NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2019
(Unaudited)
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, along with licensing of its intellectual property 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. (“Global Trek”) designs, manufactures, sells and distributes, hardware, software, and connectivity,
using Global Positioning System (“GPS”), Bluetooth Low Energy (“BLE”), Radio Frequency (“RF”)
and Near Field Communication (“NFC”) technologies for monitoring and tracking of people and high value assets. Supported
through a proprietary IoT enterprise monitoring platform and intellectual property portfolio, our award-winning patented GPS
SmartSole® — is the world’s first wearable technology tracking device created for those at risk of wandering
due to Alzheimer’s, dementia, autism and traumatic brain injury. The product platform can be customized and integrated into
numerous products whose location and movement can be monitored in real time through our 24x7 tracking 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, all of which is also managed by Global Trek, along with IP licensing.
LOCiMOBILE,
Inc. (“LOCiMOBILE”), is the Company’s digital platform which has been at the forefront of Smartphone application
(“App”) development since 2009. With a suite of mobile applications, we are able to turn the iPhone, iPad, Android
and other GPS enabled handsets into a tracking device which can be tracked from handset to handset, 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.
Through
a proprietary enterprise IoT monitoring platform and licensing subscription business model, the Company offers a complete end
to end solution of hardware, middleware, Apps, connectivity, licensing and professional services, letting you know where or how
someone or something is at the touch of a button, delivering safety, security and peace of mind in real-time.
Basis
of Presentation
The
accompanying unaudited condensed 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 nine months ended September
30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019. The accompanying
unaudited condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements
for the year ended December 31, 2018, 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.
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 incurred a net
loss of $442,173 during the period ended September 30, 2019, has incurred losses since inception resulting in an accumulated deficit
of $23,265,367 and a stockholders’ deficit of $3,408,718 as of September 30, 2019. 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 the financial statements are 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 until such time
as revenues and related cash flows are sufficient to fund our operations.
The
Company’s independent registered public accounting firm has also included explanatory language in their opinion accompanying
the Company’s audited financial statements for the year ended December 31, 2018. The Company’s financial statements
do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the
amounts and classifications of liabilities that may result from the possible inability of the Company 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.
SIGNIFICANT ACCOUNTING POLICIES
Revenue
Recognition
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).
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.
IP
Licensing Revenue
Beginning
in 2019 we began our transition into an outbound licensing model whereby revenue recorded by the Company includes revenue for
our License and Partnership agreement with Inventergy which provides for ongoing royalties based on monetization of IP licenses.
The Company recognizes revenue for these licenses upon execution of the licensing agreement. During the period ended September
30, 2019 eleven licensing agreements were entered into for $182,500 of which our share is 45% or $82,125. In addition, the company
entered into a new licensing agreement with Inpixon, for which the Company recognized revenue of $650,000 during the period ended
September 30, 2019 (see Note 3).
Disaggregation
of Net Sales
During
the period ended September 30, 2019, the Company’s customer base and revenue streams were comprised of approximately 33%
B2B (Wholesale Distributors and Enterprise Institutions), 9% B2C (consumers and government agencies who bought on the behalf of
consumers, through our online ecommerce platform and through Amazon, Google and iTunes), 57% IP (our monetization campaign from
consulting, licensing and asserting our patents) and 1% Military and Law Enforcement.
During
the period ended September 30, 2018, the Company’s customer base and revenue streams were comprised of approximately 52%
B2B (Wholesale Distributors and Enterprise Institutions), 21% B2C (consumers and government agencies who bought on the behalf
of consumers, through our online ecommerce platform and through Amazon, Google and iTunes), 6% IP (our monetization campaign from
consulting, licensing and asserting our patents) and 21% Military and Law Enforcement.
