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GTXO > SEC Filings for GTXO > Form 10-Q on 19-Aug-2013All Recent SEC Filings

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Form 10-Q for GTX CORP


19-Aug-2013

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", "GTX", "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:

Table of Contents

· 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. The Company has signed several exclusive and non-exclusive licensing agreements with parties who in 2012 began to deploy the GTX products and services.

On February 15, 2013 and June 26, 2013, the Company entered into two separate one-year advisory service agreements with Brewer Sports International, LLC ("BSI") (the "Advisory Agreements"). The Advisory Agreements are expected to increase our brand and market awareness in an effort to increase sales and expand our global reach, including integration of our GPS Smart Shoe technology with BSI's Coalition for Concussion Treatment campaign. BSI will utilize its extensive network to facilitate outreach efforts with synergetic companies and partnering organizations as well as secure product endorsements and global exposure for our product line. BSI will include the Company in its upcoming Traumatic Brain Injury awareness conference and expand its social media awareness programs relative to this issue and the products and services offered by the Company. As compensation for such services, the Company has granted BSI 5,500,000 shares of common stock valued at $145,000.

During July 2013, the Company converted its platform test agreement with AttachaPack LLC into an exclusive licensing agreement for the GPS Tracking platform and to allow the miniaturized two-way GPS with SOS and emergency voice capabilities to be embedded in AttachaPackTM backpacks. AttachaPackTM offers a range of innovative backpacks that feature interchangeable pockets in hundreds of patterns so kids can easily customize and create their own backpack.

On July 12, 2013, the Company entered into an exclusive three-year contract with Atlantic Footcare, Inc., ("Atlantic") to develop and launch GPS embedded insoles. Atlantic would be the Company's exclusive manufacturer of its new shoe insole to be used with our embedded GPS devices.

· LOCiMOBILE, Inc., our mobile application subsidiary, has developed and owns LOCiMOBILE®, a suite of mobile tracking applications ("Apps") that turn the latest smartphones and tablets such as iPhone®, 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 the date of this Quarterly Report, our 20 Apps have experienced over 1.5 million downloads in 162 countries. Additionally, we have released our newest enterprise App, Track My Work Force, which allows employers to easily track and monitor employees, drivers, sales reps, and more using their Smartphone, tablet or any web enabled devices. The Company continues to rollout new and innovative products which will include a series of applications 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 methods of keeping track of their employees. In addition, our goal is to expand into the proximity marketing and advertising business and begin to leverage our over 1.5 million global user base. Our roadmap also consists of additional applications for the iPad, other tablets, TV's, and more applications for the iPhone 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.

· 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 that support 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 digital medical record Code Amber Alertag. The Alertag is a product and service that provides worldwide access to critical personal information in emergency situations for person who subscribe to the product and service. As of the date hereof, Alertag has over 2,500 annual subscribers. In addition, CANS recently signed up 85 sales agents in 10 countries that have begun selling Alertags, adding to our existing 300 online affiliates and channel partners with affiliates in 61 countries and 25 active organizations throughout the United States which market and sell the Alertag. The Alertag is offered on an annual $29.95 subscription based model, and complements the overall GTX business model of providing location based e-health technologies and services.

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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 June 30, 2013 ("Q2 2013") Compared to the Three Months Ended June 30, 2012 ("Q2 2012")

                                          Q2 2013                        Q2 2012
                                      $       % of Revenues          $        % of Revenues

Revenues                           $   49,966          100%      $     45,461          100%
Cost of goods sold                     19,645           39%            25,812           57%
Net profit                             30,321           61%            19,649           43%

Wages and professional fees           216,231          433%           271,485          597%
General and administrative             49,523           99%           144,838          319%
Operating expenses                    265,754          532%           416,323          916%

Loss from operations                (235,433)        (471%)         (396,674)        (873%)
Other income (expense), net          (37,167)         (74%)            12,000           26%
Net loss                          $ (272,600)        (546%)     $   (384,674)        (846%)

Revenues

Revenues during Q2 2013 increased by 10% or $4,505 in comparison to Q2 2012 due primarily to revenues generated from the sale of 1,000 Alertags, valued at approximately $13,000. Additionally, in Q2 2013, monthly GPS tracking subscriptions on the NavistarTM GPS Shoe have increased, we have started to generate sales from the new Track My Work Force App, and we have entered into additional platform test agreements which had not been received in Q2 2012. These increases are offset by revenues generated from our Apps which decreased by $17,000, when compared to Q2 2012. This decrease is attributable to a decrease in the purchase of new Apps, and a large increase in downloads for upgrades by current subscribers, which upgrades are provided free of charge. Revenues in Q2 2013 consisted primarily of income from the sale and renewal of Alertags (29%), Apps (23%), platform test agreements and monthly portal fees (21%) and monthly GPS tracking subscriptions on the NavistarTM GPS Shoe(16%).

