We have audited the accompanying consolidated
balance sheet of GTX Corp (the Company) as of December 31, 2017, and the related consolidated statements of operations and comprehensive
loss, stockholders’ deficit, and cash flows for the year ended December 31, 2017, and the related notes (collectively referred
to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the consolidated
financial position of the Company as of December 31, 2017, and the results of its operations and its cash flows for the year ended
December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
These consolidated financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United
States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities
laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with
the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have,
nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required
to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides
a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated
financial statements, the Company’s recurring losses from operations and its likely need for additional financing in order
to meet its financial obligations raise substantial doubt about its ability to continue as a going concern. These financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER
31, 2018 AND 2017
1.
ORGANIZATION AND BASIS OF PRESENTATION
During
the periods covered by these financial statements, GTX Corp and its subsidiaries (the “Company” or “GTX”)
were engaged in business operations that design, manufacture and sell various interrelated and complementary products and services
in the wearable technology and Personal Location Services marketplace. GTX owns 100% of the issued and outstanding capital stock
of its two subsidiaries - Global Trek Xploration, Inc. and LOCiMOBILE, Inc.
Global
Trek Xploration, Inc. focuses on the design, manufacturing and sales distribution of its hardware, software, and connectivity,
Global Positioning System (“GPS”) and Bluetooth Low Energy (“BLE”) monitoring and tracking platform, which
provides real-time tracking and monitoring of people and high valued assets. Utilizing a miniature quad band GPRS transceiver,
antenna, circuitry, battery and inductive charging pad our solutions can be customized and integrated into numerous products whose
location and movement can be monitored in real time over the Internet through our 24x7 tracking portal or on a web enabled cellular
telephone. 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, all of which is also managed by Global Trek.
LOCiMOBILE,
Inc., is the Companies digital platform which has been at the forefront of Smartphone application (“App”) development
since 2008. With a suite of mobile applications that turn the iPhone, iPad, Android and other GPS enabled handsets into a tracking
device which can be tracked from handset to handset or through our tracking portal or on any connected device with internet access.
LOCiMOBILE has launched over 20 Apps across multi mobile device operating systems and continues to launch consumer and enterprise
apps.
Basis
of Presentation
The
accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States. 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.
On
June 22, 2018, the Company effected a 1-for-75 reverse stock split of its common stock. All references to shares of common stock
outstanding, average number of shares outstanding and per share amounts in these consolidated financial statements and notes to
consolidated financial statements have been restated to reflect as if the reverse stock split occurred as of the earliest period
presented.
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 $1,758,182 and utilized
cash in operations of $416,348 during the year ended December 31, 2018, has incurred losses since inception resulting in
an accumulated deficit of $22,823,194 as of December 31, 2018 and has a stockholders’ deficit of as of December 31,
2018. The Company anticipates further losses in the development of its business. These factors raise substantial doubt about the
Company’s ability to continue as a going concern within one year after the date of the financial statements being issued.
The ability of the Company to continue as a going concern is dependent upon the Company’s ability to raise additional funds
and implement its business plan. The financial statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern.
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 ability
to obtain additional financing, the successful development of the Company’s contemplated plan of operations, or its ability
to achieve profitable operations are necessary for the Company to continue operations, and there is no assurance that these can
be achieved. 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.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue
Recognition
Through
December 31, 2017, revenue was recognized when there is persuasive evidence of an arrangement, delivery has occurred, the fee
is fixed or determinable, and collectability of the resulting receivable is reasonably assured. Determining whether and when these
criteria have been satisfied requires the Company to make assumptions and judgments that could have a significant impact on the
timing and amount of revenue it reports. The Company recognized revenue when risk of loss transferred to its customers and collection
of the receivable was reasonably assured, which generally occurs when the product is shipped, or the service has been rendered
with regard to services income.
Effective
January 1, 2018 the Company adopted Accounting Standards Update (“ASU”) no. 2014-09,
Revenue from Contracts with
Customers (ASC 606)
. Under the update, revenue is recognized based on a five-step model. The core principle of the model is
that revenue will be recognized when the transfer of promised goods or services to customers is made in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. The adoption of this standard
did not result in any changes to previously reported amounts.
We
account for revenue in accordance with ASC 606. A performance obligation is a promise in a contract to transfer a distinct good
or service to the customer, and is the unit of account in ASC 606. Revenue is measured as the amount of consideration we expect
to receive in exchange for transferring goods or providing services. The contract transaction price is allocated to each distinct
performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. We do not have any significant
payment terms, as payment is received shortly after goods are delivered or services are provided.
We
derive our revenues primarily from hardware sales, subscription services fees, IP licensing and professional services fees. Hardware
includes our SmartSole, Military and other Stand-Alone Devices. Subscription services revenues consist of fees from customers
accessing our cloud-based software solutions and subscription or license fees for our platform. Professional services and other
revenues consist primarily of fees from implementation services, configuration, data services, training and managed services related
to our solutions. IP licensing is related to our agreement with Inventergy whereby we have partnered in order to monetize our
IP portfolio (see, Note 3, below).
