10-Q 1 form10-q.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark one)

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

 

For the quarterly period ended June 30, 2019

 

OR

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to __________

 

Commission file number 000-53046

 

GTX Corp
 
(Exact name of registrant as specified in its charter)

 

Nevada   98-0493446
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

117 W. 9th Street, Suite 1214, Los Angeles, CA, 90015
(Address of principal executive offices) (Zip Code)

 

(213) 489-3019
(Registrant’s telephone number, including area code)

 

(Former name, former address and former fiscal year, if changed since last report.)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer [  ] Accelerated filer [  ]
Non-accelerated filer [  ] (Do not check if a smaller reporting company) Smaller reporting company [X]
Emerging growth company [  ]    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [  ] No [X]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 88,887,406 common shares issued and outstanding as of August 13, 2019.

 

 

 

  

 

 

GTX CORP AND SUBSIDIARIES

For the quarter ended June 30, 2019

FORM 10-Q

 

    PAGE NO.
PART I. FINANCIAL INFORMATION  
     
Item 1. Condensed Financial Statements: 3
     
  Condensed Consolidated Balance Sheets at June 30, 2019 (unaudited) and December 31, 2018 3
     
  Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2018 (unaudited) 4
     
  Condensed Consolidated Statements of Stockholders’ Deficit for the six months ended June 30, 2019 and 2018 (unaudited) 5
     
  Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018 (unaudited) 7
     
  Notes to Condensed Consolidated Financial Statements (unaudited) 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
     
Item 4. Controls and Procedures 25
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 26
     
Item 1A. Risk Factors 26
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 26
     
Item 3. Defaults Upon Senior Securities 26
     
Item 4. Mine Safety Disclosures 26
     
Item 5. Other Information 26
     
Item 6. Exhibits 26
     
  Signatures 27

 

2
 

 

PART I

 

ITEM 1. FINANCIAL STATEMENTS

 

GTX CORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

   June 30, 2019   December 31, 2018 
   (Unaudited)     
ASSETS          
Current assets:          
Cash and cash equivalents  $188,500   $69,856 
Accounts receivable, net   104,392    97,572 
Inventory   42,030    22,567 
Investment in marketable securities   634,850    344 
Other current assets   13,582    3,479 
Total current assets   983,354    193,474 
           
Property and equipment, net   29,094    58,388 
Intangible assets   15,630    16,260 
Total assets  $1,028,078   $268,466 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
Current liabilities:          
Accounts payable  $228,974   $246,551 
Accrued expenses   417,944    438,552 
Accrued expenses – related parties   576,658    332,174 
Deferred revenues   325,000    26,000 
Convertible promissory notes, net of discount   1,226,496    1,293,109 
Convertible notes, related parties   884,546    884,546 
Revolving line of credit   

136,510

    65,000 
Notes payable   200,000    200,000 
Derivative liabilities   227,422    232,162 
Total current liabilities   4,223,550    3,718,094 
           
Commitments and contingencies          
           
Stockholders’ deficit:          
Preferred stock, $0.001 par value; 10,000,000 shares authorized; 1,000,000 shares issued and outstanding at June 30, 2019 and December 31, 2018   100    100 
Common stock, $0.0001 par value; 2,071,000,000 shares authorized; 86,887,406 and 63,363,436 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively   8,688    6,336 
Additional paid-in capital   19,804,683    19,367,130 
Accumulated deficit   (23,008,943)   (22,823,194)
Total stockholders’ deficit   (3,195,472)   (3,449,628)
Total liabilities and stockholders’ deficit  $1,028,078   $268,466 

 

See accompanying notes to condensed consolidated financial statements.

 

3
 

 

GTX CORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

   Three Months Ended June 30,   Six Months Ended June 30, 
   2019   2018   2019   2018 
Product sales  $84,707   $80,263   $104,109   $230,160 
Service income   98,398    54,485    148,152    96,150 
Licensing income   659,000    12,500    692,750    25,000 
Total revenues   842,105    147,248    945,011    351,310 
                     
Cost of products sold   32,248    31,178    48,144    93,608 
Cost of other revenue   26,842    10,885    32,830    21,871 
Cost of royalty revenue   5,119    -    23,145    - 
Total cost of goods sold   64,209    42,063    104,119    115,479 
                     
Gross margin   777,896    105,185    840,892    235,831 
                     
Operating expenses:                    
Wages and benefits   180,254    218,363    363,382    385,476 
Sales and marketing   1,857    6,043    3,420    23,427 
Professional fees   138,817    61,121    355,231    128,424 
General and administrative   44,683    67,798    124,112    145,915 
                     
Total operating expenses   365,611    353,325    846,145    683,242 
                     
Loss from operations   412,285    (248,140)   (5,253)   (447,411)
                     
Other income/(expenses):                    
Noncash financing costs on related party notes   -    (247,147)   (11,250)   (247,147)
Unrealized gain/(loss) on marketable securities   -    -    506    - 
Amortization of debt discount   -    (129,636)   (20,024)   (255,855)
Derivative income/(expense)   37,012    (17,389)   4,739    (8,564)
Interest expense and financing costs   (78,571)   (39,308)   (154,467)   (85,509)
                     
Total other income/(expenses)   (41,559)   (433,480)   (180,496)   (597,075)
                     
Net income/(loss)   370,726    (681,620)   (185,749)   (1,044,487)
                     
Components of comprehensive loss:                    
Unrealized loss on available for sale investment   -    (647)   -    (1,845)
                     
Comprehensive net income/(loss)  $370,726   $(682,267)  $(185,749)  $(1,046,330)
                     
Weighted average number of common shares outstanding - basic and diluted   83,730,416    10,847,215    77,554,574    10,401,939 
                     
Net income/(loss) per common share - basic and diluted  $0.00  $(0.06)  $0.00  $(0.10)

 

See accompanying notes to condensed consolidated financial statements.