The
following table shows the Company’s disaggregated net sales by customer type for the nine months ended September 30, 2019
and 2018:
|
|
September
30,
2019
|
|
|
September
30,
2018
|
|
B2B
|
|
$
|
430,430
|
|
|
$
|
306,189
|
|
B2C
|
|
|
110,117
|
|
|
|
123,690
|
|
Military
|
|
|
12.405
|
|
|
|
126,445
|
|
IP
|
|
|
732,125
|
|
|
|
37,500
|
|
Total
|
|
$
|
1,285,077
|
|
|
$
|
593,824
|
|
Use
of Estimates
The
preparation of the accompanying unaudited 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, investments in marketable securities, accounts receivable, other current assets,
accounts payable and accrued liabilities approximate their fair value due to their short maturities. The Company uses Level 3
inputs for its valuation methodology for the derivative liabilities.
Concentrations
We
currently rely on one manufacturer to supply us with our GPS SmartSole and two manufacturers 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.
During
the nine months ended September 30, 2019, the Company had two customers that each represented 77% and 8% of our sales on an individual
basis, or approximately 85% in the aggregate, and during the nine months ended September 30, 2018, the Company had three major
customers that each represented more than 39%, 23% and 10% of our sales on an individual basis, or approximately 71% in the aggregate.
During
the three months ended September 30, 2019, the Company had three customers that each represented 55% and 17% and 8%, of our sales
on an individual basis, or approximately 80% in the aggregate, and during the three months ended September 30, 2018, the Company
had four major customers that each represented more than 42%, 21%, 7% and 7% of our sales on an individual basis, or approximately
77% in the aggregate.
Share-based
Compensation
The
Company issues stock options and warrants, shares of common stock, and equity interests as share-based compensation to employees
and non-employees. The Company accounts for its share-based compensation to employees in accordance with FASB ASC 718, Compensation
– Stock Compensation. Stock-based compensation cost is measured at the grant date, based on the estimated fair value
of the award, and is recognized as expense over the requisite service period.
In
prior periods up to March 31, 2019, the Company accounted for share-based compensation issued to non-employees and consultants
in accordance with the provisions of FASB ASC 505-50, Equity - Based Payments to Non-Employees. Measurement of share-based
payment transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or
services received; or (b) the equity instruments issued. The final fair value of the share-based payment transaction is determined
at the performance completion date. For interim periods, the fair value is estimated, and the percentage of completion is applied
to that estimate to determine the cumulative expense recorded.
In
June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting. The guidance was issued to simplify the accounting for share-based transactions by expanding the scope
of Topic 718 from only being applicable to share-based payments to employees to also include share-based payment transactions
for acquiring goods and services from nonemployees. As a result, nonemployee share-based transactions will be measured by estimating
the fair value of the equity instruments at the grant date, taking into consideration the probability of satisfying performance
conditions. The Company adopted ASU 2018-07 on April 1, 2019. The adoption of the standard did not have a material impact on our
financial statements for the three months ended September 30, 2019 or the previously reported financial statements.
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.
Investments
in Marketable Securities
The
Company’s securities investments that are acquired and held principally for the purpose of selling them in the near term
are classified as trading securities. Trading securities are recorded at fair value based on quoted market price (level 1) on
the balance sheet in current assets, with the change in fair value during the period included in earnings.
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 September
30, 2019 and 2018. Common stock equivalents, totaling 15,190,000 and 11,321,667 at September 30, 2019 and 2018, respectively,
were not included in the computation of diluted earnings per share in 2019 and 2018 in the unaudited consolidated statements of
operations as inclusion of such shares would be anti-dilutive.
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
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 are not believed by management to have a material impact on the Company’s present
or future consolidated financial statements.
3.
LICENSE AGREEMENTS
IP
Monetization 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, which now due to ongoing continuations
has grown to 5 Patents, were assigned to an Inventergy subsidiary (“Inventergy LBS, LLC”), and Inventergy assigned
a 45% revenue share in net revenue collected on these patents to GTX. Pursuant to a non-exclusive license back to GTX, GTX will
still retain all use rights of the 5 patents. The agreement provides for ongoing royalties based on monetization of IP licenses.
