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GTX CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 2 of Part I of this report include forward-looking statements. These forward looking statements are based on our management's current expectations and beliefs and involve numerous risks and uncertainties that could cause actual results to differ materially from expectations. In some cases, you can identify forward-looking statements by terminology such as "may," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "proposed," "intended," or "continue" or the negative of these terms or other comparable terminology. You should read statements that contain these words carefully, because they discuss our expectations about our future operating results or our future financial condition or state other "forward-looking" information. Many factors could cause our actual results to differ materially from those projected in these forward-looking statements, including but not limited to: variability of our revenues and financial performance; risks associated with product development and technological changes; the acceptance our products in the marketplace by existing and potential future customers; general economic conditions. You should be aware that the occurrence of any of the events described in this Quarterly Report could substantially harm our business, results of operations and financial condition, and that upon the occurrence of any of these events, the trading price of our securities could decline. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, growth rates, levels of activity, performance or achievements. We are under no duty to update any of the forward-looking statements after the date of this Quarterly Report to conform these statements to actual results. Introduction As used in this Quarterly Report, the terms "GTX Corp", "we", "us", "our", and "the Company" mean GTX Corp and our three wholly-owned subsidiaries. Operations GTX Corp provides various interrelated and complimentary products and services in the Personal Location Services marketplace. We currently conduct our operations through three wholly-owned subsidiaries that operate in related sectors of the personal location-based market. In general our subsidiaries consist of the following: · Our subsidiary, Global Trek Xploration ("GTX California"), offers a GPS and cellular location platform that enables subscribers to track in real time the whereabouts of people, pets or high valued assets through a miniaturized transceiver module, wireless connectivity gateway, middleware and viewing portal. On March 18, 2010, GTX California entered into a four-year agreement with Aetrex Worldwide, Inc. ("Aetrex") pursuant to which we granted Aetrex the licensing rights to our end to end patented two way GPS platform and embed our GPS tracking device into certain footwear products manufactured and sold by Aetrex. Aetrex Worldwide, Inc. is a global leader in pedorthic footwear and foot orthotics. Aetrex has certain exclusive and non-exclusive rights under this agreement. In order to retain its exclusive rights, Aetrex must purchase 156,000 devices from us over the four-year period commencing on the date that we ship to Aetrex the first production order of devices as follows: 6,000 GPS tracking devices in the first year, 25,000 devices during the second year, 50,000 during the third year, and 75,000 devices during the fourth year. On June 30, 2010, Aetrex issued its first purchase order for 3,000 devices, which we expect to ship to Aetrex in the third quarter of 2011. The end-users of the GPS enabled Aetrex shoes, expected to be predominately seniors afflicted with dementia, will be required to pay us a monthly service fee, a portion of which will be shared with Aetrex. The Aetrex shoe is scheduled to be released in the third quarter of 2011. 13-------------------------------------------------------------------------------- On May 28, 2010, the Company entered into a three year agreement with Midnite Air Corp ("MNX") granting MNX the exclusive rights to the GPS tracking platform for use in the transportation of high valued assets. In order to retain exclusive rights, MNX must purchase a minimum of 15,000 devices over the three year term at 5,000 per year and activate each device with a monthly monitoring subscription. Each device shipped will automatically be activated within 90 days of receipt with a monthly data monitoring and connectivity subscription fee. We have completed the integration process between the GTX tracking platform and the MNX backend customer service portal, delivered 40 devices to MNX and activated the monthly monitoring as of August 11, 2011. MNX must purchase an additional 4,960 devices before May 3, 2012 in order to retain their exclusive rights. During 2010, the Company also signed two international licensing agreements, with Tracking Central in Australia and with Peace of Mind in Mexico, expanding its international distribution