 

4
 

 

GTX CORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

Three Months Ended June 30, 2019 (Unaudited)

 

For the Three Months Ended June 30, 2019 (Unaudited)
                   Additional         
   Preferred Stock   Common Stock   Paid-In   Accumulated     
   Shares   Amount   Shares   Amount   Capital   Deficit   Total 
                             
Balance, March 31, 2019   1,000,000    100    80,960,744   $8,096   $19,647,513   $(23,379,669)  $(3,723,960)
Issuance of common stock for services   -    -    -    -    -    -    - 
Issuance of common stock for financings   -    -    -    -    -    -    - 
Issuance of common stock for conversion of debt   -    -    5,926,662    593    39,149    -    39,742 
Issuance of warrants for financings   -    -    -    -    27,500    -    27,500 
Issuance of warrants for services   -    -    -    -    -    -    - 

Fair Value of common stock issued to management

   -    -    -    -    90,521    -    90,521 
Net income   -    -    -    -    -    370,726    370,726 
Balance, June 30, 2019   1,000,000   $100    86,887,406   $8,688   $19,804,683   $(23,008,943)  $(3,195,472)

 

For the Six Months Ended June 30, 2019 (Unaudited)
                   Additional         
   Preferred Stock   Common Stock   Paid-In   Accumulated     
   Shares   Amount   Shares   Amount   Capital   Deficit   Total 
                             
Balance, January 31, 2019   1,000,000   $100    63,363,436   $6,336   $19,367,130   $(22,823,194)  $(3,449,628)
Issuance of common stock for services   -    -    6,200,000    620    76,260    -    76,880 
Issuance of common stock for financings   -    -    250,000    25    3,075    -    3,100 
Issuance of common stock for conversion of debt   -    -    17,073,970    1,707    90,180    -    91,887 
Issuance of warrants for financings   -    -    -    -    49,992    -    49,992 
Issuance of warrants for services   -    -    -    -    4,799    -    4,799 

Fair Value of common stock issued to management

   -    -    -    -    213,247    -    213,247 
Net loss   -    -    -    -    -    (185,749)   (185,749)
Balance, June 30, 2019   1,000,000   $100    86,887,406   $8,688   $19,804,683   $(23,008,943)  $(3,195,472)

 

See accompanying notes to condensed consolidated financial statements.

 

5
 

 

GTX CORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT

Six Months Ended June 30, 2019 (Unaudited)

 

Three Months Ended June 30, 2018 (Unaudited)
                       Accumulated         
                   Additional   Other         
   Preferred Stock   Common Stock   Paid-In   Comprehensive   Accumulated     
   Shares   Amount   Shares   Amount   Capital   Loss   Deficit   Total 
                                 
Balance, March 31, 2018   -    -    10,282,960   $1,028   $19,048,077   $(60,447)  $(21,368,630)  $(2,379,972)
Issuance of common stock for services   -    -    20,000    2    5,698    -    -    5,700 
Issuance of common stock for conversion of debt   -    -    1,733,334    174    68,826    -    -    69,000 
Issuance of preferred stock for services   1,000,000    100              46,263              46,363 
BCF for shares issued   -    -    -    -    81,250    -    -    81,250 
Cumulative effect of adopting ASU 2016-01   -    -    -    -    -    60,447    (60,447)   - 
Net loss   -    -    -    -    -    -    (682,265)   (682,265)
Balance, June 30, 2018   1,000,000   $100    12,036,294   $1,204   $19,250,114   $-   $(22,111,342)  $(2,859,924)

 

Six Months Ended June 30, 2018 (Unaudited)
                       Accumulated         
                   Additional   Other         
   Preferred Stock   Common Stock   Paid-In   Comprehensive   Accumulated     
   Shares   Amount   Shares   Amount   Capital   Loss   Deficit   Total 
                                 
Balance, January 1, 2018   -    -    9,389,976   $939   $18,855,596   $(59,249)  $(21,005,763)  $(2,208,477)
Issuance of common stock for services   -    -    80,667    8    17,762    -    -    17,770 
Issuance of common stock for conversion of debt   -    -    2,565,651    257    149,243    -    -    149,500 
Issuance of preferred stock for services   1,000,000    100              46,263              46,364 
BCF for shares issued   -    -    -    -    181,250    -    -    181,250 
Cumulative effect of adopting ASU 2016-01   -    -    -    -    -    59,249    (61,093)   (646)
Net loss   -    -    -    -    -    -    (1,044,486)   (1,044,486)
Balance, June 30, 2018   1,000,000   $100    12,036,294   $1,204   $19,250,114   $-   $(22,111,342)  $(2,859,924)

 

See accompanying notes to condensed consolidated financial statements.