Product
sales
At
the inception of each contract, we assess the goods and services promised in our contracts and identify each distinct performance
obligation. The Company recognizes revenue upon the transfer of control of promised products or services to the customer in an
amount that depicts the consideration the Company expects to be entitled to for the related products or services. For the large
majority of the Company’s sales, transfer of control occurs once product has shipped and title and risk of loss have transferred
to the customer.
Services
Income
The
Company’s software solutions are available for use as hosted application arrangements under subscription fee agreements
without licensing perpetual rights to the software. Subscription fees from these applications are recognized over time on a ratable
basis over the customer agreement term beginning on the date the Company’s solution is made available to the customer. Our
subscription contracts are generally one to three months in length. Amounts that have been invoiced are recorded in accounts receivable
and deferred revenues or revenues, depending on whether the revenue recognition criteria have been met.
The
majority of our professional services arrangements are recognized on a time and materials basis. Professional services revenues
recognized on a time and materials basis are measured monthly based on time incurred and contractually agreed upon rates. Certain
professional services revenues are based on fixed fee arrangements and revenues are recognized based on the proportional performance
method. In some cases, the terms of our time and materials and fixed fee arrangements may require that we defer the recognition
of revenue until contractual conditions are met. Data services and training revenues are generally recognized as the services
are performed.
Royalty
Revenue
Royalty
revenue recorded by the Company relates exclusively to the Company’s License and Partnership agreement with Inventergy which
provides for ongoing royalties based on monetization of IP licenses. The Company recognizes revenue for royalties under ASC 606,
which provides revenue recognition constraints by requiring the recognition of revenue at the later of the following: 1) sale
or usage of the products or 2) satisfaction of the performance obligations. The Company has satisfied its performance obligations
and therefore recognizes royalty revenue when the sales to which the royalties relate are completed. During the years ended December
31, 2018 and 2017, the Company did not recognize any royalty revenue.
During
the year ended December 31, 2018, the Company’s customer base were comprised of approximately 33.47% B2B (Wholesale Distributors
and Enterprise Institutions), 25.24% B2C (consumers and government agencies who bought on the behalf of consumers, through our
online ecommerce platform and through Amazon, Google and iTunes), 7.85% IP (our monetization campaign from consulting, licensing
and asserting our patents) and 33.45% Military and Law Enforcement. During the year ended December 31, 2017, the Company’s
customer base and revenue streams were comprised of approximately 53.27% B2B (Wholesale Distributors and Enterprise Institutions),
23.96% B2C (consumers and government agencies who bought on the behalf of consumers, through our online ecommerce platform and
through Amazon, Google and iTunes), 13.61% IP (our monetization campaign from consulting, licensing and asserting our patents)
and 9.16% Military and Law Enforcement.
Disaggregation
of Net Sales
The
following table shows the Company’s disaggregated net sales by product type:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Product sales
|
|
$
|
443,069
|
|
|
$
|
297,616
|
|
Service income
|
|
|
193,974
|
|
|
|
124,119
|
|
Consulting income
|
|
|
50,000
|
|
|
|
116,653
|
|
Total
|
|
$
|
687,043
|
|
|
$
|
538,388
|
|
The
following table shows the Company’s disaggregated net sales by customer type:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
B2B
|
|
$
|
230,069
|
|
|
$
|
289,416
|
|
B2C
|
|
|
176,974
|
|
|
|
126,319
|
|
Military
|
|
|
230,000
|
|
|
|
49,000
|
|
IP
|
|
|
50,000
|
|
|
|
73,653
|
|
Total
|
|
$
|
687,043
|
|
|
$
|
538,388
|
|
Allowance
for Doubtful Accounts
We
extend credit based on our evaluation of the customer’s financial condition. We carry our accounts receivable at net realizable
value. We monitor our exposure to losses on receivables and maintain allowances for potential losses or adjustments. We determine
these allowances by (1) evaluating the aging of our receivables; and (2) reviewing high-risk customers financial condition. Past
due receivable balances are written off when our internal collection efforts have been unsuccessful in collecting the amount due.
Our allowance for doubtful accounts was $15,918 as of December 31, 2018 and $22,312 as of December 31, 2017.
Shipping
and Handling Costs
Shipping
and handling costs are included in cost of goods sold in the accompanying consolidated statements of operations.
Product
Warranty
The Company’s warranty policy provides
repair or replacement of products (excluding GPS Shoe devices) returned for defects within ninety days of purchase. Warranty liabilities
are recorded at the time of sale for the estimated costs that may be incurred under our standard warranty. As of December 31,
2018 and 2017, products returned for repair or replacement have been immaterial. Accordingly, a warranty liability has
not been deemed necessary.
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. 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. The Company uses Level 2 inputs for its valuation methodology for
the derivative liabilities.
Cash
and Cash Equivalents
Cash
equivalents consist of highly liquid investments with insignificant rate risk and with original maturities of three months or
less at the date of purchase.
Inventory
Inventory
generally consists of raw materials and finished goods and is valued at the lower of cost (first-in, first-out) or net realizable
value. The Company evaluates its inventory for excess and obsolescence on a regular basis. In preparing the evaluation the Company
looks at the expected demand for the product, as well as changes in technology, in order to determine whether or not a reserve
is necessary to record the inventory at net realizable value. For the years ending December 31, 2018 and 2017 the Company did
not recognize any charges to expense associated with excess and obsolete inventory cost adjustments.