The Company recognizes revenue for these licenses upon execution of the licensing agreement. During the period ended September
30, 2019 eleven licensing agreements were entered into for $182,500 of which our share is 45% or $82,125.
During
the periods ended September 30, 2019 and 2018, the Company provided IP consulting services to INVT in the amounts of $0 and $37,500,
respectively
Inpixon
Agreement
On
June 27, 2019 the Company completed its sale and licensing of certain assets and patents of GTX to Inpixon, consisting of a portfolio
of global positioning system (“GPS”) technologies and intellectual property, including, but not limited to the following:
(a)
an intellectual property portfolio that includes a registered patent, along with more than 20 pending patent applications or licenses
to registered patents or pending applications relating to GPS technologies;
(b)
a smart school safety network (“SSSN”) solution that consists of a combination of wristbands, gateways and proprietary
backend software, which rely on the Bluetooth Low-Energy (“BLE”) protocol and a low-power enterprise wireless 2.4Ghz
platform, to help school administrators identify the geographic location of students or other people or things (e.g., equipment,
vehicles, tools, etc.) in order to, among other things, ensure the safety and security of students while at school;
(c)
a personnel equipment tracking system (“P.E.T.S.”) and ground personnel safety system (“GPSS”), which
includes a combination of hardware and software components, for a GPS and radio frequency (“RF”) based personnel,
vehicle and asset-tracking solution designed to provide ground situational awareness and near real-time surveillance of personnel
and equipment traveling within a designated area for, among other things, government and military applications; and,
(d)
a right to 30% of royalty payments that may be received by GTX in connection with its ownership interest in Inventergy LBS, LLC
(“Inventergy”) which is the owner of certain patents related to methods and systems for communication with a tracking
device.
The
Assets were sold for aggregate consideration of $884,000 consisting of (i) $250,000 in cash delivered at the closing (the “Cash
Consideration”) and (ii) 1,000,000 shares of Inpixon’s restricted common stock, par value $0.001 per share (the “Shares”)
valued at $634,000 at the date of the sale. 100,000 of the Shares are subject to certain holdback restrictions and forfeiture
for the purpose of satisfying indemnification claims. In addition, the Company and Inpixon entered into a six month consulting
agreement, pursuant to which the Company will provide services to assist Inpixon with the transition of the assets acquired under
the Agreement. Under the consulting agreement, the Company will receive a monthly fee of $15,000 over the 6-month term of the
consulting agreement commencing on July 1, 2019.
The
Company analyzed and performed an assessment of the terms of the Agreement with Inpixon pursuant to the provisions of ASC 606,
Revenue from Contracts with Customers (“ASC 606”). Under ASC 606, the objective when allocating the transaction price
is for an entity to allocate the transaction price to each performance obligation (or distinct good or service) in an amount that
depicts the amount of consideration to which the entity expects to be entitled in exchange for transferring the promised goods
or services to the customer. Based on the provisions of ASC 606, the Company determined $650,000 of the purchase price represented
the value from the licensing agreements and was recognized as revenue at the date of the agreement as all performance obligations
had been met; and $234,000 represented the fair value of the consulting services that will be amortized as revenue as the services
will be provided over 6 month period. During the nine month period ended September 30, 2019, $95,125 of this amount was amortized
and reflected as service income.
4.
RELATED PARTY TRANSACTIONS
Convertible
notes payable to related parties - In 2017, management elected to transfer the existing accrued salaries into long-term convertible
promissory notes. As of September 30, 2019 and December 31, 2018, these notes total $884,546. 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 was $200,198 and $134,039 as of September 30, 2019 and December 31, 2018, respectively, and is included in the accrued
expenses – related parties on the accompanying balance sheet.
Accrued
wages and costs - 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 September
30, 2019, and December 31, 2018, the Company owed $408,531 and $198,135, 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.
5.