 

6
 

 

GTX CORP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

   Six Months Ended June 30, 
   2019   2018 
Cash flows from operating activities:          
Net loss  $(185,749)  $(1,046,330)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation and amortization   29,924    35,126 
Bad debt expense   -    5,159 
Change in fair value of marketable securities   (506)   1,845 
Receipt of marketable securities from license agreement   (634,000)   - 
Equity-based compensation   81,679    17,770 
Gain on extinguishment of derivative liability   -    (98,644)
Change in fair value of derivative liabilities   (4,740)   107,208 
Amortization of debt discount   20,024    255,855 
Fair value of common stock issued to management   213,247    46,363 
Non-cash interest and financing expense   53,092    214,499 
Increase in accrued interest on convertible notes   11,250    - 
Changes in operating assets and liabilities:          
Accounts receivable   (6,820)   (20,485)
Inventory   (19,463)   13,368 
Other current and non-current assets   (10,103)   615,803 
Accounts payable and accrued expenses   (38,185)   220,346 
Accrued expenses - related parties   244,484    (45,668)
Deferred revenues   299,000    (11,934)
           
Net cash provided/(used) in operating activities   53,134    (289,719)
           
Cash flows from investing activities:          
Purchase of property and equipment   -    (12,500)
Net cash used in investing activities   -    (12,500)
           
Cash flows from financing activities:          
Proceeds from convertible promissory notes   -    425,000 
Proceeds from line of credit   71,510    - 
Payments on convertible promissory notes   (6,000)   (56,000)
           
Net cash provided by financing activities   65,510    369,000 
           
Net change in cash and cash equivalents   118,644    66,781 
           
Cash and cash equivalents, beginning of period   69,856    1,454 
           
Cash and cash equivalents, end of period  $188,500   $68,235 
           
Supplemental disclosure of cash flow information:          
Income taxes paid  $-   $- 
Interest paid  $11,764   $- 
           
Supplementary disclosure of noncash financing activities:          
Issuance of common stock for accrued expenses  $-   $25,750 
Debt discount on convertible promissory notes  $-   $181,250 
Issuance of common stock for conversion of debt  $90,888   $149,500 
Debt discount related to derivative liabilities  $20,024   $33,456 

 

See accompanying notes to condensed consolidated financial statements.

 

7
 

 

GTX CORP AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 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 consolidated financial statements of GTX have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and applicable regulations of the U.S. Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted pursuant to such rules and regulations. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair statement of financial position and results of operations have been included. Our operating results for the six months ended June 30, 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.

 

8
 

 

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 $185,749 during the period ended June 30, 2019, has incurred losses since inception resulting in an accumulated deficit of $23,008,943 and a stockholders’ deficit of $3,195,472 as of June 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 for the twelve months following the filing date of our Quarterly Report on Form 10-Q, August 14, 2019. 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.

 

9
 

 

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 June 30, 2019 five licensing agreements were entered into for $95,000 of which our share is 45% or $42,750. 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 June 30, 2019 (see Note 3).

 

Disaggregation of Net Sales

 

During the period ended June 30, 2019, the Company’s customer base and revenue streams were comprised of approximately 14.13% B2B (Wholesale Distributors and Enterprise Institutions), 7.67% B2C (consumers and government agencies who bought on the behalf of consumers, through our online ecommerce platform and through Amazon, Google and iTunes), 75.38% IP (our monetization campaign from consulting, licensing and asserting our patents) and 2.82% Military and Law Enforcement.

 

During the period ended June 30, 2018, the Company’s customer base and revenue streams were comprised of approximately 31.43% B2B (Wholesale Distributors and Enterprise Institutions), 23.59% B2C (consumers and government agencies who bought on the behalf of consumers, through our online ecommerce platform and through Amazon, Google and iTunes), 7.12% IP (our monetization campaign from consulting, licensing and asserting our patents) and 37.86% Military and Law Enforcement.

 

The following table shows the Company’s disaggregated net sales by customer type:

 

    June 30, 2019     June 30, 2018  
B2B   $ 153,114     $ 110,431  
B2C     72,519       82,879  
Military     26,628       133,000  
IP     692,750       25,000  
Total   $ 945,011     $ 351,310  

 

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.

 

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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 six months ended June 30, 2019, the Company had two customers that each represented 82% and 6% of our sales on an individual basis, or approximately 84% in the aggregate, and during the six months ended June 30, 2018, the Company had three major customers that each represented more than 37%, 23% and 12% of our sales on an individual basis, or approximately 72% in the aggregate.

 

During the three months ended June 30, 2019, the Company had two customers that each represented 87% and 4%, of our sales on an individual basis, or approximately 91% in the aggregate, and during the three months ended June 30, 2018, the Company had three major customers that each represented more than 31%, 23% and 16% of our sales on an individual basis, or approximately 70% in the aggregate.

 

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.

 

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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 June 30, 2019 and 2018. Common stock equivalents, totaling 15,316,000 and 13,703,333 at June 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 June 30, 2019 five licensing agreements were entered into for $95,000 of which our share is 45% or $42,750.