Property
and Equipment
Property
and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are calculated
using the straight-line method over the estimated two year useful lives of the assets. When property and equipment are retired
or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain
or loss is included in operations. Expenditures for maintenance and repairs are expensed as incurred.
Website
Development
Under
ASC 350-50 –
Intangibles – Goodwill and Other – Website Development Costs
, costs and expenses incurred
during the planning and operating stages of the Company’s website development are expensed as incurred. The Company accounts
for the development of its website by expensing all costs associated with the planning of the website as incurred and capitalizing
the costs to develop the website. Depreciation is calculated using the straight-line method over the estimated two year useful
lives of the assets.
Software
Development Costs
Software
development costs include payments made to independent software developers under development arrangements primarily for the development
of our smart-phone mobile applications (“Apps”). Software development costs are capitalized once technological feasibility
of a product is established and it is determined that such costs should be recoverable against future revenues. For products where
proven technology exists, this may occur early in the development cycle. Technological feasibility is evaluated on a product-by-product
basis. Amounts related to software development that are not capitalized are charged immediately to product research and development
costs.
Commencing
upon the related product’s release, capitalized software development costs are amortized to cost of sales based upon the
higher of (i) the ratio of current revenue to total projected revenue or (ii) the straight-line method. The recoverability of
capitalized software development costs is evaluated based on the expected performance of the specific products for which the costs
relate. The following criteria are used to evaluate expected product performance: historical performance of comparable products
using comparable technology and orders for the product prior to its release.
Significant
management judgments and estimates are utilized in the assessment of when technological feasibility is established, as well as
in the ongoing assessment of the recoverability of capitalized costs. If revised forecasted or actual product sales are less than
and/or revised forecasted or actual costs are greater than the original forecasted amount utilized in the initial recoverability
analysis, the net realizable value may be lower than originally estimated in any given quarter, which could result in an impairment
charge.
Research
and Development Costs
Research and development costs consist
primarily of fees paid to consultants and outside service providers, patent fees and costs, and other expenses relating to the
acquisition, design, development and testing of the Company’s products. Research and development expenditures are expensed
as incurred and totaled $25,163 and $49,126 for the years ended December 31, 2018 and 2017, respectively.
Concentrations
We
currently rely on one manufacturer to supply us with our GPS SmartSole and one manufacturer to supply us with the GPS device included
in the GPS SmartSole. The loss of either of these manufacturers could severely impede our ability to manufacture the GPS SmartSole.
As
of December 31, 2018, the Company had four customers representing approximately 40%, 30%, 9% and 8% of sales and three
customers representing approximately 54%, 12%, and 9% of total accounts receivable, respectively. The Company had three customers
representing approximately 33%, 29%, and 16% of sales and three customers representing approximately 8%, 23%, and 11% of total
accounts receivable, respectively for the year ended December 31, 2017.
Intangible
Assets
The
Company records identifiable intangible assets acquired from other enterprises or individuals at cost. Intangible assets consist
of a licensing agreement enabling the Company to sell its GPS-related vehicle tracking software and services.
Marketable
Securities
Through
December 31, 2017, the Company accounted for its investment in marketable equity securities as “available for sale”
securities. Our marketable securities were marked to market on a quarterly basis, with unrealized gains and losses being excluded
from earnings and reflected as a component of other comprehensive income.
On
January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments – Overall: Recognition and Measurement of Financial
Assets and Financial Liabilities. ASU 2016-01 primarily affects equity investments, financial liabilities under the fair value
option, and the presentation and disclosure requirements for financial instruments. Among other things, this new guidance requires
certain equity investments to be measured at fair value with changes in fair value recognized in net income. As such, the Company
measures its equity investments at their fair value at end of each reporting period. The fair value of our available for sale
securities is determined based on quoted market prices for identical securities on a quarterly basis.
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.
Net
Loss Per Common Share
Basic net loss per share is computed by dividing
net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share is
computed by dividing net loss by the weighted average number of shares of common stock and potentially outstanding shares of common
stock during each period. There were no dilutive shares outstanding as of December 31, 2018 and 2017. Common stock equivalents,
totaling 11,555,000 and 13,852,000 at December 31, 2018 and 2017, respectively, were not included in the computation
of diluted earnings per share in 2018 and 2017 on the consolidated statements of operations due to the fact that the Company reported
a net loss in 2018 and 2017.
Income
Taxes
The
Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized
by applying the statutory tax rates in effect in the years in which the differences between the financial reporting and tax filing
bases of existing assets and liabilities are expected to reverse. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized.
Stock-based
Compensation
Stock-based
compensation expense is recorded for stock and stock options awarded in return for services rendered. The expense is measured
at the grant-date fair value of the award and recognized as compensation expense on a straight-line basis, which is generally
commensurate with the vesting period. The Company estimates forfeitures that it expects will occur and records expense based upon
the number of awards expected to vest.
Comprehensive
Loss
FASB
ASC 220 establishes rules for reporting and displaying comprehensive loss and its components. Comprehensive loss is the sum of
net loss as reported in the consolidated statements of operations and comprehensive loss transactions as reported in the consolidated
statement of stockholders’ deficit. Comprehensive loss transactions that applied to the Company through December 31, 2017
resulted from unrealized losses on available for sale investments. On January 1, 2018 the Company adopted ASC 2016-01, and such
gains and losses are now reported as part of earnings.