channels. · Our LOCiMOBILE, Inc. subsidiary has developed, and launched smart-phone mobile applications ("Apps") for the iPhone, iPad, Android, BlackBerry and other GPS enabled handsets and tablets that permit authorized users to locate and track the movement of the holder of the handset. Our 17 Apps, that run on six different platforms (including iPhone, BlackBerry and Google Android), have experienced over 1,030,000 downloads in 117 countries with two of our Apps in the iTunes top 25 social networking category, reaching number seven on the downloads list, number two on the highest grossing list and iTunes "What's Hot" list. There are currently several new Apps in development and scheduled for release in the third quarter of 2011. These include a series of applications that will be geared for the enterprise user, by offering "private label" versions of our popular consumer apps to companies looking for a more personalized and secure method of keeping track of their employees. In addition, the Company will expand into proximity marketing and begin to leverage its global user base. Our roadmap also consists of further development of additional applications for the iPad and other tablets and TV's, and more applications for the iPhone, BlackBerry and Google Android operating systems, all of which are expected to further contribute to our user base community, the value of our brand, and revenue increases from App sales, monthly subscriptions and advertising. LOCiMOBILE has created 9 new videos that have been posted on YouTube, is formulating 2 new strategic alliances with signed contracts expected to close in the 3rd quarter and is entering the gaming and entertainment category looking to expand its user base and demographics. · Our Code Amber News Service, Inc. ("CANS") subsidiary is a U.S. and Canadian syndicator and content provider of all state Amber Alerts (public notifications of child abductions) and missing person alerts. Additionally, CANS markets and sells the patent pending electronic medical Code Amber Alertag and has recently signed up dozens of online affiliates and channel partners with a current total of 290 affiliates in 61 countries and 25 active fundraising organization throughout the United States that are selling the Alertag. The Alertag comes with an annual $19.95 subscription based model and compliments the overall GTX business model of providing peace of mind and personal location solutions to the masses. Code Amber recently formed an alliance with Lifespire, Inc., a nonprofit organization dedicated to helping developmentally disabled individuals reach their life's aspirations. LifeSpire is working on a new version of the Code Amber Alertag which will help accelerate the treatment and care of those in need, and potentially save thousands of lives. LifeSpire informed us that their initial 400 unit test order was successful and that they plan to place another order in the 3rd quarter of 2011. 14-------------------------------------------------------------------------------- GTX Corp has recognized Latin America as a growing and strategically important market and is engaging this market through partnerships, bilingual sales and technical support staff along with localized software translated into Spanish for the region. GTX Corp has commenced selling personal location solutions to Mexico, Brazil, Colombia, Peru, Chile, Venezuela and Guatemala, through hardware devices, platform licensing and smart phone Apps and Alertags. The Company expects to see significant growth in 2011 as the Company increases the number of local partnerships and marketing efforts in these international territories. For 2011 the Company is exploring partnerships in Europe, Canada and China and has signed agreements with companies operating in those territories in order to explore and evaluate expansion into those territories. In addition, based on the successful soft launch of the MNX product, the Company is planning to expand into Europe and is securing office space in the UK to better support the global needs of MNX and Aetrex. The Company has brought on 3 advisors in the region to advance our wireless carrier relationships, expand our mobile apps presence in the European app stores and to establish licensing partners for the GTX backend monitoring platform. Australia, New Zealand, China, Canada and Israel are also being explored as potential launch markets in 2012. Results of Operations The following discussion should be read in conjunction with our consolidated financial statements and the related notes that appear elsewhere in this Quarterly Report. Second Quarter of 2011 Compared to Second Quarter of 2010 Dollar % Three Months Ended June 30, Variance Variance 2011 2010 % of % of Favorable $ Revenues $ Revenues (Unfavorable) Revenues $ 118,320 100 % $ 142,446 100 % $ (24,126 ) (17 )% Cost of goods sold 85,229 72 % 64,288 45 % (20,941 ) (33 )% Net profit 33,091 28 % 78,158 55 % (45,067 ) (58 )% Salaries and