NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
June 30,
2014
(Unaudited)
1.
ORGANIZATION AND BASIS OF PRESENTATION
GTX Corp and subsidiaries (the “Company”
or “GTX”) are engaged in businesses that design, develop and sell various interrelated and complementary products and
services in the Personal Location Services marketplace. GTX owns 100% of the issued and outstanding capital stock of Global Trek
Xploration (“GTX California”), LOCiMOBILE, Inc., and Code Amber News Service, Inc. (“CANS”).
GTX California
is a solution provider offering an enterprise GPS and cellular location platform that provides real-time tracking of the whereabouts
of people, pets, vehicles and high valued assets through a miniaturized transceiver module, wireless connectivity gateway, middleware
and viewing portal. Our core products and services are supported by an IP portfolio of patents,
patents
pending, registered trademarks, copyrights, URLs and a library of software source code. LOCiMOBILE, Inc., has been engaged in Smartphone
application (App) development since 2008. With a suite of mobile application
s
that turn the
iPhone, iPad, 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. LOCiMOBILE has launched numerous Apps across multi mobile device operating systems and
continues to launch consumer and enterprise apps. 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 personal health record Code Amber Alertag.
Basis of Presentation
The accompanying unaudited consolidated financial
statements of GTX have been prepared in accordance with accounting principles generally accepted in the United States for interim
financial information and applicable regulations of the U.S. Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the
United States have been omitted pursuant to such rules and regulations. In the opinion of management, all adjustments (consisting
only of normal recurring adjustments) considered necessary for a fair statement of financial position and results of operations
have been included. Our operating results for the six months ended June 30, 2014 are not necessarily indicative of the results
that may be expected for the year ending December 31, 2014. The accompanying unaudited consolidated financial statements should
be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2013, which are included
in our Annual Report on Form 10-K.
The accompanying consolidated financial statements
reflect the accounts of GTX Corp and its wholly owned subsidiaries. All significant inter-company balances and transactions have
been eliminated.
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 $1,227,301 and $527,924
for the six months ended June 30, 2014 and 2013, respectively, has incurred losses since inception resulting in an accumulated
deficit of $16,663,166 as of June 30, 2014, and has negative working capital of $1,033,730 as of June 30, 2014. A significant
portion of the Company’s net loss during the six months ended June 30, 2014 results from $449,033 of derivative expense due
to adjustments to derivative liabilities associated with our convertible debt and not from operations. However, 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 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.
2.
SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of the accompanying unaudited
consolidated financial statements requires the use of estimates that affect the reported amounts of assets, liabilities, revenues,
expenses and contingencies. These estimates include, but are not limited to, estimates related to revenue recognition, allowance
for doubtful accounts, inventory valuation, tangible and intangible long-term asset valuation, warranty and other obligations and
commitments. Estimates are updated on an ongoing basis and are evaluated based on historical experience and current circumstances.
Changes in facts and circumstances in the future may give rise to changes in these estimates which may cause actual results to
differ from current estimates.
Fair Value Estimates
Pursuant to the Accounting Standards Codification
(“ASC”) No. 820, “
Disclosures
About Fair Value of Financial Instruments
”, the Company records its financial assets and liabilities at fair value.
ASC No. 820 provides a framework for measuring fair value, clarifies the definition of fair value and expands disclosures regarding
fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability
(an exit price) in an orderly transaction between market participants at the reporting date. ASC No. 820 establishes a three-tier
hierarchy, which prioritizes the inputs used in the valuation methodologies in measuring fair value:
Level 1—Inputs
are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2—Inputs
(other than quoted prices included in Level 1) are either directly or indirectly observable for the asset or liability through
correlation with market data at the measurement date and for the duration of the asset/liability’s anticipated life.
Level 3—Inputs
reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement
date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.
The carrying values for cash and cash equivalents,
accounts receivable, other current assets, accounts payable and accrued liabilities approximate their fair value due to their short
maturities.
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.
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. This
model requires assumptions related to the remaining term of the instrument and risk-free rates of return, our current Common Stock
price and expected dividend yield, and the expected volatility of our Common Stock price over the life of the option.
Reclassifications
For comparability, certain prior period amounts
have been reclassified, where appropriate, to conform to the financial statement presentation used in 2014. These reclassifications
have no impact on net loss.
Recently Issued Accounting Pronouncements
The Financial Accounting Standards Board has
recently issued accounting pronouncements, most of which represent technical corrections to the accounting literature or application
to specific industries, which are not expected to have a material impact on the Company’s financial position, results of
operations or cash flows. We do not believe that the adoption of any recently issued accounting standards will
have a material effect on our financial position and results of operations.
3.
RELATED PARTY TRANSACTIONS
In order to preserve cash for other working
capital needs, various officers and members of management have agreed to accrue, and defer payment of, portions of their salaries
since fiscal 2011. As of June 30, 2014 and December 31, 2013, the Company owed $316,900 and $306,250, respectively for such accrued
wages.
4.
DEBT
The following table summarizes the components
of our short-term borrowings:
|
|
June 30, 2014
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
Atlantic Note
|
|
$
|
200,000
|
|
|
$
|
112,500
|
|
BSM Note dated June 26, 2013
|
|
|
—
|
|
|
|
30,000
|
|
Total short-term convertible notes
|
|
|
200,000
|
|
|
|
142,500
|
|
Less: Debt discount
|
|
|
(54,341
|
)
|
|
|
(51,703
|
)
|
Short-term convertible notes, net of debt discount
|
|
|
145,659
|
|
|
|
90,797
|
|
|
|
|
|
|
|
|
|
|
Related party short-term borrowings
|
|
|
—
|
|
|
|
4,000
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
$
|
145,659
|
|
|
$
|
94,797
|
|
|
|
|
|
|
|
|
|
|
Short-term derivative liabilities
|
|
$
|
145,342
|
|
|
$
|
70,535
|
|
|
|
|
|
|
|
|
|
|
Short-term convertible notes
Atlantic Agreement and SPA
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 the Company’s
embedded GPS devices. In conjunction with the Agreement, on July 24, 2013, we also entered into a Security Purchase Agreement (the
“SPA”) with Atlantic. Pursuant to the SPA, Atlantic committed to purchase (i) a convertible promissory note (the
“
Atlantic
Note
”
) in the original principal amount of $200,000, accruing 6% interest per annum, and maturing on November 13,
2014, and (ii) 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 agreed 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 $200,000 loan
has been fully funded. 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.