Segments
The Company operates
in one segment for the manufacture and distribution of its products. In accordance with the “Segment Reporting” Topic
of the ASC, the Company’s chief operating decision maker has been identified as the Chief Executive Officer and President,
who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Existing
guidance, which is based on a management approach to segment reporting, establishes requirements to report selected segment information
quarterly and to report annually entity-wide disclosures about products and services, major customers, and the countries in which
the entity holds material assets and reports revenue. All material operating units qualify for aggregation under “Segment
Reporting” due to their similar customer base and similarities in: economic characteristics; nature of products and services;
and procurement, manufacturing and distribution processes. Since the Company operates in one segment, all financial information
required by “Segment Reporting” can be found in the accompanying financial statements.
Recently
Issued Accounting Pronouncements
In
February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 requires
a lessee to record a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease
payments, on the balance sheet for all leases with terms longer than 12 months, as well as the disclosure of key information about
leasing arrangements. ASU 2016-02 requires recognition in the statement of operations of a single lease cost, calculated so that
the cost of the lease is allocated over the lease term, generally on a straight-line basis. ASU 2016-02 requires classification
of all cash payments within operating activities in the statement of cash flows. Disclosures are required to provide the amount,
timing and uncertainty of cash flows arising from leases. A modified retrospective transition approach is required for lessees
for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented
in the financial statements, with certain practical expedients available. ASU 2016-02 is effective for fiscal years beginning
after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. The Company has
not yet evaluated the impact of the adoption of ASU 2016-02 on the Company’s financial statement presentation or disclosures.
In
June 2018, the FASB issued Accounting Standards Update 2018-07, Compensation – Stock Compensation (Topic 718): Improvements
to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”). ASU 2018-07 expands the scope of Topic 718 to include
share-based payment transactions for acquiring goods and services from nonemployees. ASU 2018-07 also clarifies that Topic 718
does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction
with selling goods or services to customers as part of a contract accounted for under Revenue from Contracts with Customers (Topic
606). ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal
years. Early adoption is permitted. The Company will adopt the provisions of ASU 2018-07 in the quarter beginning January 1, 2019.
The adoption of ASU 2018-07 is not expected to have any impact on the Company’s financial statement presentation or disclosures.
Other
recent accounting pronouncements issued by the FASB, its Emerging Issues Task Force, the American Institute of Certified Public
Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on
the Company’s present or future consolidated financial statements.
3.
JOINT VENTURE AND INVESTMENT IN EQUITY SECURITIES
The
Company has the following transactions with Inventergy Global, Inc. (NASDAQ: INVT).
Joint
Venture Agreement
On
June 16, 2016, the Company entered into a Definitive Agreement with Inventergy Innovations, LLC (“Inventergy”), a
subsidiary of INVT. The Company partnered with Inventergy to monetize three (3) GTX Patents. Upon signing the Agreement, the Patents
were assigned to an Inventergy subsidiary, and Inventergy assigned a 45% interest in the entity to GTX. Inventergy is also obligated
to make a sequence of quarterly payments to GTX beginning in January 2017, which payments represent non-refundable advances against
future royalty and other payments. Pursuant to a non-exclusive license back to GTX, GTX will still retain all use rights of the
3 patents.
The Company uses the equity method to account
for its 45% investment in the Inventergy subsidiary. Under the equity method, the Company recognizes its share of the earnings
and losses of the subsidiary as they accrue instead of when they are realized. There have been no operations of the joint
venture to date, and as of December 31, 2018 and 2017, the Company’s investment in the venture was $0.
Investment
in Equity Securities
As
of December 31, 2018, and December 31, 2017, we owned 42,500 shares of common stock of INVT at a closing with a fair value of
$344 and $3,230 respectively. Our investment accounted for less than a 5% interest in the equity of this Company. Through December
31, 2017, the Company previously accounted for this as an investment in available for sale securities, and as such unrealized
gains and losses were recorded as adjustment to accumulated other comprehensive income. During 2017, the Company reflected an
unrealized loss of $59,249 on this investment.
In
January 2018, the Company adopted ASU 2016-01, Financial Instruments (Subtopic 825-10): Recognition and Measurement of Financial
Assets and Financial Liabilities (“ASU 2016-01 using the modified retrospective transition method. Upon adoption, we reclassified
$59,249 related to available-for-sale investment securities from accumulated other comprehensive loss to accumulated deficit as
a cumulative-effect adjustment. Under the new guidance, these securities will continue to be measured at fair value; however,
the changes in unrealized net holding gains and losses will be reported in earnings. Comparative information continues to be reported
under the accounting standards in effect for the period. The effect of the change for the twelve months ended December 31, 2018
was an increase to net loss of approximately $2,886, which is included in Other income (expense) on the Condensed Consolidated
Statements of Operations.
Sales
to INVT
During the years ended December 31, 2018 and
2017, the Company provided IP consulting services to INVT in the amounts of $50,000 and $116,653, respectively.
4.
RELATED PARTY TRANSACTIONS
In order to preserve cash for other working
capital needs, various officers, members of management, employees and Board Members agreed to accrue portions of their
wages and sometimes various out-of pocket expenses since 2011. As of December 31, 2018, and 2017, the Company owed $198,135
and $0, respectively, for such accrued wages and other expenses owed for other services which are included in the accrued
expenses – related parties on the accompanying balance sheet.