Cost of goods sold

Cost of goods sold decreased 24% or $6,167 during Q2 2013 in comparison to Q2 2012 due primarily to the decrease in revenues generated by our Apps and pay approximately 30% commission on that App revenue. Accordingly, as our App revenue decreased $17,000, the commissions paid decreased approximately $5,000. Cost of goods sold during Q2 2013 consist primarily of the commissions paid on the sale of our Apps to our subscribers, the commissions paid to Aetrex for their portion of the monthly service fee on the NavistarTMGPS Shoe, and depreciation on the capitalized costs of the Apps that we sell.

Wages and professional fees

Wages and professional fees during Q2 2013 decreased 20% or $55,254 in comparison to Q2 2012 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 during Q2 2013 decreased 66% or $95,315 in comparison to Q2 2012 due to the recognition of impairment on capitalized software development costs during Q2 2012. During 2012, management 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 Q2 2012. Excluding the $103,000 impairment charge in 2012, general and administrative expenses in Q2 2013 increased approximately $8,000 or 18% as a result of additional maintenance on our portal and website incurred during Q2 2013.

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Other Income (Expense), net

Other income (expense), net for Q2 2013 consists primarily of costs associated with our debt financing. The accounting treatment for the bifurcation of the derivative liability embedded in our Convertible Note resulted in net derivative expense of approximately $17,000. The net derivative expense represents the initial recording of the derivative liabilities as well as the subsequent change in fair value of the derivative liability during the period. Additionally, the conversion of portions of the Convertible Note resulted in a loss on conversion of approximately $17,000. Lastly, included is approximately $3,000 of interest expense relating to the Convertible Note.

Six Months Ended June 30, 2013 Compared to the Six Months Ended June 30, 2012



                                                Six Months Ended June 30,
                                           2013                           2012
                                     $       % of Revenues          $        % of Revenues

Revenues                          $   95,412          100%      $    264,860          100%
Cost of goods sold                    46,532           49%           233,076           88%
Net profit                            48,880           51%            31,784           12%

Wages and professional fees          405,589          425%           559,802          211%
General and administrative            93,382           98%           212,146           80%
Operating expenses                   498,971          523%           771,948          291%

Loss from operations               (450,091)        (472%)         (740,164)        (279%)
Other income (expense), net         (77,833)         (82%)            12,000            5%
Net loss                         $ (527,924)        (553%)     $   (728,164)        (275%)

Revenues

Revenues during the first six months of 2013 decreased 64% or $169,448 as compared to the same period in 2012 primarily due to revenues generated from the shipment in 2012 of approximately 1,500 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 2013. Additionally, revenues generated from our Apps decreased by $37,000, or 67%, to approximately $18,000 when compared to six months ended June 30, 2012. This decrease is attributable to a decrease in the purchase of new Apps, and a large increase in downloads for upgrades by current subscribers, which upgrades are provided free of charge. The decrease in revenues during 2013 from the Aetrex and App revenues was partially offset by increased revenues generated from the sale of 1,000 Alertags, valued at approximately $13,000, an increase in monthly GPS tracking subscriptions for the NavistarTM GPS Shoe, receipt of revenues from the commercial release of the new Track My Work Force App and revenues from the new platform test agreements which had not been received in Q2 2012. Revenues during the six months ended June 30, 2013 consisted primarily of application income (26%), platform test agreements and monthly portal fees (22%), the sale and renewal of Alertags (15%) and monthly GPS tracking subscriptions on the NavistarTM GPS Shoe (15%).

Cost of goods sold

Cost of goods sold decreased 80% or $186,544 during the six months ended June 30, 2013 in comparison to the same period in 2012 due to the cost of the GPS devices we shipped to Aetrex during 2012. Cost of goods sold during the 2013 consist primarily of the commissions paid on the sale of our Apps to our subscribers, the commissions paid to Aetrex for their portion of the monthly service fee on the NavistarTM GPS Shoe, and depreciation on the capitalized costs of the Apps that we sell.

Wages and professional fees

Wages and professional fees during the first six months of 2013 decreased 28% or $154,213 compared to the same 2012 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 six months ended June 30, 2013 decreased 56% or $118,764 in comparison to the same 2012 period due primarily to the recognition of impairment on capitalized software development costs during the 2012 period. Management assessed the value of our capitalized software development costs during 2012 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 2012. Excluding the $103,000 impairment charge in 2012, general and administrative expenses in 2013 decreased approximately $16,000 or 14% due primarily to reductions in depreciation expense and travel, as well as, the implementation of various general cost cutting measures.

Other Income (Expense), net

Other income (expense), net for the six months ended June 30, 2013 consists primarily of costs associated with our debt financing. The accounting treatment for the bifurcation of the derivative liability embedded in our Convertible Note resulted in net derivative expense of approximately $16,000. The net derivative expense represents the initial recording of the derivative liabilities as well as the subsequent change in fair value of the derivative liability during the period. Additionally, the conversion of portions of the Convertible Note and the payoff of a line of credit in January 2013 resulted in a loss on extinguishment of debt of approximately $53,000. Lastly, included is approximately $9,000 of interest expense relating to the Convertible Note and a short-term loan payable to one of our Board Members.