If Atlantic is unable to
dispose of the shares of common stock into which the Atlantic Note may be converted and the Warrant may be exercised (the “Registrable
Shares”) under Rule 144 as promulgated by the United States Securities and Exchange Commission (the “SEC”) under
the Securities Act of 1933, as amended (the “Securities Act”), Atlantic may request that the Company file a Form S-1
registration statement or Form S-3 registration statement (if applicable) with respect to one hundred percent (100%) of the Registrable
Shares then outstanding, then the Company shall, as soon as practicable, and in any event within sixty (60) days after the date
such request is given by Atlantic, file a registration statement under the Securities Act covering all Registrable Shares that
Atlantic requested to be registered.
BSM Lending, LLC Convertible Promissory
Note
On June 26, 2013, the Company entered into
a Convertible Promissory Note with BSM Lending, LLC (“BSM”), for the principal sum of $30,000 plus interest of 15%
per annum (the “BSM Note”). 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. On April 14, 2014, BSM Lending, LLC converted
the BSM Note of $30,000 plus accrued interest of $3,514 into 1,463,493 shares of our common stock, resulting in a loss on extinguishment
of debt in the amount of $13,464.
Long-term debt
The following table summarizes the components
of our long-term debt:
|
|
June 30, 2014
|
|
December 31, 2013
|
|
|
|
|
|
|
|
|
|
Fund A & R 1st Debenture dated September 19, 2013
|
|
$
|
—
|
|
|
$
|
53,438
|
|
Fund 2nd Debenture dated September 19, 2013
|
|
|
200,000
|
|
|
|
200,000
|
|
Fund 3rd Debenture dated September 19, 2013
|
|
|
742,000
|
|
|
|
477,000
|
|
Total long-term convertible notes
|
|
|
942,000
|
|
|
|
730,438
|
|
Less: Debt discount
|
|
|
(630,571
|
)
|
|
|
(492,766
|
)
|
Total long-term convertible notes, net of debt discount
|
|
$
|
311,429
|
|
|
$
|
237,672
|
|
|
|
|
|
|
|
|
|
|
Long-term derivative liabilities
|
|
$
|
702,377
|
|
|
$
|
411,708
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2014, our long-term debt matures
as follows:
2014
|
|
$
|
-
|
2015
|
|
|
-
|
2016
|
|
|
318,000
|
2017
|
|
|
624,000
|
2018 and thereafter
|
|
|
-
|
Total
|
|
$
|
942,000
|
112359 Factor Fund
Effective September 19, 2013, the Company
entered into a Securities Purchase Agreement with 112359 Factor Fund, LLC (the “Fund”) pursuant to which the Company
issued and sold to the Fund (i) an amended and restated convertible debenture (th
e
“A
& R
1
st
Debenture
”
) in the principal
amount of $123,394, (ii) a secured convertible debenture in the principal amount of $200,000 (the “2
nd
Debenture”),
and (iii) a secured convertible debenture payable in eight (8) tranches totaling an aggregate principal balance of $901,000 (the
“3
rd
Debenture” and together with the A & R 1
st
Debenture and 2
nd
Debenture,
the “Debentures”).
The A & R 1
st
Debenture accrued
interest at the lesser of the applicable Federal Rate or 6% per annum and was convertible into shares of common stock of the Company
at a price equal to 100% of the average of the 5 lowest closing market prices for the Company’s common stock for the 30 trading
days preceding conversion. During the six months ended June 30, 2014, the Fund converted the remaining principal amount owed under
the A & R 1
st
Debenture of $53,438 into 5,625,075 shares of our common stock, resulting in a loss on extinguishment
of debt of $11,813. In accordance with the terms of the A & R 1
st
Debenture, all accrued interest owed was forgiven
as the debt was converted in full prior to its maturity date.
The 2
nd
Debenture, in the amount
of $200,000, was issued to the Fund in consideration for the Fund’s various agreements issued under the Security Purchase
Agreement. The 2nd Debenture matures December 31, 2017 and accrues interest on the unconverted outstanding principal balance at
a rate per annum of the lesser of the applicable Federal Rate or 6%. Following the Payment Compliance Date, as defined below, at
the option of the Fund, the outstanding principal amount due under the 2
nd
Debenture may be converted into shares of
the Company’s common stock at a price equal to lesser of (a) the outstanding balance due under the Debenture divided by $0.01
per shares (the “Conversion Price,”) or (b) 9.99% of the then-current issued and outstanding capital stock of the Company
as of the first (1
st
) anniversary of the Payment Compliance Date. The “Payment Compliance Date” shall mean
the later to occur of (a) the date on which the Fund has paid the Company the full $425,000 purchase price of the 3
rd
Debenture, or (b) the date on which all amounts due to the Fund, except for amounts due under the 2nd Debenture, have been fully
paid. If the 2nd Debenture is repaid and/or converted in full prior to its maturity date, all accrued interest will be forgiven.