 

The following table shows the Company’s IP Revenue with Inventergy:

 

   June 30, 2019   December 31, 2018 
IP Monetization Revenue  $42,750   $- 
COGS   (23,147)           - 
Net Monetization Revenue  $19,603   $- 

 

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During the periods ended June 30, 2019 and 2018, the Company provided IP consulting services to INVT in the amounts of $0 and $25,000, 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.

 

The following table shows the Company’s IP Revenue with Inpixon:

 

   June 30, 2019   December 31, 2018 
IP Monetization Revenue  $650,000   $        - 
COGS   -    - 
Net Monetization Revenue  $650,000   $- 

 

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 June 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 $177,902 and $134,039 as of June 30, 2019 and December 31, 2018 and is included in the accrued expenses – related parties on the accompanying balance sheet.

 

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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 June 30, 2019, and December 31, 2018, the Company owed $398,756 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:

 

   June 30, 2019   December 31, 2018 
Raw materials  $10,276   $717 
Finished goods   31,754    21,850 
Total Inventories  $42,030   $22,567 

 

6. PROPERTY AND EQUIPMENT

 

Property and equipment, net, consists of the following:

 

    June 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     (384,919 )     (355,625 )
Total property and equipment, net   $ 29,094     $ 58,388  

 

Depreciation expense for the period ended June 30, 2019 and 2018 was $29,924 and $35,126, respectively, and is included in general and administrative expenses.

 

7. INVESTMENTS IN MARKETABLE EQUITY SECURITIES

 

As of June 30, 2019, and December 31, 2018, we owned 42,500 shares of common stock of INVT with a fair value of $850 and $344 respectively. Our investment accounted for less than a 5% interest in the equity of this Company.

 

As of June 30, 2019 we owned 1,000,000 shares of common stock of Inpixon with a fair value of $634,000 and $344 respectively. Our investment accounted for less than a 5% interest in the equity of this Company.

 

In accordance with ASU 2016-01, Financial Instruments (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities these securities are measured at fair value and the changes in unrealized net holding gains and losses will be reported in earnings. The change in the fair value of these securities during the period of $506, which is included in other expenses on the Condensed Consolidated Statements of Operations.

 

8. NOTES PAYABLE

 

The following table summarizes the components of our short-term borrowings:

 

    June 30, 2019     December 31, 2018  
(a) Term loans   $ 200,000     $ 200,000  
(b) Revolving lines of credit     136,510       65,000  
                 
Total   $ 336,510     $ 265,000  

 

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(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, 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 June 30, 2019. The principal balance outstanding on the note as of June 30, 2019 and December 31, 2018 was $200,000.

 

(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. The Company is accounting for the value of the shares to be issued as the funds are advanced.

 

As of June 30, 2019 and December 31, 2018 the Company had received $130,000 and $65,000 in advances, respectively under the line of credit, and had paid down $6,264 in interest.

 

The Company also has line of credit with its business bank, Union Bank, whereby funds can be borrowed at 2 points over prime. As of June 30, 2019 the balance on this account was $6,510.

 

As of June 30, 2019 the company had a total of $136,510 in its line of credit balances.

 

9. CONVERTIBLE NOTES

 

As of June 30, 2019 and December 31, 2018, the Company had a total of $1,226,496 and $1,313,133, respectively, of outstanding convertible notes payable, which consisted of the following:

 

    June 30, 2019     December 31, 2018  
a) Convertible Notes – with fixed conversion terms   $ 955,000     $ 967,000  
b) Convertible Notes – with variable conversion     271,496       346,133  
Total     1,226,496       1,313,133  
Less: Debt discount     -       (20,024 )
Total convertible notes, net of debt discount   $ 1,226,496     $ 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 $955,000 as of June 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 six months ended June 30, 2019, we issued 5,500,000 shares of common stock to convert $6,000 of these outstanding convertible notes (see Note 9) and made payments of $6,000. As of June 30, 2019, balance of the Convertible Notes was $955,000. These notes are currently past due.

 

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    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 June 30, 2019.
     
  b) Convertible notes payable with principal balance of $271,496 as of June 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 six months ended June 30, 2019, we issued 11,626,662 shares of common stock to convert $85,887 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 June 30, 2019, balance of the Convertible Notes was $271,496.

 

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 June 30, 2019, the Company recorded an increase in derivative liability of $15,710 and recorded an extinguishment of $20,449 related to convertible notes that were converted into shares of the Company’s common stock during the current period then ended. At June 30, 2019, the balance of the derivative liabilities was $227,422.

 

At June 30, 2019 and December 31, 2018, the derivative liabilities were valued using a Black-Scholes-Merton pricing model with the following assumptions:

 

   June 30, 2019   December 31, 2018 
Conversion feature:          
Risk-free interest rate   2.04%   2.57%
Expected volatility   537.68%   504.95%
Expected life (in years)   .1 to .773 years    .1 to .773 years 
Expected dividend yield   -    - 
Fair Value:          
Conversion feature  $227,422   $232,162 

 

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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 six months ended June 30, 2019:

 

   Value of Shares   Number of Shares 
Shares issued for conversion of debt  $91,888    17,073,970 
Shares issued for financings  $3,100    250,000 
Shares issued for services rendered   76,880    6,200,000 
Total shares issued  $171,868    23,523,970 

 

Shares issued for services rendered were to various members of management, the Board of Directors, employees and consultants and are expensed as Stock-Based Compensation in the accompanying consolidated statement of operations. Shares issued for 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 5.