professional fees 322,416 272 % 320,697 225 % (1,719 ) (1 )% Research and development 3,070 3 % 18,199 13 % 15,129 83 % General and administrative 71,447 60 % 90,276 63 % 18,829 21 % Operating expenses 396,933 335 % 429,172 301 % 32,239 8 % Loss from operations (363,842 ) (307 )% (351,014 ) (246 )% (12,828 ) (4 )% Other income (expense), net 29,245 25 % 91 - % 29,154 32,037 % Net loss $ (334,597 ) (282 )% $ (350,923 ) (246 )% $ 16,326 5 % 15--------------------------------------------------------------------------------Revenues The decrease in our revenues during the second quarter of 2011 is primarily due to a $49,000 or 46% decrease in our Application revenues in comparison to the second quarter of 2010. This decrease is due to a decrease in the number of paid for Apps released in 2011 compared to 2010. A large portion of subscriber downloads of our Apps in 2011 relate to upgrades to current subscriptions, which upgrades are provided free of charge. During the second quarter of 2011 we continued to recognize revenue from our agreements with Aetrex and MNX, hardware product sales, portal software licensing, monthly subscriptions, Code Amber annual news feed subscriptions, points of display sponsorships and the sale of Code Amber Alertags. We expect that revenues will increase during the third quarter of 2011 with the release of the Aetrex shoe, the continued sales of devices and monthly monitoring services to MNX, the continued sales of smart-phone Apps along with the introduction of new Apps, and continued Code Amber Alertag sales. Cost of goods sold The increase in cost of goods sold as a percentage of revenues during the second quarter of 2011 is primarily attributable to costs incurred in generating new business for our portal services, as well as costs associated with implementing the Aetrex agreement. Additionally, included in cost of goods sold is the depreciation on the capitalized costs of the Apps, which increased by approximately $14,000 or 65% in comparison to the second quarter of 2010 due to the continued development of our Apps. Salaries and professional fees Salaries and professional fees during the second quarter of 2011 stayed relatively unchanged compared to the same 2010 period. Near the end of fiscal 2009, we implemented numerous cost cutting efforts, including reductions in staff and management positions, in response to the downturn in the U.S. and global economy. These reductions have remained in place and we continue to keep the current workforce at the minimum level necessary to maintain operations. Professional fees consist primarily of costs attributable to consultants and contractors who primarily spend their time on sales, marketing and the development of technology; legal fees relating to general corporate matters and our patent applications; and accounting expenses. We anticipate that operations will increase during the third quarter of 2011 primarily from the release of the Aetrex shoe and the continued sale of devices to MNX. Accordingly, we may have to increase our workforce, increase the amount of wages and benefits we pay, and increase the utilization of consultants and contractors in the future as the economy recovers from the setbacks caused by the crisis in the global markets. Research and development Research and development expense during the second quarter of 2011 decreased 83% in comparison to the comparable 2010 period because we have moved substantially out of the development stage into the sales stage, including sales of our LOCiMOBILE® Apps, our GPS tracking devices and our Location Data Center monitoring portal. 16 --------------------------------------------------------------------------------General and administrative General and administrative expenses consist primarily of corporate administrative costs, depreciation, occupancy costs, insurance and travel and entertainment. General and administrative expenses during the second quarter of 2011 decreased 21% in comparison to the comparable period in 2010 due primarily to reductions in depreciation expense and website maintenance, as well as the implementation of various general cost cutting measures. Other Income (Expense), net Other income (expense), net for the second quarter of 2011 is primarily attributable to discount amortization, derivative income and the gain on conversion of our convertible promissory notes. The derivative income represents the net unrealized (non-cash) change during the period in the fair value of our derivative liabilities related to embedded derivatives in our convertible promissory notes that have been bifurcated and accounted for separately. Additionally, during the second quarter of 2011, a lender converted $65,808 of our convertible promissory notes (including interest of approximately $2,000) resulting in a gain on conversion of approximately $6,000. The financial instruments that resulted in the derivative liability and debt discounts were not in place during the second quarter of 