The face amount of
the 3rd Debenture is $901,000. The Fund has agreed to purchase the 3rd Debenture in eight (8) installments
(
each such installment that is paid is referred to as a “Tranche”). The 3rd Debenture matures on the third (3
rd
)
anniversary date of each Tranche payment. The payment and maturity dates of each Tranche are as follows:
Tranche
Number
|
Tranche
Payment Date
|
Tranche
|
|
Obligation
|
Maturity
Date
|
1
|
September 19, 2013
|
$75,000
|
|
$159,000
|
September 18, 2016
|
2
|
October 14, 2013
|
$50,000
|
|
$106,000
|
October 13, 2016
|
3
|
November 15, 2013
|
$50,000
|
|
$106,000
|
November 14, 2016
|
4
|
December 13, 2013
|
$50,000
|
|
$106,000
|
December 12, 2016
|
5
|
January 17, 2014
|
$50,000
|
|
$106,000
|
January 16, 2017
|
6
|
February 14, 2014
|
$50,000
|
|
$106,000
|
February 13, 2017
|
7
|
March 14, 2014
|
$50,000
|
|
$106,000
|
March 13, 2017
|
8
|
April 18, 2014
|
$50,000
|
|
$106,000
|
April 17, 2017
|
Total Principal
|
$425,000
|
|
$901,000
|
|
Interest on the 3rd Debenture accrues on the
unconverted outstanding principal balance hereof at a rate per annum of the lesser of the applicable Federal Rate or 6% and on
a pro rata basis to the extent that each Tranche has been paid. The outstanding amounts due under the 3rd Debenture are convertible
at the option of the Fund into shares of the Company’s common stock at 100% of the average of the five lowest closing market
prices for the Common Stock for the thirty (30) trading days preceding each conversion; provided, however, that the Fund cannot
own more than 4.99% of the Company’s outstanding shares of common stock at any time, which limit may be waived by the Fund
upon 65 days’ notice. If the 3rd Debenture is repaid and/or converted in full prior to its maturity date, all accrued interest
will be forgiven. During the six months ended June 30, 2014, the Fund converted $159,000 owed under the 3
rd
Debenture
into 11,984,293 shares of our common stock resulting in a loss on extinguishment of debt of $213,050. As of June 30, 2014, the
Fund had made all of the eight Tranche payments required under the 3
rd
Debenture.
The Debentures are secured by a
blanket lien on substantially all of the Company’s assets pursuant to the terms of a security agreement (the “Security
Agreement”) executed by the Company and its subsidiaries in favor of the Fund. If an event of default occurs and continues
for more than 30 days following written notice of default from the Fund, under the Security Agreement, the fund may, in addition
to any other remedies available to it, foreclose upon the assets securing such Debentures.
In addition, to further secure the Company’s
obligations under the Debentures, the Company’s Chief Executive Officer, Mr. Patrick Bertagna, has pledged 13,180,378 shares
of his common stock of the Company (the “Pledged Securities”) pursuant to a stock pledge agreement (the “Pledge
Agreement”) executed by Mr. Bertagna in favor of the Fund. Upon the breach of any provision in the Pledge Agreement or upon
the occurrence of any default event under the Debentures, the Fund may exercise any rights and remedies available, including, but
not limited to, sale, assignment or other disposal of any or all of the Pledged Securities in exchange for cash or credit. The
Fund’s rights under the Pledge Agreement are limited to the extent that the Fund has agreed not to own more than 4.99% of
the Company’s outstanding shares of common stock at any time, which limitation the Fund can, however, waive upon 65 days’
notice.
Derivative liabilities
The conversion features embedded in the convertible
notes were evaluated to determine if such conversion feature should be bifurcated from its host instrument and accounted for as
a freestanding derivative. Excluding the 2
nd
Debenture, in all of the long-term and short-term convertible notes outstanding
at June 30, 2014 and December 31, 2013, the conversion feature was accounted for as a derivative liability. The derivatives associated
with the long-term and short-term convertible notes were recognized as a discount to the debt instrument and the discount is amortized
over the expected life of the notes with any excess of the derivative value over the note payable value recognized as additional
interest expense at the issuance date. Included in Derivative Expense, net in the accompanying consolidated statements of operations
is expense related to the recording and amortization of the debt discount totaling $177,779 and $900,382 during the three and six
months ended June 30, 2014, respectively.
The
derivative liability was calculated using the Black Scholes method over the expected terms of the convertible debentures,
with a risk free rate of 1% and volatility of 258% as of June 30, 2014 and a risk free rate of 1% and volatility of 301% as
of December 31, 2013.
Included in Derivative Income (Expense), net in the accompanying consolidated statements of
operations is
income arising from the change in fair value of the derivatives of
$1,045,195 and $451,349 for the three and six months ended June 30, 2014, respectively
5
.
EQUITY
Common
Stock
The
Company issued the following shares of common stock during the six months ended June 30, 2014
:
|
|
Value of Shares
|
|
Number of Shares
|
Shares issued for services rendered
|
$
|
64,126
|
|
3,116,176
|
Shares issued for accrued expenses
|
|
51,272
|
|
1,508,000
|
Shares issued with repurchase rights
|
|
9,543
|
|
750,000
|
Shares issued for conversion of debt
|
|
484,278
|
|
19,072,861
|
|
|
|
|
|
Total shares issued
|
$
|
609,219
|
|
24,447,037
|
|
|
|
|
|
Shares
issued for services rendered were to various members of management, the Board of Directors, employees and consultants and are expensed
as Stock-Based Compensation in the accompanying consolidated statement of operations. Shares issued for accrued expenses were granted
to a Board Member, a consultant and an employee as payment for portions of amounts owed to them for services rendered in previous
periods. Shares issued with repurchase rights relate to shares granted to members of management and the Board of Directors whereby
the Company retained the rights to acquire the shares from the stock recipients and such repurchase rights lapsed rateably over
twelve months at a rate of 1/12
th
per month beginning on January 1, 2013. Upon vesting, the shares are revalued based
on the average stock price during the respective month and the related stock based compensation expense is recognized. Shares issued
for conversion of debt relate to conversions of the BSM Note and Fund Debentures discussed in Note 4.
Common Stock Warrants
Since inception, the Company has issued warrants
to purchase shares of the Company’s common stock to shareholders, consultants and employees as compensation for services
rendered and/or through private placements.