INVENTORY
Inventories
consist of the following:
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
Raw materials
|
|
$
|
678
|
|
|
$
|
717
|
|
Finished goods
|
|
|
40,836
|
|
|
|
21,850
|
|
Total Inventories
|
|
$
|
41,514
|
|
|
$
|
22,567
|
|
6.
PROPERTY AND EQUIPMENT
Property
and equipment, net, consists of the following:
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
Software
|
|
$
|
25,890
|
|
|
$
|
25,890
|
|
Website development
|
|
|
91,622
|
|
|
|
91,622
|
|
Software development
|
|
|
294,751
|
|
|
|
294,751
|
|
Equipment
|
|
|
1,750
|
|
|
|
1,750
|
|
Less: accumulated
depreciation
|
|
|
(390,264
|
)
|
|
|
(355,625
|
)
|
Total property
and equipment, net
|
|
$
|
23,749
|
|
|
$
|
58,388
|
|
Depreciation
expense for the period ended September 30, 2019 and 2018 was $34,639 and $35,126, respectively, and is included in general and
administrative expenses.
7.
INVESTMENTS IN MARKETABLE EQUITY SECURITIES
The
Company’s equity investments represented investments of purchased shares of stock of two (2) entities with ownership percentages
of less than 5%. The Company accounted for these investments pursuant to ASU 2016-01, Financial Instruments – Overall: Recognition
and Measurement of Financial Assets and Financial Liabilities. As such, these investments were recorded at their market value
as of September 30, 2019, with the change in fair value being reflected in the statement of operations. These investments consisted
of the following:
As
of December 31, 2018, the Company owned 42,500 shares of Inventergy’s common stock with fair value of $344 as of the year
then ended. During the current period ended September 30, 2019, the Company was able to obtain observable evidence that the investment
had a market value of $0.02 per share, or an aggregate value of $850 as of the period then ended. As such, the Company recorded
an unrealized gain from the change in market value of $506 during the current period ended September 30, 2019 in its condensed
statement of operations.
In
June 2019, the Company acquired 1,000,000 shares of Inpixon’s restricted common stock valued at $634,000, as consideration
for the assets sold to Inpixon (see Note 3), and which accounted for less than 5% in equity of Inpixon. During the current period
ended September 30, 2019, the Company was able to obtain observable evidence that the investment had a market value of $0.116
per share, or an aggregate value of $116,000 as of the period then ended. As such, the Company recorded an unrealized loss from
the change in market value of $518,000 during the current period ended September 30, 2019 in its condensed statement of operations.
8.
NOTES PAYABLE
The
following table summarizes the components of our short-term borrowings:
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
(a) Term loans
|
|
$
|
217,000
|
|
|
$
|
200,000
|
|
(b) Revolving
lines of credit
|
|
|
107,000
|
|
|
|
65,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
324,000
|
|
|
$
|
265,000
|
|
(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 5% per annum. The term loan became due on April 14, 2017, however the maturity date has been extended to
October 1, 2019 and the Company issued the lender warrants to purchase 2,500,000 shares of the Company’s common stock valued
at $22,492 as consideration for the extension of the loan which has been recorded as a financing cost during the period ended
September 30, 2019. The principal balance outstanding on the note as of December 31, 2018 was $200,000. During the period ended
September 30, 2019 the Company repaid $33,000, resulting in a balance due of $167,000 as of September 30, 2019.
On
September 29, 2019, the Company entered into a term loan agreement with Inpixon for an aggregate principal balance of $50,000
at an interest rate of 14% per annum. This note is tied to the Asset Purchase Agreement with Inpixon, dated as of June 27, 2019,
whereby Inpixon agrees to fund the Company $50,000 a month until their S1 registration for the shares due to the Inpixon sale
is effective. The principal balance outstanding on the note as of September 30, is $50,000.
(b)
Lines of Credit
The
Company obtained a line of credit agreement with an accredited investor of $500,000 during 2018. 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, under the line of credit. During the nine months ended September
30, 2019, the Company was advanced $65,000, and repaid $23,000 resulting in a balance due of $ $107,000 as of September 30, 2019.