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Liquidity and Capital Resources

As of June 30, 2013, we had approximately $33,000 of cash and cash equivalents, and a working capital deficit of approximately $754,000, compared to approximately $31,000 of cash and cash equivalents and a working capital deficit of approximately $664,000 as of December 31, 2012. Since June 30, 2013, we have received $30,000 under the BSM Note (see below), and $25,000 under the Atlantic Note (see below).

During the three and six months ended June 30, 2013, our net loss decreased 29% and 27%, respectively to approximately $273,000 and $528,000, respectively, compared to a net loss of approximately $385,000and $728,000, respectively, for the three and six months ended June 30, 2012. Net cash used in operating activities for the six months ended June 30, 2013 and 2012 was approximately $105,000 and $237,000, respectively. The decrease in net cash used in operating activities was primarily due to adjustments to our net loss related to depreciation, the loss on extinguishment of debt, stock based compensation and adjustments to our derivative liabilities, as well as, increases in accounts payable to vendors 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.

There was no cash used for investing activities during the six months ended June 30, 2013. Net cash used in investing activities during the six months ended June 30, 2012 was approximately $12,000 and consisted primarily of payments for the development of our LOCiMOBILE®products, which payments were capitalized.

Net cash provided by financing activities during the six months ended June 30, 2013 was $107,500 and consisted of proceeds totaling $75,000 received from advances under a convertible note payable agreement, as well as, short-term loans totaling $30,000 and $10,000 each from our Chief Executive Officer and a Board Member, respectively. The Company repaid $7,500 of the short-term loan to the Board Member during the six months ended June 30, 2013. Net cash provided by financing activities during the six months ended June 30, 2012 was approximately $167,000 and consisted primarily of proceeds received from the sale of shares under an equity line of financing that we had with Dutchess Equity Fund, L.P. During Q1 2012, we sold 2,115,497 shares of common stock to Dutchess resulting in proceeds of approximately $152,000. The equity line expired in November 2012 and accordingly is no longer available for our use.

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 December 2011 will increase during the remainder of 2013, and (ii) that we will receive additional revenues from our other licenses, Alertag subscriptions, Track My Work Force subscriptions, international distributors, hardware sales, professional services and new customers in the pipeline, 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 expenditures. 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 continue to raise additional capital in order to fund our operations in 2013.

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 28, April 24, and June 27, 2013, the lender made additional advances of $25,000 each to the Company. 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.

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As of the date of this Quarterly Report, the holder of our Convertible Note has elected to convert portions of the outstanding balance into 4,250,100 shares of our common stock. The conversion price was calculated at the lesser of $0.025 or 70% of the lowest trade price in the 25 trading days previous to the conversion and averaged $0.0072 per share resulting in $30,556 of the outstanding principle balance being converted into stock.

On June 26, 2013, the Company entered into a Convertible Promissory Note with BSM Lending, LLC, for the principal sum of $30,000 plus interest of 15% per annum (the "BSM Note") and matures on June 25, 2014. The BSM Note was not funded until July 1, 2013. The Company may repay the BSM Note and accrued interest at any time prior to maturity. The BSM Note is convertible into shares of common stock of the Company at a price equal to 65% of the 5 day average closing price per share of the Company's common stock (the "Conversion Rate"). BSM may elect to convert in increments of less that 9.9% of the issued and outstanding shares of common stock of the Company, however, the Company will give the option to BSM to convert any amount exceeding 9.9% prior to such a conversion. Additionally, the BSM Note includes an automatic conversion feature whereby all amounts of principal will be converted into shares of common stock at the then effective Conversion Rate upon the sale of all or substantially all of the assets of the Company or in the event of a change in control.

On July 12, 2013, the Company entered into an Exclusive Manufacturing Agreement (the "Agreement") with Atlantic Footcare, Inc., a Rhode Island corporation ("Atlantic") whereby Atlantic would be the Company's exclusive manufacturer of its new shoe insole to be used with our embedded GPS devices. In conjunction with the Agreement, on July 24, 2013 (the "Closing"), we also entered into a Security Purchase Agreement (the "SPA") with Atlantic. Pursuant to the SPA, Atlantic has committed to purchase (A) a convertible promissory note (the "Atlantic Note") in the original principal amount of $200,000, accruing interest 6% per annum, and maturing on November 13, 2014, and (B) a warrant to purchase shares of the Company's common stock, par value $0.001 per share (the "Warrant").

In accordance with the SPA, Atlantic agrees to lend to the Company up to $200,000, as follows:

(i) $50,000 (comprised of $25,000 in cash and $25,000 in insole development and tooling costs associated with manufacturing insoles containing the Company's GPS devices, the value of which shall be determined by Atlantic (the "Services")); and

(ii) 3 installments of $50,000 (each comprised of $25,000 in cash and $25,000 in Services) the cash portion of each of which shall be funded on or about the 45th day after the Closing, the 75th day after the Closing and the 105th day after the Closing.

Atlantic may at any time elect to convert all of the entire outstanding principal amount of the Atlantic Note plus the accrued interest into 12% of the Company's issued and outstanding common stock immediately following the issuance thereof, multiplied by a fraction, the numerator of which is the principal amount of the Atlantic Note then outstanding and the denominator of which is $200,000.

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