A summary of the Company’s warrant activity
and related information is provided below:
|
|
Exercise Price $
|
|
Number of
Warrants
|
Outstanding and exercisable at December 31, 2013
|
|
|
0.02 - 0.08
|
|
|
|
7,720,000
|
|
Warrants exercised
|
|
|
—
|
|
|
|
—
|
|
Warrants granted
|
|
|
—
|
|
|
|
—
|
|
Warrants expired
|
|
|
0.08
|
|
|
|
(5,720,000
|
)
|
Outstanding and exercisable at June 30, 2014
|
|
|
0.02
|
|
|
|
2,000,000
|
|
|
|
|
|
|
|
|
|
|
Stock Warrants as of June 30, 2014
|
|
Exercise
|
|
Warrants
|
|
Remaining
|
|
Warrants
|
|
Price
|
|
Outstanding
|
|
Life (Years)
|
|
Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.02
|
|
|
2,000,000
|
|
|
1.19
|
|
|
2,000,000
|
|
In connection with the SPA entered into with
Atlantic on July 12, 2013 (See Note 4), the Company issued a Warrant to Atlantic, whereby Atlantic is entitled to purchase from
the Company a total number of shares of common stock, such that, when added to the total number of shares of common stock acquired
by Atlantic upon conversion of the Atlantic Note, equals 12% of the common stock outstanding as of the date of such conversion,
as such total outstanding amount may, be increased by issuances of common stock occurring on or prior to November 13, 2014 (or
by issuances of common stock occurring after November 13, 2014 but pursuant to convertible instruments issued or commitments made
by the Company prior to November 13, 2014), other than issuances of excluded securities as such term is defined in the Atlantic
Note, at an exercise price per share equal to $0.001 per share, at any time and from time to time on or after the Closing Date
and through and including November 13, 2020. As of the June 30, 2014, Atlantic has not converted any portion of the Atlantic Note.
Common Stock Options
Under the Company’s
2008 Equity Compensation Plan (the “2008 Plan”), we are authorized to grant stock options intended to qualify as Incentive
Stock Options, “ISO”, under Section 422 of the Internal Revenue Code of 1986, as amended, non-qualified options, restricted
and unrestricted stock awards and stock appreciation rights to purchase up to 7,000,000 shares of common stock to our employees,
officers, directors and consultants, with the exception that ISOs may only be granted to employees of the Company and its subsidiaries,
as defined in the 2008 Plan. After adjusting for expired and estimated pre-vesting forfeitures, options for approximately 2,216,000
shares were still available for grant under the 2008 Plan as of June 30, 2014.
Stock option activity under the 2008 Plan for
the six months ended June 30, 2014 is summarized as follows:
|
|
Shares
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Life (in years)
|
|
Grant Date Fair Value
|
Outstanding at December 31, 2013
|
|
|
775,133
|
|
|
$
|
0.14
|
|
|
|
1.09
|
|
|
$
|
46,901
|
|
Options granted
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Options exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Options cancelled/ forfeited/ expired
|
|
|
(304,138
|
)
|
|
$
|
0.23
|
|
|
|
—
|
|
|
|
(31,072
|
)
|
Outstanding at June 30, 2014
|
|
|
470,995
|
|
|
$
|
0.080
|
|
|
|
1.21
|
|
|
$
|
15,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2014
|
|
|
470,995
|
|
|
$
|
0.080
|
|
|
|
1.21
|
|
|
$
|
15,829
|
|
The Company recognizes option expense ratably
over the vesting periods. As all outstanding options had vested as of December 31, 2012, we have recognized no compensation expense
related to options granted under the 2008 Plan during the three and six months ended June 30, 2014 and 2013. The Company intends
to issue new shares to satisfy share option exercises.
5
.
SUBSEQUENT
EVENTS
On July 15, 2014, we entered into a one-year
agreement for corporate advisory and business development services (“Advisory Agreement”). In accordance with the Advisory
Agreement, we granted the consulting firm 1,000,000 shares of common stock (valued at $20,000) and agreed to issue the consulting
firm an additional 1,000,000 shares of our common stock on a quarterly basis through the term of the Advisory Agreement. Additionally,
upon our receiving revenue from a successfully closed product sales transaction resulting from the consulting firm’s introduction
of a new customer to us, we agreed to pay the consulting firm a fee equal to 10% of the gross margin generated from each closed
transaction.
On July 24, 2014, the Fund converted $77,080
owed under the 3rd Debenture into 4,100,000 shares of our common stock, resulting in a loss on conversion of $4,920.
On July 28, 2014, we entered into a
4
th
convertible debenture with the Fund in the principal amount of $75,000 (the “4
th
Debenture”).
The 4
th
Debenture is to be funded in Tranches on or about July 28, 2014, August 30, 2014 and September 30, 2014 in
the amounts of $35,000, $20,000, and $20,000, respectively and matures on January 30, 2015. Interest on the 4
th
Debenture
accrues on the unconverted outstanding principal balance hereof at a rate per annum of the lesser of the applicable Federal Rate
or six percent (6%) and on a pro rata basis to the extent that each Tranche has been paid. The outstanding amounts due under the
4
th
Debenture are convertible at the option of the Fund into shares of the Company’s common stock at 50% of the
average of the five lowest closing market prices for the common stock for the 30 trading days preceding each conversion. As consideration
for the 4
th
Debenture, we are required to have in reserve at all times, enough shares of our common stock to effect
the issuance of all of the conversion shares due to the Fund upon conversion of outstanding amounts owed under the Debentures,
the 4
th
Debenture and any future convertible debentures held by the Fund. As of August 8, 2014, we had approximately
957,000,000
shares of our common stock reserved to fulfill this requirement.
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 wearable technology marketplace. Our subsidiaries are summarized as follows:
·
Global Trek Xploration
(“GTX California”) focuses
on hardware, software, connectivity, 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 Location Data Center tracking portal
is fully scalable and has been licensed to several partners both in the U.S. and internationally. It is a secure platform equipped
with a database, application-programming interface (API) for custom integration and communication SMS gateway software and hardware.
