, we anticipate that we will have to raise additional capital in order to fund our operations in 2013.

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 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. The Company was unable to make the mandatory payments or repay the Advance Amounts by the November 27, 2012 maturity date. As of December 31, 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 $21,000 resulting in a net amount owed under the Line Agreement of $13,500 at December 31, 2012.

On January 14, 2013, the Holder of the Line Agreement entered into assignment agreement with an unrelated third party (the "Assignee") whereby the Assignee assumed all of the Holder's right, title, and interest in and to the Line Agreement in the aggregate amount of $13,500 (the "Note"). As consideration for the assignment of the Note, on January 15, 2013 we paid the Assignee 2,459,355 shares of common stock and the Assignee paid the Holder $13,500. The market value of the 2,459,355 shares of common stock on the date of the assignment was approximately $49,000, or $0.02 per share resulting in the Company incurring finance costs of approximately $35,500.

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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 was due on November 30, 2012. As of December 31, 2012, the Company has not repaid the Aetrex loan and $9,500 remains outstanding. In addition to the Aetrex loan, as of December 31, 2012 the Company owes Aetrex approximately $15,000 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.

On November 14, 2012, the Company entered into a convertible promissory note in the principal amount of $200,000 with a 10% original issue discount (the "Convertible Note"). Upon closing of the Convertible 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. On February 27, 2013, the lender advanced the Company an additional $25,000. The Convertible Note matures one year from the effective date of each payment. If the Company repays the amount advanced within 90 days, the interest rate will be 0%, otherwise a one-time interest charge of 10% shall be applied to the principal sum outstanding. The Company may repay the amount advanced within 180 days from the date received, after which we may not make further payments on that advance amount without written approval from the lender. The Convertible Note is convertible into shares of common stock of the Company at a price equal to 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. As of the date of this Annual Report, the Company had not made any payments on the Convertible Note.

We are currently a party to two licensing agreements (with Aetrex and MNX) and five international distributor agreements. During 2013, we anticipate that we will generate increased revenues from these licensing agreements and from our current and potential domestic and international distributors that are currently evaluating our platform. 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 our 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 2013.

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. Our funding requirements for these projects will depend on numerous factors, including:

ˇ Costs involved in the completion of the hardware, software, interface customization and website development necessary to continue the commercialization of our products;

ˇ The costs of licensing activities, including product marketing and advertising; and
ˇ Revenues derived from product sales and the licensing of our technology, the sale of GPS enabled shoes in conjunction with the Aetrex Licensing Agreement, the sales of our other GPS devices and monitoring services, the LOCiMobileŽ applications for GPS enabled handsets, the sale of Alertags and advertising sales from CANS.

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As noted above, based on budgeted revenues and expenditures, unless revenues increase significantly, we believe that our existing and projected sources of liquidity may not be sufficient to satisfy our cash requirements for the next twelve months. Accordingly, we will need to raise additional funds during 2013. The sale of additional equity securities will result in additional dilution to our existing stockholders. Sale of debt securities could involve substantial operational and financial covenants that might inhibit our ability to follow our business plan. We have not identified the sources for the additional financing that we will require, and there is no assurance that sufficient funding through a financing will be available to us at acceptable terms or at all. Any additional funding that we obtain in a financing is likely to reduce the percentage ownership of the Company held by our existing security-holders. The amount of this dilution may be substantial based on our current stock price, and could increase if the trading price of our common stock declines at the time of any financing from its current levels. We may also attempt to raise funds through corporate collaboration and licensing arrangements. To the extent that we raise additional funds through collaboration and licensing arrangements, we may be required to grant licenses on terms that are not favorable to us. There can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all. If we are unable to obtain the needed additional funding, we may have to further reduce our current level of operations, or may even have to totally discontinue our operations.

We are subject to many risks associated with early stage businesses, including the above discussed risks associated with the ability to raise capital. Please see the section entitled "Risk Factors" for more information regarding risks associated with our business.