On December 31, 2017, management elected to
transfer the existing accrued salaries into long-term convertible promissory notes. As of December 31, 2018, and 2017,
these notes total $884,546 and $670,047, respectively. The notes bear a 10% annual interest rate. Management shall have the
right, but not the obligation to convert up to 50% of the amount advanced and accrued interest into shares, warrants or options
of common or preferred stock of the Company at $0.01 per share (see Note 8). Accrued interest on the notes were $134,039 and $45,668
as of December 31, 2018 and 2017 and is included in the accrued expenses – related parties on the accompanying balance
sheet.
5.
INVENTORY
Inventories
consist of the following:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Raw materials
|
|
$
|
717
|
|
|
$
|
33,928
|
|
Finished goods
|
|
|
21,850
|
|
|
|
23,907
|
|
Total Inventories
|
|
$
|
22,567
|
|
|
$
|
57,835
|
|
6.
PROPERTY AND EQUIPMENT
Property
and equipment, net, consists of the following:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Software
|
|
$
|
25,890
|
|
|
$
|
25,890
|
|
Website development
|
|
|
91,622
|
|
|
|
91,622
|
|
Software development
|
|
|
294,751
|
|
|
|
282,251
|
|
Equipment
|
|
|
1,750
|
|
|
|
-
|
|
Less: accumulated depreciation
|
|
|
(355,625
|
)
|
|
|
(283,529
|
)
|
|
|
|
|
|
|
|
|
|
Total property and equipment, net
|
|
$
|
58,388
|
|
|
$
|
116,234
|
|
Depreciation
expense for the years ended December 31, 2018 and 2017 was $72,096 and $62,446, respectively, and is included in general and administrative
expenses.
7.
NOTES PAYABLE
The
following table summarizes the components of our short-term borrowings:
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
(a)
Term
loans
|
|
$
|
200,000
|
|
|
$
|
200,000
|
|
(b)
Line of credit
|
|
|
65,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
265,000
|
|
|
$
|
200,000
|
|
(a)
Term loans
In 2015, the Company entered into an unsecured
term loan agreement with a third party for an aggregate principal balance of $200,000 at an interest rate of 14% per annum. The
term loan became due on April 14, 2017. The principal balance outstanding on the note as of December 31, 2018 and December 31,
2017 was $200,000 and is past due, and $5,655 of accrued interest has been paid down in 2018.
(b)
Line of Credit
The
Company obtained a line of credit agreement with an accredited investor of $5,000,000 during 2018. There were three borrowings
against the line as of December 31, 2018 for aggregate borrowings of $65,000. The line bears interest of 17%. The line is based
upon GTXO providing the investor with purchase orders and use of proceeds, including production of goods schedules and loan repayment
timelines. These loans/drawdowns are specifically for product, inventory and/or purchase order financing.
Upon
completion of the terms of the Line of Credit, GTX Corp. will issue to the investor 7,500,000 shares of GTXO common stock or $75,000
of GTXO common stock, whichever is greater.
As
of December 31, 2018 the Company had received $65,000 in advances.
8.
CONVERTIBLE NOTES
As
of December 31, 2018 and December 31, 2017, the Company had a total of $1,313,133 and $923,875, respectively, of convertible
notes payable, which consisted of the following:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
a) Convertible Notes – with fixed conversion
|
|
$
|
967,000
|
|
|
$
|
517,500
|
|
b) Convertible Notes – with variable conversion
|
|
|
346,133
|
|
|
|
406,375
|
|
Total
|
|
|
1,313,133
|
|
|
|
923,875
|
|
Less: Debt discount
|
|
|
(20,024
|
)
|
|
|
(142,117
|
)
|
Total convertible notes, net of debt discount
|
|
$
|
1,293,109
|
|
|
$
|
781,758
|
|
|
a)
|
Convertible
notes payable with principal balance of $517,500 as of December 31, 2017 consist of loans provided to the Company from various
investors. These notes carry simple interest at a rate ranging from 0% to 14% per annum and with terms ranging from
1 to 2 years. In lieu of the repayment of the principal and accrued interest, the outstanding amounts are convertible, at
the option of the note holder, generally at any time on or prior to maturity and automatically under certain conditions, into
the Company’s common shares at $0.015 to $0.001 per share. These notes became due in 2017 and prior, and are
currently past due.
|
|
|
|
|
|
During
the period ended December 31, 2018, the Company entered into Convertible Promissory Agreements with accredited investors for
an aggregate principal balance of $470,000. The Purchasers may convert their notes after six months into common shares
in the Company at a price equal to $0.002 to $0.30. The notes bear interest from 1% to 12% mature at various dates ranging
from four to six months. The notes were issued pursuant to Section 4(a)(2) of the Securities Act of 1933. On the dates of
the agreement, the closing price of the common stock range from $0.0018 to $0.23 per share. As the conversion price embedded
in the note agreements was below the trading price of the common stock on the dates of issuance, a beneficial conversion feature
(BCF) was recognized at the date of issuance. The Company recognized a debt discount at the date of issuance in the aggregate
amount of $181,250 related to the intrinsic value of beneficial conversion feature. During the twelve months ended
December 31, 2018, we issued 5,900,000 shares of common stock to convert $40,500 of these outstanding convertible notes and
paid down in cash the principal balance on three notes by $2,000.