 

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 June 30, 2019, the Company had amortized expense of $213,247 related to the retention plan and the remaining $829,774 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     0.015       (1,489,000 )
Outstanding and exercisable at June 30, 2019     2.25 - .01       15,316,000  

 

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Stock Warrants as of June 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 
$1.125    84,000    0.02    84,000 
$2.25    42,000    0.02    42,000 

 

During the period ended June 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 June 30, 2019 had an intrinsic value of approximately $4,650.

 

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 June 30, 2019.

 

There are no options outstanding as of June 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 July 12, 2019, we issued 2,000,000 shares of common stock to an investor for converting $10,160 in debt from a convertible note that was issued in the third quarter of 2017.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 of Part I of this report include forward-looking statements. These forward looking statements are based on our management’s current expectations and beliefs and involve numerous risks and uncertainties that could cause actual results to differ materially from expectations. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “proposed,” “intended,” or “continue” or the negative of these terms or other comparable terminology. You should read statements that contain these words carefully, because they discuss our expectations about our future operating results or our future financial condition or state other “forward-looking” information. Many factors could cause our actual results to differ materially from those projected in these forward-looking statements, including but not limited to: variability of our revenues and financial performance; risks associated with product development and technological changes; the acceptance our products in the marketplace by existing and potential future customers; general economic conditions. You should be aware that the occurrence of any of the events described in this Quarterly Report could substantially harm our business, results of operations and financial condition, and that upon the occurrence of any of these events, the trading price of our securities could decline. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, growth rates, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this Quarterly Report to conform these statements to actual results.

 

Introduction

 

Unless otherwise noted, the terms “GTX Corp”, the “Company”, “we”, “us”, and “our” refer to the ongoing business operations of GTX Corp and our wholly-owned subsidiaries, Global Trek Xploration, and LOCiMOBILE, Inc.

 

Organization and Presentation

 

During the periods covered by these financial statements, GTX Corp and subsidiaries (collectively, the “Company,” “GTX,” “we” or “our”) is in the in the field of wearable GPS, people and asset tracking Location-Based Services (LBS) and Real-Time Location Systems (RTLS). GTX Corp owns 100% of the issued and outstanding capital stock of Global Trek Xploration 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. Known for its game-changing and award-winning patented GPS SmartSole® — think Dr. Scholl’s meets LoJack, the world’s first invisible 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. develops Smartphone application (“App”) for both consumer and enterprise deployment. 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 numerous Apps across multiple mobile device operating systems and continues to launch consumer and enterprise apps. LOCiMOBILE apps have over 2 million downloads across 50 plus countries and have been ranked in the iTunes top 10 downloads and highest grossing App category.

 

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Operations

 

The Company designs, develops, manufactures, distributes and sells related tracking products and services, using GPS, BLE, RF and NFC technology, to a global B2B and B2C network of resellers, affiliates, distributors, nonprofit organizations, government agencies, police departments, manufacturers reps and retailers. 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 our customers know where or how someone, or something, is at the touch of a button, delivering safety, security and peace of mind in real-time. With the exception of our military products, all of our consumer and enterprise tracking products funnel into the GTX Corp IoT monitoring platform which supports end user customers in over 35 countries. The Company is also in the business of licensing intellectual property and monetizing its patent portfolio.

 

Overview

 

As the Company continues to focus on building channels of distribution and expanding its product line of embedded smart wearable tracking devices, Stand-Alone GPS devices, Digital Apps, NFC solutions and military human and asset tracking solutions, beginning in the first quarter of 2019 we also started recognizing revenues from granting non-exclusive intellectual property licenses to companies that are using or want to use our patented technology in the market place.

 

The GTX patent portfolio addresses three core areas: Footwear and wearables, Communication to and from a device to a server and Backend Server process related to people and asset tracking Location-Based Services (LBS) and Real-Time Location Systems (RTLS).

 

GTX’s Intellectual Property (IP) portfolio not only supports the Company’s product lines by creating barriers to competitors but also underscores the Company’s intrinsic value. During the second quarter ending June 30, 2019 the Company and the Inventergy, LLC signed multiple IP non-exclusive license agreements with three different companies, which generated over $550,000 in top line IP licensing income. We also sold two patents for an additional $100,000 which brought our total IP income for the quarter at over $650,000. Of the two patents we sold, the buyer licensed back to GTX in perpetuity one of the patents, thereby enabling us to retain our intellectual property rights and competitive barriers. This transaction was transformative and validated the underlying value of our portfolio in the Location -Based Services market place.

 

The signing of these license agreements, starting with three during the first quarter of 2019 and an additional three during the second quarter highlight the momentum and traction we are garnering with our monetization campaign. Our IP licensing revenues for the second quarter 2019 compared to the same period 2018, increased 5,172% and for the six month period comparing 2019 to 2018 we had a 2,671% increase. This was a significant quarter for IP revenues and even though we are continuing ongoing conversations or negotiations with other companies and expect to sign additional IP agreements this year, it is important to note there is no way for us to predict outcomes. Every company we engage has a different outlook, a different strategy, legal team, budget, etc. In addition, IP monetization is not our core business, it is an adjunct to our business and has inherent ebbs and flows.