Subscriber internet communications are routed through GTX California’s proprietary, fault-tolerant, carrier-class, and application-specific
interface software. Our Location Data Center services are also offered to non-GTX California products and hardware systems (i.e.
handsets and personal electronics) of major electronics manufacturers through the offer and sale of exclusive licenses (either
geographical, regional or product categories).
During 2013, we entered into an exclusive
three-year contract with Atlantic Footcare, Inc., (“Atlantic”) to develop and launch the GPS SmartSole
TM
(the “SmartSole”), a product designed to monitor the location of the wearer of shoes that are outfitted with the SmartSole.
Atlantic is the Company’s exclusive manufacturer of the new shoe insole to be used with our embedded GPS devices. The patented
SmartSole fits easily into most shoes providing the user even more opportunities to use the tracking device. The SmartSoles are
designed to bring peace of mind to family members and those caring for the millions of people suffering from memory impairment
and chronic wandering. The SmartSole sends a signal to the central monitoring website showing the wearer’s exact location
using a combination of satellite and cellular technology. Once the GPS tracking account is set up, the location of the SmartSole
can be monitored from a computer, tablet or smartphone. As of the date of this Quarterly Report, the GPS SmartSole
TM
is
still in its evaluation phase both in the US and internationally. The product is expected to be commercially released during the
latter half of 2014. On May 8, 2014, we announced our receipt of a purchase order for SmartSole products from a European distributor.
These products are expected to be shipped during the third quarter of 2014.
Designed for less chronic wanderers
and as an introduction to our other footwear-based location monitoring products, in March 2014 we released the Bluetooth Low Energy
(“BLE”) SmartSoles, a footwear system designed to monitor when the wearer enters or leaves a room or building. The
BLE SmartSoles were specifically designed based on the needs of assisted living facilities and the care giving communities. Similar
to the SmartSole, the BLE SmartSole looks and feels like a regular insole, may be placed in most shoes and trimmed to fit. The
BLE SmartSole is embedded with a miniaturized BLE chip that reports when the user crosses a virtual perimeter. The BLE SmartSole
has a battery life of over one year, alleviating the caregiver from the worry of recharging or replacing batteries. The technology
is customizable for personal home use or commercial assisted living facilities and the caregiver is alerted via email or text when
the wearer leaves the area.
The Company is currently engaged
in over 2 dozen pilot programs in the US, Canada, New Zealand, U.K., and Switzerland, with several other countries in the pipeline.
These pilot programs are being conducted by assisted living facilities, Government and Municipal agencies, health organizations,
retailers, distributors and independent sales representatives. Several of these pilot programs will conclude during August 2014
and are expected to transition into commercial roll outs. The pilot programs generally last 1 to 3 months.
The Company’s “Stand
Alone” direct-to-consumer GPS device is now offered for sale through the GTX website and on Amazon.com at prices ranging
from $119 to $179 each, with several monthly subscription plans ranging from $17 to $30 per month. We are also introducing voice
capabilities and starting to resell data and voice service plans.
In 2010, GTX California entered into
a license agreement with Aetrex Worldwide, Inc. under which we granted Aetrex the exclusive right to embed our GPS tracking device
into certain footwear products manufactured and sold solely by Aetrex (the “License Agreement”). The Navistar
TM
GPS Shoes did not meet our expectations or the expectations of Aetrex and, accordingly, effective March 18, 2014, we did not renew
our license agreement with Aetrex, and Aetrex has ceased actively marketing or selling this first generation line of GPS Shoes.
|
|
·
LOCiMOBILE, Inc.
, our mobile application subsidiary, 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 Annual Report, our 20+ Apps have experienced over 1.6 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.
|
|
|
·
Code Amber News Service, Inc. (“CANS”)
is our wholly-owned subsidiary in the U.S. and Canada 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 personal health record Code
Amber Alertag. The Alertag is a product and service that provides worldwide access to critical personal information in emergency
situations for persons who subscribe to the product and service. The Alertag complements the overall GTX business model of providing
location based e-health technologies and services.
|
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, 2014
(“Q2 2014”) Compared to the Three Months Ended June 30, 2013 (“Q2 2013”)
|
|
Three Months Ended June 30,
|
|
|
2014
|
|
2013
|
|
|
$
|
% of Revenues
|
|
$
|
% of Revenues
|
|
|
|
|
|
|
|
Revenues
|
$ 34,091
|
100%
|
$ 49,966
|
100%
|
Cost of goods sold
|
|
15,987
|
47%
|
|
19,645
|
39%
|
Net profit
|
|
18,104
|
53%
|
|
30,321
|
61%
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
Wages and professional fees
|
|
199,668
|
586%
|
|
216,231
|
433%
|
General and administrative
|
|
61,162
|
179%
|
|
49,523
|
99%
|
Total operating expenses
|
|
260,830
|
765%
|
|
265,754
|
532%
|
|
|
|
|
|
|
|
Loss from operations
|
|
(242,726)
|
-712%
|
|
(235,433)
|
-471%
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
792,505
|
2325%
|
|
(37,167)
|
-74%
|
Net income (loss)
|
|
$ 549,779
|
1613%
|
|
$ (272,600)
|
-546%
|
|
|
|
|
|
|
|
Revenues
Revenues during Q2 2014
decreased by 32% or $15,875 in comparison to Q2 2013 primarily due to decreases in Alertag sales, App revenue and platform test
agreements. During Q2 2013 we sold 1,000 Alertags resulting in the recognition of approximately $13,000 of revenues. No such sale
occurred during Q2 2014. Revenues generated by our Apps sold on iTunes decreased $5,000 in comparison to Q2 2013 due 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. To counteract the decreases in our iTunes App revenues, which were predominately consumer driven, we are focusing
on our Track My Workforce App geared towards the enterprise customer. Revenues generated by the Track My Work Force App continue
to grow as we introduce the App into the marketplace but still are not significant. Lastly, during Q2 2013 we entered into a platform
test agreement with a backpack manufacturer resulting in the recognition of $5,000 of revenues. The agreement with the backpack
manufacturer has since been terminated resulting in no additional revenues being recognized in Q2 2014. These decreases in our
revenues were offset by increases in GPS device sales of $13,000 and increased licensing revenues.