The
Company also has line of credit with its business bank, Union Bank, whereby funds can be borrowed at 2 points over prime. During
the period ended September 30, 2019 had borrowed $30,000 and had repaid the entire balance. As such there is no balance outstanding
as of September 30, 2019.
9.
CONVERTIBLE NOTES
As
of September 30, 2019 and December 31, 2018, the Company had a total of $1,177,588 and $1,313,133, respectively, of outstanding
convertible notes payable, which consisted of the following:
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
a) Convertible Notes
– with fixed conversion terms
|
|
$
|
941,250
|
|
|
$
|
967,000
|
|
b) Convertible
Notes – with variable conversion
|
|
|
236,338
|
|
|
|
346,133
|
|
Total
|
|
|
1,177,588
|
|
|
|
1,313,133
|
|
Less: Debt
discount
|
|
|
-
|
|
|
|
(20,024
|
)
|
Total convertible
notes, net of debt discount
|
|
$
|
1,177,588
|
|
|
$
|
1,293,109
|
|
|
a)
|
Included
in Convertible Notes - with fixed conversion terms, are loans provided to the Company from various investors with principal
balances totaling $941,250 as of September 30, 2019. 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 $0.30 per share. These notes became due in 2017
and prior, and are currently past due.
|
|
|
|
|
|
At
December 31, 2018, balance of the Convertible Notes was $967,000. During the nine months ended September 30, 2019, we issued
3,000,000 shares of common stock to convert $6,000 of these outstanding convertible notes (see Note 9) and made payments of
$19,750. As of September 30, 2019, balance of the Convertible Notes was $941,250. These notes are currently past due.
|
|
|
On
certain of these notes the conversion price embedded in the note agreements was below the trading price of the common stock
on the dates of issuance, and a beneficial conversion feature (BCF) was recognized at the date of issuance as a note discount.
As of December 31, 2018, the unamortized discount was $20,024 and was fully amortized during the period ended September 30,
2019.
|
|
|
|
|
b)
|
Convertible
notes payable with principal balance of $236,338 as of September 30, 2019 consists 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. 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 at the date of issuance which was recorded as a valuation discount that was fully amortized as
of December 31, 2018.
|
|
|
|
|
|
At
December 31, 2018, balance of the loans was $346,133. During the nine months ended September 30, 2019, we issued 22,806,359
shares of common stock to convert $121,045 of outstanding convertible notes (see Note 9). In addition, certain of the notes
included a penalty provision for non-payment which resulted in an additional finance charge of $11,250 being added to the
principal balance. As of September 30, 2019, balance of the Convertible Notes was $238,338.
|
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, 2018, the balance of the derivative liabilities was $232,162. During the period ended September 30, 2019, the Company
recorded an increase in derivative liability of $15,710 and recorded an extinguishment of $247,213 related to convertible notes
that were converted into shares of the Company’s common stock during the current period then ended. At September 30, 2019,
the balance of the derivative liabilities was $659.
At
September 30, 2019 and December 31, 2018, the derivative liabilities were valued using a Black-Scholes-Merton pricing model with
the following assumptions:
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
Conversion feature:
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
1.784
|
%
|
|
|
2.57
|
%
|
Expected volatility
|
|
|
309.45
|
%
|
|
|
504.95
|
%
|
Expected life (in years)
|
|
|
.1
to .773 years
|
|
|
|
.1
to .773 years
|
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
Fair Value:
|
|
|
|
|
|
|
|
|
Conversion
feature
|
|
$
|
659
|
|
|
$
|
232,162
|
|
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.
10.