|
|
|
|
|
|
Also,
during the same period, the Company entered into a Convertible Promissory Agreement with
an accredited investor with a principal balance of $25,000. The Purchaser may
convert their note after November 30, 2018 into common shares in the Company at a price
equal to a 40% discount to market. The note bears interest of 1%. As part of the note
agreement, the Company issued 500,000 shares of common stock and warrants to acquire
500,000 shares of common stock at an exercise price of $.04 per share. The Company recognized
a debt discount at the date of issuance in the aggregate amount of $12,500 related to
the fair value of the intrinsic value of the beneficial conversion feature and the equity
instruments issued with the financing. During the year ended December 31, 2018 the Company
repaid $3,000 of principal and $22,000 was outstanding as of December 31, 2018.
The balance of the valuation discount of notes with a fixed conversion as of December 31, 2017 was
$52,712
. During the period ended December
31, 2018 the Company recorded a valuation discount of $193,750 upon issuance of convertible notes payable and amortized
$246,462 of debt discount leaving no remaining unamortized balance at December 31, 2018. See subsequent events for
Amendment to the Notes.
|
|
b)
|
Convertible
notes payable with principal balance of $406,375 were outstanding as of December 31,
2017 and consist of loans provided to the Company from various investors. These notes
are non-interest bearing and with terms ranging from 1 to 2 years. In lieu of the repayment
of the principal and accrued interest, the outstanding amounts are convertible, at the
option of the note holder, generally at any time on or prior to maturity and automatically
under certain conditions, into the Company’s common shares at 60% of the lowest
trading price in the prior 30 days.
During
the twelve-month period ended December 31, 2018, we issued 5,216,826 shares of common stock to convert $154,367 of outstanding
convertible notes. In addition, we paid down $56,000 under the note agreements.
|
|
|
|
|
|
During
the period ended December 31, 2018, the Company had issued a Convertible Promissory Note as payment for services incurred
under an Advisory Agreement with a third party for a principal balance of $55,125 under the same terms as the notes above.
Additionally, the same party entered into two other Convertible Promissory Note agreements for services, one for $10,000
at a 40% discount to market with a 10% interest rate, and the other for $85,000 with a 2% discount rate.
|
|
|
|
|
|
The
Company determined that since the conversion floor of these notes had no limit to the conversion price, the Company could
no longer determine if it had enough authorized shares to fulfil its conversion obligation. As such, pursuant to current accounting
guidelines, the Company determined that the conversion feature of these notes created a derivative with a fair value totaling
$96,556 at the date of issuances. The Company recorded $78,396 as a valuation discount to be amortized over
the life of the note and the remaining $18,160 as a financing cost.
|
|
|
|
|
|
The unamortized valuation discount relating to these notes was $89,405 as of December 31, 2017.
During the period ended December 31, 2018 the Company recorded a valuation discount of $78,396 upon issuance of convertible
notes payable, and recorded amortization of debt discount of $147,777 as interest expense. Unamortized debt discount as of
December 31, 2018 related to these notes was $20,024.
|
Convertible
Notes Due to Related Parties
On
September 30, 2016, management elected to convert accrued salaries into long-term convertible promissory notes. The balance of
such note at December 31, 2016 was $428,997. On December 31, 2017, management elected to transfer additional accrued salaries
into long-term convertible promissory notes, due on March 31, 2019, totaling $241,050 and are due 18 months after issuance.
The notes bear a 10% annual interest rate. Management shall have the right, but not the obligation to convert up to 50% of the
amount advanced and accrued interest into shares, warrants or options of common or preferred stock of the Company at $0.75 per
share. As of December 31, 2017, the outstanding balance on the convertible notes was $670,047.
During
the period ended June 30, 2018, the Company recognized additional notes with an aggregate amount of $214,499 which represent 50%
of the related party notes that matured on March 31, 2018. The notes are due on March 31, 2019. Such amount was recorded as noncash
financing cost during the twelve months ended December 31, 2018. As of December 31, 2018, the outstanding balance on the convertible
promissory notes was $884,546.
On
December 31, 2018 interest of $133,533 is accrued on the above notes and included in accrued expenses to related parties.
Derivative
liabilities
Under
authoritative guidance used by the FASB on determining whether an instrument (or embedded feature) is indexed to an entity’s
own stock, instruments which do not have fixed settlement provisions are deemed to be derivative instruments. The Company has
issued certain convertible notes whose conversion price is based on a future market price. However, since the number of shares
to be issued is not explicitly limited, the Company is unable to conclude that enough authorized and unissued shares are available
to share settle the conversion option.
As
a result, the conversion option is classified as a liability and bifurcated from the debt host and accounted for as a derivative
liability in accordance with ASC 815 and will be re-measured at the end of every reporting period with the change in value reported
in the statement of operations.
At December 31, 2017, the balance of the derivative
liabilities was $261,172. During the period ended December 31, 2018, the Company recorded an additional derivative liability with
a fair value of $96,554, recorded a gain on extinguishment of derivative liabilities of $119,099 related
to notes that were converted and a change in fair value of $6,468. At December 31, 2018, the balance of the derivative
liabilities was $232,162.