2010. Interest income generated during the same period in 2010 was minor and related to interest earned on money market accounts. Six Months Ended June 30, 2011 Compared to the Six Months Ended June 30, 2010 Dollar % Six Months Ended June 30, Variance Variance 2011 2010 % of % of $ Revenues $ Revenues Favorable (Unfavorable) Revenues $ 254,568 100 % $ 217,712 100 % $ 36,856 17 % Cost of goods sold 183,336 72 % 101,112 46 % (82,224 ) (81 )% Net profit 71,232 28 % 116,600 54 % (45,368 ) (39 )% Salaries and professional fees 719,550 283 % 872,293 401 % 152,743 18 % Research and development 4,049 1 % 40,475 19 % 36,426 90 % General and administrative 139,698 55 % 185,675 85 % 45,977 25 % Operating expenses 863,297 339 % 1,098,443 505 % 235,146 21 % Loss from operations (792,065 ) (311 )% (981,843 ) (451 )% 189,778 (19 )% Other income (expense), net (12,196 ) (5 )% 636 - % (12,832 ) (2,018 )% Net loss $ (804,261 ) (316 )% $ (981,207 ) (451 )% $ 176,946 (18 )% 17--------------------------------------------------------------------------------Revenues Revenues during the first six months of 2011 increased 17% as compared to the same period in 2010 primarily because of an increase in revenues generated from our licensing agreements with Aetrex and MNX. In addition to approximately $125,000 in revenues generated from the sale of our Apps, we continued to generate revenues from the Aetrex agreement, the promotion of our portal services, hardware product sales, portal software licensing, monthly subscriptions, Code Amber annual news feed subscriptions, points of display sponsorships and the sale of Code Amber Alertags. We expect that revenues will increase during the third quarter of 2011 with the release of the Aetrex shoe and the continued sale of devices to MNX. Cost of goods sold The increase in cost of goods sold as a percentage of revenues during the first six months of 2011 is primarily attributable to costs incurred in generating new business for our portal services, as well as, costs associated with the Aetrex agreement. Additionally, included in cost of goods sold is the depreciation on the capitalized costs of the Apps, which increased by approximately $32,000 or 82% in comparison to the first six months of 2010 due to the continued development of our Apps. Salaries and professional fees Salaries and professional fees during the first six months of 2011 decreased 18% compared to the same 2010 period. The decrease is primarily due to reductions in staffing in order to preserve cash, as well as cost cutting efforts we implemented in response to the downturn in the U.S. and global economy. Professional fees consist primarily of costs attributable to consultants and contractors who primarily spend their time on sales, marketing and the development of technology; legal fees relating to general corporate matters and our patent applications; and accounting expenses. We anticipate that operations will increase during the third quarter of 2011 primarily from the release of the Aetrex shoe and the continued sale of devices to MNX. Accordingly, we may have to increase our workforce, increase the amount of wages and benefits we pay, and increase the utilization of consultants and contractors in the future. Research and development Research and development expense during the first six months of 2011 decreased 90% in comparison to the same 2010 period because we have moved substantially out of the development stage for all of our products, including our LOCiMOBILE® Apps, our GPS tracking devices and our Location Data Center tracking portal. General and administrative General and administrative expenses consist primarily of corporate administrative costs, depreciation, occupancy costs, insurance and travel and entertainment. General and administrative expenses during the first six months of 2011 decreased 25% in comparison to the same period in 2010 due primarily to reductions in depreciation expense and website maintenance, as well as, the implementation of various general cost cutting measures. 18 --------------------------------------------------------------------------------Other Income (Expense), net Other income (expense), net for the first six months of 2011 is primarily attributable to discount amortization, derivative income and the gain on conversion of our convertible promissory notes. The derivative income represents the net unrealized (non-cash) change during the period in the fair value of our derivative liabilities related to embedded derivatives in our convertible promissory notes that have been bifurcated and accounted for separately. Additionally, during the first six months of 2011, a total of $78,808 of our convertible promissory notes (including interest of approximately $2,000) were converted, resulting in a gain on conversion of approximately $14,000. The financial instruments that resulted in the derivative liability and debt discounts were not in place during the first six months of 2010. Interest income generated during the same period in 2010 was minor and related to interest earned on money market accounts. 