 

On June 27th the Company closed an IP licensing and asset sale transaction to Inpixon (NASDAQ: INPX) in the amount of $884,000 of which $250,000 was paid in cash and $634,000 was paid in marketable securities. As per the allocation schedule in the agreement the Company is deferring $50,000 over a 4-year period for the non-compete clause ($3,125 over the next 16 quarters) and will defer $184,000 over the next 6 months ($92,000 over the next 2 quarters) for the sale of the technology. The 6 months of deferred revenues coordinates with the 6-month consulting agreement the Company received as part of the asset purchase agreement (See Exhibit 10.1).

 

The income we expect from the consulting agreement is not part of the $884,000 and will be recognized in future quarters.

 

In addition to a very strong IP licensing quarter, during the quarter ending June 30, 2019, compared to the same period 2018, our overall subscribers increased by 42.5%, (by 38% domestically and 44% internationally) with service income increasing by 81%, military sales increase of 30% and hardware sales increase of 6%. By all quantifiable measures this was an excellent quarter. We added a new distribution channel through an agreement with Phoniro, a subsidiary of Assa Abloy, a leader in providing digital health care solutions to seniors in Denmark, Sweden, Norway, Finland, the Netherlands and U.K. We successfully delivered our first order to Hill Air Force Base, continued to support Edwards Air Force Base and continued to work with the Sri Lanka government.

 

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In the spirit of exploring new opportunities, we started a new R&D project with our Canadian distributor to embed our tracking technology inside custom handmade orthotic insoles in order to enter a high-end and high price point specialized market across Canada. We also began piloting our new Near Field Communication (NFC) Temperature Trackers. These tags provide real-time temperature sensing and data logging across the supply chain necessary with transportation of perishables; food, drinks, pharmaceuticals and other temperature sensitive products that can be negatively affected by conditions in transit. The data can be read by an NFC-enabled smartphone and with built-in security measures can be uploaded to our server in order to prevent unauthorized modification of data logs, allowing brands, retailers, and distributors to verify the quality of their perishable goods in transit, by confirming that temperature-sensitive products were shipped properly. This is still a new business silo we are exploring but we see this technology as a natural extension into the world of tracking, taking us beyond humans and high value assets to tracking and monitoring of perishable shipments of food, beverages, biopharmaceuticals, live organs and many other temperature sensitive shipments.

 

Results of Operations

 

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

 

Three Months Ended June 30, 2019 (“Q2 2019”) Compared to the Three Months Ended June 30, 2018 (“Q2 2018”)

 

   Three Months Ended June 30, 
   2019   2018 
   $   % of Revenues   $   % of Revenues
                 
Product sales   84,707    10%   80,263    55%
Service income   98,397    12%   54,485    37%
Licensing income   659,000    78%   25,000    8%
Total revenues   842,105    100%   147,248    100%
Cost of products sold   32,824    4%   31,178    21%
Cost of other revenue   26,841    4%   10,885    20%
Cost of licensing revenue   5,119    1%   -    0%
Cost of goods sold   64,209    8%   42,063    41%
Gross profit   777,896    92%   105,185    71%
                     
Operating expenses:                    
Wages and benefits   180,254    21%   218,363    148%
Professional fees   138,816    16%   61,121    42%
Sales and marketing expenses   1,857    0%   6,043    4%
General and administrative   44,683    5%   67,798    46%
Total operating expenses   365,611    43%   353,325    240%
                     
Profit/(loss) from operations   412,559    49%   (433,480)   -169%
                     
Other expense, net   (41,559)   -5%   (681,621)   -294%
Net profit/(loss)   370,726    44%   (681,621)   -463%

 

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Revenues

 

Revenues as a whole in Q2 2019 increased by 472% or $694,857 in comparison to Q2 2018, primarily because of the increase in sales related to IP license fee income. Product revenues increased in Q2 2019 by 6% or $4,444 over Q2 2018 primarily due to the revenue we received from our military sales, service income increasing by 81% or $43,912 as recurring fees continue to increase and IP licensing revenues increased 5172% or $646,500. IP licensing income from Inventergy in Q2 2019 continued with 1 licensing and settlement agreement executed.

 

The Company’s goal is to generate recurring subscription revenues from the use of all of our tracking products.

 

We had a 44% increase in international subscribers, 38% domestic subscribers and a 42% increase in total subscribers for Q2 2019 compared to Q2 2018.

 

Cost of goods sold

 

Cost of goods sold increased by 53% or $22,146 during Q2 2019 in comparison to Q2 2018 primarily due to the sales of IP revenues with little or no costs associated with them. The total gross margin increased from 71.43% in Q2 of 2018 to 92.38% in Q2 of 2019 primarily from the high margin sales related to IP licensing revenue.

 

Wages and benefits

 

Wages and benefits during Q2 2019 decreased by 17% or $38,109 in comparison to Q2 2018, primarily on lower staffing expenses.