At
December 31, 2018 and December 31, 2017, the derivative liabilities were valued using a probability weighted Black-Scholes-Merton
pricing model with the following assumptions:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Conversion feature:
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
2.57
|
%
|
|
|
2.0
|
%
|
Expected volatility
|
|
|
504.95
|
%
|
|
|
165.68
|
%
|
Expected life (in years)
|
|
|
.1 to .773 years
|
|
|
|
.1 to .5 years
|
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
Fair Value:
|
|
|
|
|
|
|
|
|
Conversion feature
|
|
$
|
232,162
|
|
|
$
|
261,172
|
|
The
risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company uses the historical volatility
of its common stock to estimate the future volatility for its common stock. The expected life of the conversion feature of the
notes was based on the remaining contractual term of the notes. The expected dividend yield was based on the fact that the Company
has not paid dividends to its common stockholders in the past and does not expect to pay dividends to its common stockholders
in the future.
9.
INCOME TAXES
The
provision for refundable Federal income tax consists of the following as of December 31:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Federal income tax benefit calculated at statutory rate of 21%
and 34%, respectively
|
|
$
|
598,000
|
|
|
$
|
431,000
|
|
Less: Stock based compensation expense
|
|
|
(55,000
|
)
|
|
|
(37,000
|
)
|
Effect of rate change from 34% to 21%
|
|
|
(2,102,000
|
)
|
|
|
(1,895,000
|
)
|
Change in valuation allowance
|
|
|
1,559,000
|
|
|
|
1,501,000
|
|
Net income tax provision
|
|
$
|
-
|
|
|
$
|
-
|
|
The
cumulative tax effect at the expected rate of 21% and 34% of significant items comprising our net deferred tax amount is as follows
at December 31:
|
|
2018
|
|
|
2017
|
|
Deferred tax asset attributable to:
|
|
|
|
|
|
|
|
|
Net operating losses carried forward
|
|
$
|
3,396,282
|
|
|
$
|
3,061,000
|
|
Less: Valuation allowance
|
|
|
(3,396,282
|
)
|
|
|
(3,061,000
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
At December 31, 2018, the Company had an
unused net operating loss carryover approximating $16,166,000, subject to section 386 limitations, that is available to offset
future taxable income, which expires beginning in 2028.
The
Company established a full valuation allowance. The Company continually reviews the adequacy of the valuation allowance and recognizes
a benefit from income taxes only when reassessment indicates that it is more likely than not that the benefits will be realized.
10.
EQUITY
Preferred
Stock
During
the year ended December 31, 2018, the Company authorized its preferred shares to have voting rights equal to two-thirds of all
the issued and outstanding shares of common stock, shall be entitled to vote on all matters of the corporation, and shall have
the majority vote of the board of directors. The subject preferred stock lacks any dividend rights, does not have liquidation
preference, and is not convertible into common stock. During the year ended December 31, 2018, the Company issued one million
shares to certain officers and board members. The Company retained a third-party valuation firm whose input was utilized in determining
the related per share valuation of the preferred shares. Based on Management’s assessment and the valuation report, the
fair value of the preferred shares was determined to be $0.0463 per share or an aggregate of $46,363.
Common
Stock
The
Company issued the following shares of common stock for the years ended December 31:
|
|
2018
|
|
|
2017
|
|
|
|
Value of Shares
|
|
|
# of shares
|
|
|
Value of Shares
|
|
|
# of shares
|
|
Shares issued for services rendered
|
|
$
|
60,999
|
|
|
|
39,580,667
|
|
|
$
|
94,250
|
|
|
|
216,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for conversion of debt
|
|
|
194,829
|
|
|
|
11,116,826
|
|
|
|
392,620
|
|
|
|
2,328,414
|
|
Common shares issued upon exercise of warrants
|
|
|
-
|
|
|
|
2,419,961
|
|
|
|
-
|
|
|
|
-
|
|
Shares issued for financing
|
|
|
19,090
|
|
|
|
856,000
|
|
|
|
20,325
|
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares issued
|
|
$
|
274,918
|
|
|
|
53,973,454
|
|
|
$
|
507,195
|
|
|
|
2,585,081
|
|
Shares issued for services rendered were to
various members of management, employees and consultants and are generally expensed as Stock-Based Compensation in the accompanying
consolidated statement of operations. Also included are shares of common stock issued to our 2018 investors in conjunction with
their note and share purchase agreements. Shares issued for conversion of debt relate to conversions of both short and long term
debt as discussed in Note 8. Shares issued for financing in 2018 relate to shares granted to investors for their participation
in the 2018 financings.
During the year ended December 31, 2018
the Company issued 80,667 shares of common stock with a fair value of $17,770 at the date of grant for services.
On October 16, the Company created a long-term
employment retention bonus plan and issued 39,500,000 of restricted common shares to the plan. The shares have a 3-year vesting
period and those eligible, employees, directors and advisors must have been with the Company for at least 7 years with an additional
2 years necessary in order to participate in the plan and 3 to become fully vested. The shares will vest with a mandatory 2 year
minimum requirement for such vesting to become valid with 33.4% in year two and 66.66% at the end of year three. If the individual
leaves the Company prior to vesting the Company or its assignee retains the option to repurchase the unvested shares at par. The
shares had a fair value of $622,500 at the date of grant, which cost will be amortized over the three-year vesting period. For
the period ending December 31, 2018, the company had amortized expense of $43,229 related to the retention plan and the remaining
$579,231 will be recognized as compensation cost as the shares vest.