Contractual Obligations and Commercial Commitments

The following table sets forth our contractual obligations as of December 31,
2012:

                                    Payments due by period
                   Total     Less than 1 year   1-3 years   More than 3 years
Line Agreement    $ 13,500           $ 13,500    $    -            $      -
Convertible Note    27,500             27,500         -                   -
Aetrex Loan          9,500              9,500           -                   -
Total             $ 50,500           $ 50,500    $    -            $      -

Off-Balance Sheet Arrangements

There are no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Inflation

Inflation and changing prices have had no effect on our net sales and revenues or on our income from continuing operations over our two most recent fiscal years.

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Critical Accounting Policies and Estimates

The financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States. Because a precise determination of many assets and liabilities is dependent upon future events, the preparation of financial statements for a period necessarily involves the use of estimates which have been made using careful judgment.

The financial statements have, in management's opinion, been properly prepared within reasonable limits of materiality and within the framework of the significant accounting policies summarized below.

We have identified the following critical accounting policies that are most important to the portrayal of our financial condition and results of operations and that require management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The following is a review of the more critical accounting policies and methods used by us:

Going Concern

The consolidated financial statements have been prepared on a going concern basis which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Company has incurred net losses of $1,217,509 and $1,466,743 for the years ended December 31, 2012 and 2011, respectively, has incurred losses since inception resulting in an accumulated deficit of $13,930,955 as of December 31, 2012, and has negative working capital of $663,722 at December 31, 2012. A significant part of our negative working capital position at December 31, 2012 consisted of $392,834 of amounts due to officers and management of the Company for accrued wages. The Company anticipates further losses in the development of its business.

The ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. The Company's ability to raise additional capital through the future issuances of debt or equity is unknown. The obtainment of additional financing, the successful development of the Company's contemplated plan of operations, or its transition, ultimately, to the attainment of profitable operations are necessary for the Company to continue operations. The ability to successfully resolve these factors raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements of the Company do not include any adjustments that may result from the outcome of these aforementioned uncertainties.

Revenue Recognition

Revenues consist primarily of the sale of our GPS device to Aetrex International Worldwide, Inc. "Aetrex" for use in the Aetrex NavistarTM GPS Shoe and the related monthly service fee from subscribers, our mobile tracking applications sold via the Apple iTunes Store and the Google Marketplace, the sale of GPS tracking devices and the related monthly service fees, licensing agreements, and the sale of Code Amber Alertags.

The Company recognizes revenue from product sales when the product is shipped to the customer and title has transferred. The Company recognizes application revenue when the application is purchased by the customer. The Company assumes no remaining significant obligations associated with the product sale other than that related to its warranty program discussed below. Revenue related to monthly service fees both for the GPS Shoes and GPS tracking devices, licensing agreements and annual subscriptions are recognized over the respective terms of the agreements.

Revenue from multiple-element arrangements is allocated to the elements based on the relative fair value of each element, which is generally based on the relative sales price of each element when sold separately. Each element's allocated revenue is recognized when the revenue recognition criteria for that element have been met. If the Company cannot objectively determine the fair value of any undelivered element included in a multiple-element arrangement, the Company defers revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements.

Product Warranty

The Company's warranty policy provides repair or replacement of products (excluding GPS Shoe devices) returned for defects within ninety days of purchase. Warranty liabilities are recorded at the time of sale for the estimated costs that may be incurred under our standard warranty. As of December 31, 2011, products returned for repair or replacement have been immaterial. Accordingly, a warranty liability has not been deemed necessary. The GPS Shoe devices are covered under the manufacturer's standard limited warranty which covers any defects in materials and workmanship for a period of 12 months following the purchase of the device by the customer.

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Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Derivative Instruments

Our debt or equity instruments may contain embedded derivative instruments, such as conversion options, which in certain circumstances may be required to be bifurcated from the associated host instrument and accounted for separately as a derivative instrument liability.

The identification of, and accounting for, derivative instruments is complex. Our derivative instrument liabilities are re-valued at the end of each reporting period, with changes in the fair value of the derivative liability recorded as charges or credits to income, in the period in which the changes occur. For bifurcated conversion options that are accounted for as derivative instrument liabilities, we determine the fair value of these instruments using the Black -Scholes option pricing model. That model requires assumptions related . . .

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