 

Professional fees

 

Professional fees consist of costs attributable to consultants and contractors who primarily spend their time on legal, accounting, product development, business development, corporate advisory services and investor relations. Such costs increased $77,695 or 127% during Q2 2019 as compared to Q2 2018, primarily due to issuance of non-cash stock-based compensation to advisors related to the Inpixon transaction of $67,723 and non-cash related retention bonuses of $60,729.

 

Sales and marketing expenses

 

Sales and marketing expenses decreased by 69% or $4,186 during Q2 2019 in comparison to Q2 2018. These costs are expected to ramp up as we begin to launch new products.

 

General and administrative

 

General and administrative costs during Q2 2019 decreased by $23,114 or 34% in comparison to Q2 2018 due to lower D&O insurance costs, R&D and travel and entertainment expenses.

 

Other expense, net

 

Other expense, net decreased 90% or $391,921 from Q2 2018 to Q2 2019 primarily as a result of not adding any new debt instruments that carry non-cash derivative liabilities or increasing the amortization of debt discounts related to debt financings. As of June 30, 2019, the Company had $227,423 in derivative liabilities. Other expense, net also includes interest expenses related to notes.

 

Net loss

 

Net loss decreased by 154% or $1,052,346 from Q2 2018 to Q1 2019 primarily as a result of the increase in IP licensing and patent sales.

 

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Six Months Ended June 30, 2019 (“Q2 2019”) Compared to the Six Months Ended June 30, 2018 (“Q2 2018”)

 

   Six Months Ended June 30, 
   2019   2018 
   $   % of Revenues   $   % of Revenues 
                 
Product sales   104,109    11%   230,160    66%
Service income   148,152    16%   96,150    27%
Licensing income   692,750    73%   25,000    7%
Total revenues   945,011    100%   351,310    100%
Cost of products sold   48,144    5%   93,608    27%
Cost of other revenue   32,830    3%   

-

    

0

%
Cost of licensing revenue   23,145    2%   21,871    6%
Cost of goods sold   104,119    11%   115,479    33%
Gross profit   840,892    89%   235,831    67%
                     
Operating expenses:                    
Wages and benefits   517,045    55%   385,476    110%
Professional fees   201,568    21%   128,424    37%
Sales and marketing expenses   3,420    0%   23,427    7%
General and administrative   124,112    13%   145,916    42%
Total operating expenses   846,145    90%   683,243    194%
                     
Loss from operations   (5,253)   -1%   (447,412)   -127%
                     
Other expense, net   (180,496)   -19%   (597,075)   -170%
Net loss   (185,749)   -20%   (1,044,487)   -297%

 

Revenues

 

Revenues as a whole in Q2 2019 increased by 169% or $593,701 in comparison to Q2 2018, primarily because of the increase in sales related to IP license fee income. Product revenues decreased in Q2 2019 by 55% or $126,050 over Q2 2018 primarily due to the decrease in revenue we received from our military and Smartsole sales, service income increased by 54% or $52,002 as recurring fees continue to increase and IP licensing revenues increased 2671% or $667,750. IP licensing income from Inventergy in Q2 2019 increased with 5 licensing and settlement agreements executed.

 

The Company’s goal is to generate recurring subscription revenues from the use of all of our tracking products.

 

We had a 44% increase in international subscribers, 38% domestic subscribers and a 42% increase in total subscribers for Q2 2019 compared to Q1 2018.

 

Cost of goods sold

 

Cost of goods sold decreased by 10% or $11,360 during Q2 2019 in comparison to Q2 2018 primarily due to the costs related to the large increase in sales for higher margin IP licensing fees. The total gross margin increased from 67% in Q2 of 2018 to 89% in Q2 of 2019 as we had large sales in high margin revenue.

 

Wages and benefits

 

Wages and benefits during Q2 2019 increased by 34% or $131,569 in comparison to Q2 2018, primarily from non-cash accruals of retention bonus.

 

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Professional fees

 

Professional fees consist of costs attributable to consultants and contractors who primarily spend their time on legal, accounting, product development, business development, corporate advisory services and investor relations. Such costs increased $226,807 or 177% during Q2 2019 as compared to Q2 2018, primarily due to issuance of non-cash stock-based compensation to advisors related to the Inpixon transaction of $91,679 and non-cash related retention bonuses of $60,729.

 

Sales and marketing expenses

 

Sales and marketing expenses decreased by 85% or $20,007 during Q2 2019 in comparison to Q2 2018. These costs are expected to ramp up as we begin to launch new products.

 

General and administrative

 

General and administrative costs during Q2 2019 decreased by $21,805 or 15% in comparison to Q1 2018 primarily due to lower D&O insurance costs, R&D and travel and entertainment expenses.

 

Other expense, net

 

Other expense, net decreased 70% or $416,579 from Q2 2018 to Q1 2019 primarily as a result of not adding any new debt instruments that carry non-cash derivative liabilities or increasing the amortization of debt discounts related to debt financings. As of June 30, 2019, the Company had $227,423 in derivative liabilities. Other expense, net also includes interest expenses related to notes.

 

Net loss

 

Net loss decreased by 81% or $783,756 from Q2 2018 to Q2 2019 primarily as a result of the sale of IP licenses and patents.