During the year ended December 31, 2018
the Company issued 856,000 shares of common stock with a fair value of $19,090 at the date grant for financing costs.
Common
Stock Warrants
Since
inception, the Company has issued numerous warrants to purchase shares of the Company’s common stock to shareholders, consultants
and employees as compensation for services rendered.
A
summary of the Company’s warrant activity and related information is provided below (the exercise price and the number of
shares of common stock issuable upon the exercise of outstanding warrants have been adjusted to reflect a 1-for-75 reverse stock
split.):
|
|
Exercise Price $
|
|
|
Number of Warrants
|
|
Outstanding and exercisable at December 31, 2016
|
|
|
0.0125 - 0.03
|
|
|
|
3,852,000
|
|
Warrants exercised
|
|
|
-
|
|
|
|
-
|
|
Warrants granted
|
|
|
0.015 - 0.02
|
|
|
|
10,000,000
|
|
Warrants expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable at December 31, 2017
|
|
|
0.0125 - 0.03
|
|
|
|
13,852,000
|
|
Warrants exercised
|
|
|
0.0125 - 0.015
|
|
|
|
(2,865,000
|
)
|
Warrants granted
|
|
|
0.01 - 0.04
|
|
|
|
750,000
|
|
Warrants expired
|
|
|
0.015 - 0.02
|
|
|
|
(182,000
|
)
|
Outstanding and exercisable at December 31, 2018
|
|
|
0.0125 - 0.04
|
|
|
|
11,555,000
|
|
Stock Warrants as of December 31, 2018
|
|
Exercise
|
|
|
Warrants
|
|
|
Remaining
|
|
|
Warrants
|
|
Price
|
|
|
Outstanding
|
|
|
Life (Years)
|
|
|
Exercisable
|
|
$
|
0.0125
|
|
|
|
500,000
|
|
|
|
0.30
|
|
|
|
500,000
|
|
$
|
0.015
|
|
|
|
5,135,000
|
|
|
|
0.54
|
|
|
|
5,135,000
|
|
$
|
0.01
|
|
|
|
250,000
|
|
|
|
1.96
|
|
|
|
250,000
|
|
$
|
0.020
|
|
|
|
5,000,000
|
|
|
|
0.87
|
|
|
|
5,000,000
|
|
$
|
0.040
|
|
|
|
500,000
|
|
|
|
1.23
|
|
|
|
500,000
|
|
$
|
1.125
|
|
|
|
128,000
|
|
|
|
0.34
|
|
|
|
128,000
|
|
$
|
2.25
|
|
|
|
42,000
|
|
|
|
0.51
|
|
|
|
42,000
|
|
During the period ended December 31, 2018,
2,865,000 warrants were exercised on a cashless basis that resulted in the issuance of 2,419,962 shares of common stock, in addition
warrants 182,000 expired and 750,000 were issued. The outstanding and exercisable warrants at December 31, 2018 has no intrinsic
value.
Common
Stock Options
Under
the Company’s 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.
The
Plan provides for the issuance of a maximum of 7,000,000 shares of which, after adjusting for estimated pre-vesting forfeitures
and expired options, approximately 2,235,000 were available for issuance as of December 31, 2018.
No options were granted during 2018 and
2017.
11.
COMMITMENTS & CONTINGENCIES
Bonuses
The
Company has an employment agreement with its CEO which, among other provisions, provide for the payment of a bonus, as determined
by the Board of Directors, in amounts ranging from 15% to 50% of the executive’s yearly compensation, to be paid in cash
or stock at the Company’s sole discretion, if the Company has an increase in year over year revenues and the Executive performs
his duties (i) within the time frame budgeted for such duties and (ii) at or below the cost budgeted for such duties.
Contingencies
From
time to time, we may be involved in routine legal proceedings, as well as demands, claims and threatened litigation that arise
in the normal course of our business. The ultimate amount of liability, if any, for any claims of any type (either alone or in
the aggregate) may materially and adversely affect our financial condition, results of operations and liquidity. In addition,
the ultimate outcome of any litigation is uncertain. Any outcome, whether favorable or unfavorable, may materially and adversely
affect us due to legal costs and expenses, diversion of management attention and other factors. We expense legal costs in the
period incurred. We cannot assure you that additional contingencies of a legal nature or contingencies having legal aspects will
not be asserted against us in the future, and these matters could relate to prior, current or future transactions or events.
12.
SUBSEQUENT EVENTS
Subsequent to December 31, 2018, we retired
$52,145 in convertible debt and issued equity in the form of common stock of 11,147,308 shares to various investors.
On February 22, 2019, we issued 6,200,000
in restricted common stock to various consultants and advisors as part of their agreements.
On February 22, 2019, we issued 250,000
in restricted common stock to an investor as part of their note agreement.
Issued 250,000 in warrants with
a fair value of $2,500 to an advisor as part of their Advisory Agreement, with a strike price of $0.01 with a two year
term.