Cost of goods sold
Cost of goods
sold decreased 19% or $3,658 during Q2 2014 in comparison to Q1 2013 primarily due to the write-down of certain capitalized direct
labor costs and shoe molds during the year ended December 31, 2013. The depreciation related to these assets had been recorded
through cost of goods sold and inflated the costs incurred in 2013. The write off of the capitalized assets results in an overall
decrease in depreciation recorded in cost of goods sold of $5,600 when comparing Q2 2014 to Q2 2013. Additionally, cost of goods
sold have decreased as a result of our decrease in revenues. The overall decrease was offset by an increase in the sale of GPS
devices during Q2 2014.
Wages and professional fees
Wages and professional
fees during Q2 2014 decreased only 8% or $16,563 in comparison to Q2 2013 despite the reduction in consultants and marketing expenses
since June 30, 2013. This is primarily due to the hiring of a consulting firm for business development, corporate and financing
services. Professional fees are expected to remain at this level as we grow our business and expand our products into the wearable
technology marketplace both in the U.S. and internationally. Additionally, legal fees have increased due to intellectual property
services performed in relation to the GPS SmartSole.
General and administrative
General and administrative
expenses during Q2 2014 increased 24% or $11,639 in comparison to Q2 2013 primarily due to product development costs on our GPS
SmartSoles, increases in website development costs and travel expenses. During 2014 we began making improvements to our website
to facilitate the upcoming release of the SmartSole to the public. Additionally, travel and related marketing expenses were incurred
to promote the SmartSole to potential distributors and elder care facilities.
Other
income (expense), net
Other income (expense),
net for Q2 2014 consists primarily of costs associated with our debt financings. During Q2 2014, $100,064 of debt was converted
into 4,947,786 shares of our common stock valued at $168,928 resulting in a non-cash loss on extinguishment of debt of $68,864.
Additionally, the accounting treatment for the bifurcation of the derivative liabilities embedded in our long-term and short-term
convertible notes results in net derivative, non-cash income of $867,419. The net derivative expense represents the change in fair
value of the derivative liability during the period as well as the amortization of the related debt discount.
Net income (loss)
We recognized net income
of $549,779 in Q2 2014 compared to a net loss of $272,600 in the Q2 2013. The net income in Q2 2014 was solely due to $867,419
of non-cash income resulting from the accounting treatment of the Company’s derivative liabilities. Excluding the $867,419
of derivative income, the Company would have had a net loss of $317,640 in Q2 2014.
Six Months Ended June 30, 2014 Compared
to the Six Months Ended June 30, 2013
|
|
Six Months Ended June 30,
|
|
|
2014
|
|
2013
|
|
|
$
|
% of Revenues
|
|
$
|
% of Revenues
|
|
|
|
|
|
|
|
Revenues
|
$ 54,905
|
100%
|
$ 95,412
|
100%
|
Cost of goods sold
|
|
25,887
|
47%
|
|
46,532
|
49%
|
Net profit
|
|
29,018
|
53%
|
|
48,880
|
51%
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
Wages and professional fees
|
415,404
|
757%
|
|
405,589
|
425%
|
|
General and administrative
|
|
138,177
|
252%
|
|
93,382
|
98%
|
Total operating expenses
|
|
553,581
|
1008%
|
|
498,971
|
523%
|
|
|
|
|
|
|
|
Loss from operations
|
|
(524,563)
|
-955%
|
|
(450,091)
|
-472%
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
(702,738)
|
-1280%
|
|
(77,833)
|
-82%
|
Net loss
|
|
$ (1,227,301)
|
-2235%
|
|
$ (527,924)
|
-553%
|
Revenues
Revenues during the six
months ended June 30, 2014 decreased by 42% or $40,507 in comparison to the same period in 2013 due primarily to the same reasons
discussed above in the Q2 2014 analysis.
Cost of goods sold
Cost of goods sold decreased
44% or $20,645 during the six months ended June 30, 2014 in comparison to the same period in 2013 primarily due to the write-down
of certain capitalized direct labor costs and shoe molds during the year ended December 31, 2013. The depreciation related to
these assets had been recorded through cost of goods sold and inflated the costs incurred in 2013. The write off of the capitalized
assets results in a decrease in cost of goods sold of $14,600 when comparing 2014 to 2013.
Wages and professional fees
Wages and professional
fees during the six months ended June 30, 2014 increased 2% or $9,815 in comparison to the same period in 2013 despite a reduction
in consultants and marketing expenses since June 30, 2013. This is primarily due to the hiring of a consulting firm for business
development, corporate and financing services. Additionally, legal fees have increased $9,600 during the six months ended June
30, 2014 due to intellectual property services performed in relation to the GPS SmartSole. Professional fees are expected to remain
at this level as we grow our business and expand our products into the wearable technology marketplace both in the U.S. and internationally.
General and administrative
General and administrative
expenses during the six months ended June 30, 2014 increased 48% or $44,795 in comparison to the same period in 2013 primarily
due to product development costs associated with our GPS SmartSoles, increases in website development costs and travel expenses.
During 2014 we began making improvements to our website to facilitate the upcoming release of the SmartSole to the public. Additionally,
several trips throughout the U.S. and Europe were made to promote the SmartSole to potential distributors and elder care facilities.
Other
income (expense), net
Other income, net for Q2
2014 consists primarily of costs associated with our debt financings. During the six months ended June 30, 2014, $245,952 of debt
was converted into 19,072,861 shares of our common stock valued at $484,279 resulting in a non-cash loss on extinguishment of debt
of $238,327. Additionally, the accounting treatment for the bifurcation of the derivative liabilities embedded in our long-term
and short-term convertible notes results in net derivative, non-cash expense of $449,033. The net derivative expense represents
the change in fair value of the derivative liability during the period as well as the amortization of the related debt discount.