EQUITY
Common
Stock
The
Company issued the following shares of common stock during the nine months ended September 30, 2019:
|
|
Value
of Shares
|
|
|
Number
of Shares
|
|
Shares issued for conversion
of debt
|
|
$
|
127,045
|
|
|
|
25,806,359
|
|
Shares issued for financings
|
|
$
|
3,100
|
|
|
|
250,000
|
|
Shares issued
for services rendered
|
|
|
76,880
|
|
|
|
6,200,000
|
|
Total shares
issued
|
|
$
|
207,025
|
|
|
|
32,256,359
|
|
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 condensed consolidated statement of operations. Shares issued for financings
was to an accredited investor in relation to their convertible note. Shares issued for conversion of debt relate to conversion
of the convertible note discussed in Note 9.
On
October 16, 2018, 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 $1,086,250 at the date of grant, which cost
will be amortized over the three-year vesting period. The unamortized balance of the award was $1,043,021 as of December 31, 2018.
For
the period ending September 30, 2019, we cancelled 36 million shares of management’s stock, which was part of a three-year
employee retention plan. All non-vested shares were returned to treasury, thereby reducing quarterly non-cash expense by approximately
$90,000. The board is evaluating a new, less costly, employee stock option plan (ESOP) and intends to select a new plan by the
end of the year. As a result, for the period ending September 30, 2019, the Company had amortized expense of $221,267 related
to the retention plan, and the remaining/adjusted balance of $65,503 in unamortized expense that will be recognized as compensation
cost as the shares vest.
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, 2018
|
|
|
2.25
- 0.0125
|
|
|
|
11,555,000
|
|
Warrants exercised
|
|
|
-
|
|
|
|
-
|
|
Warrants granted
|
|
|
0.01
|
|
|
|
5,250,000
|
|
Warrants expired
|
|
|
2.25
- 0.015
|
|
|
|
(1,615,000
|
)
|
Outstanding
and exercisable at September 30, 2019
|
|
|
2.25
- .01
|
|
|
|
15,190,000
|
|
Stock
Warrants as of September 30, 2019
|
|
Exercise
|
|
|
Warrants
|
|
|
Remaining
|
|
|
Warrants
|
|
Price
|
|
|
Outstanding
|
|
|
Life
(Years)
|
|
|
Exercisable
|
|
$
|
0.011
|
|
|
|
2,500,000
|
|
|
|
1.51
|
|
|
|
2,500,000
|
|
$
|
0.015
|
|
|
|
4,190,000
|
|
|
|
0.38
|
|
|
|
4,190,000
|
|
$
|
0.01
|
|
|
|
3,000,000
|
|
|
|
1.53
|
|
|
|
3,000,000
|
|
$
|
0.020
|
|
|
|
5,000,000
|
|
|
|
0.38
|
|
|
|
5,000,000
|
|
$
|
0.040
|
|
|
|
500,000
|
|
|
|
0.73
|
|
|
|
500,000
|
|
|
|
|
|
|
15,190,000
|
|
|
|
|
|
|
|
15,190,000
|
|
During
the period ended September 30, 2019, 5,000,000 of the warrants issued were related to financings with total fair value at grant
date of $49,992, and 250,000 warrants were issued related to an advisory agreement with total fair value at grant date of $4,799,
3,000,000 have a 2-year term and have a strike price of $0.01, and 2,500,000 has a 1.7-year term with a strike price of $0.011.
The
outstanding and exercisable warrants at September 30, 2019 had no intrinsic value.
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.
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 September 30, 2019.
There
are no options outstanding as of September 30, 2019.
11.
COMMITMENTS & 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
On
October 3, 2019, we issued 2,900,000 shares of common stock to an investor for converting $9,902 in debt from a convertible note
that was issued in the third quarter of 2017.
On
October 4, 2019, we issued 2,500,000 shares of common stock to an investor for converting $5,950 in debt from a convertible note
that was issued in the third quarter of 2017.
On
October 11, 2019, we issued 1,900,000 shares of common stock to an investor for converting $4,522 in debt from a convertible note
that was issued in the third quarter of 2017.
On November 11, 2019, we issued 1,900,000
shares of common stock to an investor for converting $5,054 in debt from a convertible note that was issued in the third quarter
of 2017.