19 --------------------------------------------------------------------------------Liquidity and Capital Resources As of June 30, 2011, we had approximately $341,000 of cash and cash equivalents, and working capital of approximately $93,000 compared to approximately $66,000 of cash and cash equivalents and a working capital deficit of approximately $283,000 as of December 31, 2010. During the six months ended June 30, 2011 our net loss decreased to approximately $804,000 compared to a net loss of approximately $981,000 for the same 2010 period. Net cash used in operating activities was approximately $337,000 for the first six months of 2011 compared to $584,000 during the same 2010 period. The decrease in cash used in operating activities is primarily attributable to an increase in the use of stock, rather than cash, to pay consultants and employees, the accrual of management's salaries, a reduction in our support staff, and reductions in amounts paid for accounting and legal services during the period. Net cash used in investing activities during the six months ended June 30, 2011 and 2010 was approximately $29,000 and $115,000, respectively and consisted primarily of payments for the development of our LOCiMOBILE® products, which payments were capitalized. Net cash provided by financing activities during the six months ended June 30, 2011 and 2010 was approximately $641,000 and $303,000, respectively and primarily consists of proceeds received from the sale of shares from the Equity Line financing agreement and $297,500 from the June 2011 subscription agreements. During the first six months of 2011, we sold 4,844,553 shares of common stock to Dutchess at prices ranging from $0.050 - $0.0752 per share under our Equity Line, resulting in proceeds of approximately $316,000. . 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 as well as the common stock line of credit we entered into with Dutchess to fund our capital expenditures and to support our working capital requirements. Since we entered into the Investment Agreement with Dutchess in November 2009 in connection with the Equity Line, we have sold to Dutchess 7,183,389 shares of our common stock (at prices ranging from $0.1763 - $.050 per share) for net proceeds of approximately $614,000. We anticipate that we will continue to, from time to time, draw on the Equity Line to provide additional funding. The amount of such funding will depend upon our needs and the amount that is available to us under the Equity Line. In the event that we do not generate the amount of revenues that we anticipate, or if our expenses exceed our budgeted amounts, we may need to increase our use of the Equity Line. No assurance can be given that we will be able to obtain sufficient funds under the Equity Line to fund our expected working capital deficits. On December 16, 2010 and September 14, 2010, in order to fund our working capital needs, we received loans from a third-party in the principal amounts of $52,000 and $45,000, respectively (the "Loans"). The Loans bore interest at 8% per annum with maturity dates of September 20, 2011 and June 15, 2011, respectively, and were convertible into shares of our common stock. On March 23, 2011, the lender converted $13,000 of the principal balance of the $45,000 note into 384,615 shares of common stock at a conversion price of $.0338 per share. During April 2011, the lender converted the remaining balance of $32,000 plus $1,800 of accrued interest on the $45,000 note into 1,082,800 shares of common stock at conversion prices ranging from $.0301 to $.0321 per share. During June 2011, the lender converted $32,000 of the principal balance of the $52,000 note into 580,172 shares of common stock at conversion prices of approximately $.055 per share. During July 2011, the lender converted the remaining balance of $20,000 plus $2,080 of accrued interest on the $52,000 note into 461,748 shares of common stock at conversion prices of approximately $.048 per share. Accordingly, as of July 6, 2011, both Loans are paid in full. 20 -------------------------------------------------------------------------------- On May 17, 2011, the Company entered into a $50,000 original issue discount loan agreement whereby we received $40,000 and we are required to make payments of $12,500 each on June 16, July 16, August 16 and September 16, 2011. The original issue discount totaling $10,000 was recorded as interest expense during the three months ended June 30, 2011. The Loan Payable is secured by the Company's equity line financing arrangement with Dutchess. In the event we do not have the funds available to pay the amount due on any designated pay date we are required to immediately instruct Dutchess to sell as many shares as are necessary in order to make such payment. We paid both the June 16 and July 16, 2011 payments as scheduled without