Liquidity and Capital Resources
As of June 30, 2014, we
had approximately $25,000 of cash and cash equivalents, and a working capital deficit of $1,034,000, compared to $65,000 of cash
and cash equivalents and a working capital deficit of $736,000 as of December 31, 2013. A portion of our negative working
capital position at June 30, 2014 consisted of $317,000 of amounts due to officers and management of the Company for accrued wages
and $145,000 related to derivative liabilities on our short-term convertible promissory notes.
During the six months ended
June 30, 2014 and 2013, we reported a net loss of $1,227,301 and $527,924, respectively. However, net cash used in operating activities
for the six months ended June 30, 2014 and 2013 was only $278,000 and $105,000, respectively. Net cash used in operations was less
than the net loss for the six months ended June 30, 2014 primarily due to non-cash expenses relating to the net change in fair
value of our derivative liabilities and the amortization of the debt discount on our convertible debt ($449,033), as well as, the
non-cash loss on the extinguishment of debt ($238,327). These non-cash expenses during the six months ended June 30, 2013 collectively
were only $69,077.
Net cash used in investing
activities for the six months ended June 30, 2014 was $1,445 and resulted from the purchase of office equipment. There was no cash
used in investing activities for the six months ended June 30, 2013.
Net
cash provided by financing activities during six months ended June 30, 2014 was $239,750 and consisted primarily of proceeds totaling
$243,750 received from advances under various convertible note payable agreements. 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.
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. Previously, we
anticipated that revenues from the Navistar
TM
GPS Shoe that was released December 2011 would increase and would provide
us with the funds necessary to fund our working capital needs. However, revenues from the Navistar
TM
GPS Shoe were minimal,
and the Navistar license agreement was allowed to expire. Accordingly, we no longer market the Navistar
TM
GPS Shoe.
Despite the disappointing results of the Navistar GPS shoe, we continue to believe that there is a significant market opportunity
for a product that can monitor the location of senior citizens and children through GPS devices embedded in footwear. As a result,
in July 2013, we entered into an exclusive three-year contract with Atlantic Footcare, Inc. (“Atlantic”), to develop
and launch the GPS SmartSole
TM
(the “SmartSole”). Atlantic is the Company’s exclusive manufacturer
of the new shoe insole to be used with our embedded GPS devices. As of the date of this Quarterly Report, the GPS SmartSole
TM
is in its evaluation phase both in the US and internationally. The SmartSole product is expected to be commercially released
in the latter half of 2014. On May 8, 2014, we announced our receipt of a purchase order for SmartSole products from a European
distributor. These products are expected to be shipped starting in during the third quarter of 2014.
We expect to continue to
generate revenues from our other licenses, Alertag subscriptions, Track My Work Force subscriptions, international distributors,
hardware sales, professional services and new customers in the pipeline. However, the amount of such revenues is unknown and is
not expected to be sufficient to fund our working capital needs. 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 2014.
In order to fund our working
capital needs and our product development costs, in September 2013 we entered into a Securities Purchase Agreement with 112359
Factor Fund, LLC (the “Fund”) pursuant to which we issued and sold to the Fund (i) an amended and restated convertible
debenture
(the
“A & R
1
st
Deb
enture
”
)
in the principal amount of $123,394, (ii) a secured convertible debenture in the principal amount of $200,000 (the “2
nd
Debenture”), and (iii) a secured convertible debenture payable in eight (8) tranches totaling an aggregate principal
balance of $901,000 (the “3
rd
Debenture” and together with the A & R 1
st
Debenture and 2
nd
Debenture, the “Debentures”). The following is a summary of the terms of the Debentures:
The $123,394 A & R
1
st
Debenture accrued interest at the lesser of the applicable Federal Rate or 6% per annum and was convertible into
shares of common stock of the Company at a price equal to 100% of the average of the five lowest closing market prices for the
Company’s common stock for the 30 trading days preceding conversion. As of June 30, 2014, the A & R 1
st
Debenture
has been converted in full into 12,300,099 shares of common stock resulting in a total loss on extinguishment of $25,910.
The 2nd Debenture,
in the amount of $200,000, was issued to the Fund in consideration for the Fund’s various agreements issued under the Security
Purchase Agreement. Since this debenture was issued as payment for services and fees, the Company also did not receive any cash
from the issuance of this debenture. The 2nd Debenture matures December 31, 2017 and accrues interest on the unconverted outstanding
principal balance at a rate per annum of the lesser of the applicable Federal Rate or six percent (6%). Upon the later to occur
of (a) the date on which the Fund has paid the Company the full $425,000 purchase price of the 3
rd
Debenture, or (b)
the date on which all amounts due to the Fund, except for amounts due under the 2
nd
Debenture, have been fully paid,
at the option of the Fund, the outstanding principal amount due under the 2
nd
Debenture may be converted into shares
of the Company’s common stock at a price equal to the lesser of (a) the outstanding balance due under the Debenture divided
by $0.01 per shares (the “Conversion Price,”) or (b) 9.99% of the then-current issued and outstanding capital stock
of the Company as of the first (1
st
) anniversary of the Payment Compliance Date.
The face amount of
the 3
rd
Debenture is $901,000 and consists of $425,000 of cash proceeds to the Company with the remaining $476,000 being
additional debenture to the Company. The Fund funded the 3rd Debenture in eight monthly installments
during the period from September 18, 2013 through April 21,2014. The 3rd Debenture matures on the third anniversary date
of each monthly installment. Interest on the 3
rd
Debenture accrues on the unconverted outstanding principal balance
hereof at a rate per annum of the lesser of the applicable Federal Rate or six percent (6%) and on a pro rata basis to the extent
that each Tranche has been paid. The outstanding amounts due under the 3
rd
Debenture are convertible at the option of
the Fund into shares of the Company’s common stock at 100% of the average of the five lowest closing market prices for the
common stock for the 30 trading days preceding each conversion; provided, however, that the Fund cannot own more than 4.99% of
the Company’s outstanding shares of common stock at any time, which limit may be waived by the Fund upon 65 days’ notice.