 

Liquidity and Capital Resources

 

As of June 30, 2019, we had $188,500 of cash and cash equivalents, and a working capital deficit of $3,875,046, compared to $69,856 of cash and cash equivalents and a working capital deficit of $3,524,620 as of December 31, 2018. A part of our negative working capital position at June 30, 2019 consisted of $227,423 of derivative liabilities related to unsecured convertible promissory notes and $1,226,496 related to the principal balance of unsecured convertible promissory notes.

 

During the six months ended June 30, 2019, our net loss was $185,749 compared to a net loss of $1,046,332 for the six months ended June 30, 2018. Net cash received in operating activities for Q2 2019 and Q2 2018 was $52,134 and $289,719, respectively. Net cash used in operations decreased in Q2 2019 as compared to Q2 2018 by 118%, primarily due to the net change in non-cash items of $813,364 and the net change in operating assets and liabilities of $715,477.

 

Net cash provided by financing activities during Q2 2019 was $66,510 and represents $65,000 in draws upon our line of credit and $5,000, in payments on convertible notes. During Q2 2018, net cash provided by financing activities was $369,000 and consists of proceeds totaling $425,000 received from advances under a convertible note payable agreement as well as a $56,000 debt reduction payment on a Convertible Note. This reduction of 83% in additional financing is directly related to the Company not relying on convertible notes for financings, and thus, no new convertible notes were issued in Q2 of 2019.

 

Because revenues from our operations have, to date, been insufficient to fund our working capital needs, we currently rely on the cash we receive from our financing activities to fund our growth, capital expenditures and to support our working capital requirements. The sale of our product and services is expected to enhance our liquidity in 2019, although the amount of revenues we receive in 2019 still cannot be estimated.

 

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Until such time as our products and services can support our working capital requirement, we expect to continue to generate revenues from our other licenses, subscriptions, international distributors, hardware sales, professional services and new customers in the pipeline. However, the amount of such revenues is unknown and is not expected to be sufficient to fund our working capital needs. For our internal budgeting purposes, we have assumed that such revenues will not be sufficient to fund all of our planned operating and other expenditures during 2019. In addition, our actual cash expenditures may exceed our planned expenditures, particularly if we invest in the development of improved versions of our existing products and technologies, and if we increase our marketing expenses. Accordingly, we anticipate that we will have to continue to raise additional capital in order to fund our operations in 2019. No assurance can be given that we will be able to obtain the additional funding we need to continue our operations.

 

In order to continue funding our growth, IP and working capital needs and new product development costs, during the first quarter of 2019 we continued to draw down on our credit line to fund purchase orders. However, no assurance can be given that the investor will provide the funding, if and when requested by us.

 

Going Concern

 

The consolidated financial statements have been prepared on a going concern basis which assumes the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. The Company has incurred net losses of $185,749 and $1,046,332 for the period ended June 30, 2019 and 2018, respectively, has incurred losses since inception resulting in an accumulated deficit of $23,008,943 as of June 30, 2019, and has negative working capital of $3,875,046 as of June 30, 2019. A significant part of our negative working capital position at June 30, 2019 consisted of $1,563,006, of amounts due to various accredited investors of the Company for convertible promissory notes, loans and a letter of credit. The Company anticipates further losses in the development of its business. Please see the section entitled “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2018 for more information regarding risks associated with our business.

 

Off-Balance Sheet Arrangements

 

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

 

Inflation

 

We do not believe our business and operations have been materially affected by inflation.

 

Critical Accounting Policies and Estimates

 

There are no material changes to the critical accounting policies and estimates described in the section entitled “Critical Accounting Policies and Estimates” under Item 7 in our Annual Report on Form 10-K for the year ended December 31, 2018.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

As a “smaller reporting company”, we are not required to provide the information under this Item 3.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 as of the end of the period covered by this report (the “Evaluation Date”). Based upon the evaluation, our principal executive officer and principal financial officer concluded as of the Evaluation Date that our disclosure controls and procedures were effective. Disclosure controls are controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act, such as this report, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls include controls and procedures designed to reasonably ensure that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Controls Over Financial Reporting

 

There were no changes in our internal controls over financial reporting that occurred during the quarterly period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II - OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

None.

 

ITEM 1A. RISK FACTORS.

 

None.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

The issuance of the above shares was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

ITEM 5. OTHER INFORMATION.

 

None.

 

ITEM 6. EXHIBITS.

 

(a) Exhibits

 

10.1   Inpixon Sales Agreement(1)
     
31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
     
31.2   Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
     
32.1   Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act
     
32.2   Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema
     
101.CAL   XBRL Taxonomy Extension Calculation
     
101.DEF   XBRL Taxonomy Extension Definition
     
101.LAB   XBRL Taxonomy Extension Label
     
101.PRE   XBRL Taxonomy Extension Presentation

 

  (1) Incorporated by reference to the Registrant’s Current Report on Form 8-K dated July 2, 2019.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  GTX CORP
     
Date: August 13, 2019 By: /s/ ALEX MCKEAN
    Alex McKean,
    Chief Financial Officer (Principal Financial Officer)

 

Date: August 13, 2019 By: /s/ PATRICK BERTAGNA
    Patrick Bertagna,
    Chief Executive Officer

 

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