using the Dutchess equity line. We are currently a party to two licensing agreements (Aetrex and MNX), two international distributor agreements, and two separate platform test agreements for the development and release of additional products. Based on the anticipated release of the products pursuant to the licensing agreements, the orders and subscription revenues from our international partners and the development and testing of the products that are currently the subject of platform test agreements, and on the early results of those tests, we currently anticipate that we will generate revenues from both of the licensing agreements, at least one of the platform test agreements and all three of our current international distributors during 2011. However, we currently expect to incur continued losses until these and our other revenue initiatives collectively generate substantial revenues. Revenues from these sources are expected to be realized during the course of 2011. However, no assurance can be given that our current contractual arrangements and the revenues from device sales, subscriptions, Alertags, software licensing or our smart phone or tablet Apps will be sufficient to fund our working capital needs by the end of calendar year 2011. We will continue to incur normal operating expenses and we intend to continue our development efforts for our various technologies and products, including hardware, software, interface customization, and website development. We expect to further develop our sales, marketing and manufacturing programs associated with the commercialization and licensing of our GPS devices and technology. In addition, we intend to further commercialize our LOCiMOBILE® Apps, CANS and the CANS Code Amber Alertags. These activities can only be conducted if our liquidity improves. Accordingly, unless we improve our liquidity, the development of improved products, and our ability to compete, will be adversely affected. Our funding requirements will depend on numerous factors, including: · Costs involved in the completion of the hardware, software, interface customization and website development necessary to continue the commercialization of our products; · The costs of outsourced manufacturing; · The costs of licensing activities, including product marketing and advertising; and · Revenues derived from product sales and the licensing of our technology, the sale of GPS enable shoes in conjunction with the Aetrex Licensing Agreement, sales to MNX, the sales of the LOCiMobile® applications for GPS enabled handsets, and advertising sales from CANS. 21-------------------------------------------------------------------------------- As noted above, based on budgeted revenues and expenditures, planned sales of stock, proceeds from the Equity Line, the use of stock to pay for services and other measures to preserve cash, we believe that we will have sufficient liquidity to satisfy our operating cash requirements for the next twelve months. However, we expect that unless our sales increase significantly, we will need to raise additional funds during the remainder of 2011. The sale of additional equity securities will result in additional dilution to our existing stockholders. Sale of debt securities could involve substantial operational and financial covenants that might inhibit our ability to follow our business plan. Additional financing may not be available in amounts or on terms acceptable to us or at all. We may draw on the Equity Line from time to time at our option over a three year period by selling to Dutchess either (a) 200% of the average daily volume (U.S. market only) of the common stock for the three (3) trading days prior to the date of delivery of the applicable put notice, multiplied by the average of the closing prices for such trading days, or (b) any other specified amount, up to $500,000. If we are unable to obtain additional financing (through the Equity Line, or otherwise), we may be required to reduce the scope of, delay or eliminate some or all of our planned research, development and commercialization activities, which could harm our financial conditions and operating results. Since inception in 2002, we have generated significant losses (as of June 30, 2011, we had an accumulated deficit of approximately $12,051,000), and we currently expect to incur continued losses until our revenue initiatives collectively generate substantial revenues. Depending on our current contractual arrangements and the revenues from our new LOCiMOBILE® applications, we currently anticipate that our losses will continue until at least the end of calendar year 2011. We are subject to many risks associated with small and growing businesses, including the above-discussed risks associated with the ability to raise capital. Please see the section entitled "Risk Factors" included in our Annual Report on Form 10-K for the year ended December 31, 2010 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, 2010. |