As of the date of
this Quarterly Report, the 3
rd
Debenture has provided us with the $425,000 of funding. Additionally, the Fund has converted
$236,080 of the $901,000 principal balance into 16,084,293 shares of our common stock resulting in a loss on extinguishment of
debt totalling $217,970.
On July 28, 2014,
we entered into a 4
th
convertible debenture with the Fund in the principal amount of $75,000 (the “4
th
Debenture”). The 4
th
Debenture is to be funded in Tranches on or about August 28, 2014, August 30, 2014 and September
30, 2014 in the amounts of $35,000, $20,000, and $20,000, respectively and matures on January 30, 2015. Interest on the 4
th
Debenture accrues on the unconverted outstanding principal balance hereof at a rate per annum of the lesser of the applicable
Federal Rate or six percent (6%) and on a pro rata basis to the extent that each Tranche has been paid. The outstanding amounts
due under the 4
th
Debenture are convertible at the option of the Fund into shares of the Company’s common stock
at 50% of the average of the five lowest closing market prices for the common stock for the 30 trading days preceding each conversion.
As consideration for the 4
th
Debenture, we are required to have in reserve at all times, enough shares of our common
stock to effect the issuance of all of the conversion shares due to the Fund upon conversion of outstanding amounts owed under
the Debentures, the 4
th
Debenture and any future convertible debentures held by the Fund. As of August 8, 2014, we
had approximately 957,000,000 shares of our common stock reserved to fulfill this requirement.
As described above, on
July 12, 2013, we entered into an Exclusive Manufacturing Agreement (the “Agreement”) with Atlantic, whereby Atlantic
serves as our 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 purchased (i) 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 (ii) a warrant to purchase shares of the Company’s common stock at the par value of the shares (i.e. at a price
of $0.001 per share). As of June 20, 2014, Atlantic has provided the Company with the full amount of $200,000 under the Atlantic
Note.
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.
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”). The BSM Note is convertible into shares of common stock of the Company at a price equal to 65% of
the five day average closing price per share of the Company’s common stock. On April 14, 2014, BSM Lending, LLC converted
the BSM Note of $30,000 plus accrued interest of $3,514 into 1,463,493 shares of our common stock, resulting in a loss on extinguishment
of debt in the amount of $13,464.
The licensing agreements,
distribution agreements and product sales initiatives we have in place have, to date, not generated substantial revenues.
No assurance can be given that our current contractual arrangements and the revenues from our GPS SmartSoles, device sales, subscriptions,
Alertags, software licensing, or our smart phone or tablet Apps will generate significant revenues during the balance of 2014.
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 LOCiMOBILE® applications for GPS enabled handsets. We currently do not have sufficient
capital on hand to fully fund our proposed research and development activities, which lack of product development may negatively
affect our future revenues.
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 throughout 2014. 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. 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.
Since inception in 2002,
we have generated significant losses (as of June 30, 2014, we had an accumulated deficit of $16,663,166), and we currently expect
to incur continued losses until our revenue initiatives collectively generate substantial revenues. Please see the section entitled
“Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2013 for more information
regarding risks associated with our business.
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
We do not believe our business
and operations have been materially affected by inflation.
Critical Accounting Policies and Estimates
There are no material changes
to the critical accounting policies and estimates described in the section entitled “Critical Accounting Policies and Estimates”
under Item 7 in our Annual Report on Form 10-K for the year ended December 31, 2013.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a “smaller reporting
company”, we are not required to provide the information under this Item 3.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Under
the supervision and with the participation of our management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures,
as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this
report (the “Evaluation Date”). Based upon the evaluation, our principal executive officer and principal financial
officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective. Disclosure controls are
controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed under the
Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s
rules and forms. Disclosure controls include controls and procedures designed to reasonably ensure that such information is accumulated
and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow
timely decisions regarding required disclosure.
Changes in Internal Controls Over Financial
Reporting
There were no changes in
our internal controls over financial reporting that occurred during the quarterly period covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 1A. RISK FACTORS.
We
have a working capital deficit and are in need of additional liquidity.
Our
business plan had assumed that sales of the Navistar
TM
GPS Shoes would provide a substantial amount of our working capital,
which revenues would be supplemented by revenues from our other products. Sales of the GPS Shoes have significantly underperformed
our expectations, and revenues from our other products have also been less than we projected. As a result of the lack of sales
revenues, we currently have a large working capital deficit, and our revenues from our current operations are not sufficient to
fund our current operating needs. Accordingly, we will have to find alternative sources of funding in the near future. If we are
not able to obtain additional funding in the near future, we may have to further reduce our operations, take other action to protect
our properties and business, or cease operations altogether. Any such actions may have a negative effect on the viability of our
company and on the trading price of our shares.
ITEM 2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS.
On
July 30, 2014, we issued a total of 1,000,000 shares of common stock
to a consultant for corporate advisory and business
development services.
The
issuance of the above shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not
applicable.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
(a) Exhibits
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31.1
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Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act
|
32.1
|
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Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act
|
|
|
|
32.2
|
|
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
|
|
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101.INS
|
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XBRL Instance Document
|
|
|
|
101.SCH
|
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XBRL Taxonomy Extension Schema
|
|
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation
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|
|
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101.DEF
|
|
XBRL Taxonomy Extension Definition
|
|
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label
|
|
|
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101.PRE
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XBRL Taxonomy Extension Presentation
|
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SIGNATURES
Pursuant to the requirements of Section
13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
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GTX CORP
|
Date: August 8, 2014 By:
|
/s/ ALEX MCKEAN
Alex McKean,
Interim Chief Financial Officer (Principal Financial Officer)
|
Date: August 8, 2014 By:
|
/s/ PATRICK BERTAGNA
Patrick Bertagna,
Chief Executive Officer
|