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ITEM 2:
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MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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Overview
You should read the following
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) together with
our financial statements and notes thereto as of and for the year ended December 31, 2015, filed with our Annual Report on Form
10-K on April 14, 2016, and our financial statements and notes thereto as of and for the three months ended March 31, 2016, which
appear elsewhere in this Quarterly Report on Form 10-Q.
We provide
cloud-based geospatial solutions to accurately locate and digitally map underground pipelines and other infrastructure in three
dimensions. Our professional staff offers the expertise, ability, and technologies required to design and execute solutions that
are delivered in a cloud-based GIS (geographic information system) platform.
We believe that the market for aggregating
and maintaining positional data for underground assets is maturing, and that business and governmental entities are beginning to
understand the value of such data. We believe that this developing market presents us with an opportunity to deliver long-term
value to our shareholders. In order to realize that value, our primary challenge is to raise working capital sufficient to operate
our business, and investment capital to hire employees, acquire assets, and expand our business. Management is currently focused
on raising capital, and planning to position our business to capitalize on the maturing market for positional data once such capital
is in place, including identifying new technologies for aggregating positional data, developing our GeoUnderground software, and
planning the strategies and processes for our upcoming marketing campaigns. We use financial and non-financial performance indicators
to assess our business, including liquidity measures, revenues, gross margins, operating revenue, and backlog.
Liquidity and Capital Resources
At March 31, 2016, we had current assets of $442,666,
and current liabilities of $4,448,487.
Our Company has incurred net
losses since inception. Our operations and capital requirements have been funded by sales of our common and preferred stock and
advances from our chief executive officer. At March 31, 2016, current liabilities exceeded current assets by $4,005,821, and total
liabilities exceeded total assets by $3,898,160. Those factors raise doubts about our ability to continue as a going concern.
In 2014, we raised approximately $2.4 million
through private sales of our common stock, and approximately $272,000 through the exercise of outstanding warrants to purchase
Series B Stock and common stock. We also issued common stock for services valued at $82,500, and settled $500,000 of liabilities
for shares of our common stock. In 2015, we raised approximately $476,000 through private sales of our common stock, and converted
our outstanding Senior Secured Redeemable Note with a balance due of approximately $1.6 million to shares of our common stock.
On January 16, 2015, we issued
a Senior Secured Promissory Note to Horberg Enterprises LLC (the “Horberg Note”) in the principal amount of $500,000.
The Horberg Note was due on April 8, 2015, and accrued no interest through the due date. The Horberg Note was secured by liens
on all of our assets. We also issued Horberg Enterprises LLC warrants to purchase 1,500,000 shares of our common stock in consideration
for its purchasing the Horberg Note. Proceeds from the issuance of the Horberg Note were used for working capital purposes. We
repaid the Horberg Note on April 3, 2015.
On April 2, 2015, we issued a
Secured Promissory Note to David M. Truitt (the “Truitt Note”) in the principal amount of $1,000,000. The Truitt Note
bears interest at 10% per annum. The Truitt Note is secured by liens on all of our assets, and is convertible into shares of our
common stock at the option of the holder. We also issued Mr. Truitt warrants to purchase 2,000,000 shares of our common stock in
consideration for his purchasing the Truitt Note. Proceeds from the issuance of the Truitt Note were used to repay the Horberg
Note and for working capital purposes. The initial due date of the Truitt Note was October 2, 2015.
On January 27, 2016, we entered
into an Agreement and Amendment with Mr. Truitt (the “Amended Truitt Note”) pursuant to which Mr. Truitt loaned us
an additional $250,000 and extended the due date of the Truitt Note to July 31, 2016. We issued Mr. Truitt warrants to purchase
25.0 million shares of our common stock in connection with the Amended Truitt Note.
On March 16, 2016 we designated
10.0 million shares of preferred stock as Series C Convertible Preferred Stock (“Series C Stock”). Series C Stock is
convertible to common stock at a conversion ratio of 20 shares of common stock for each share of Series C Stock, subject to adjustment
for stock dividends, splits, and similar events. Series C Stock has a liquidation preference equal to its original issue price,
and has voting rights equal to five times the number of shares of common stock into which the Series C Stock is convertible. On
March 16, 2016, we sold 1,250,000 shares of Series C Stock to Mr. Truitt for consideration of $250,000.
During the second quarter of
2016, we sold 1,500,000 shares of Series C Stock to Mr. Truitt for $300,000. Also during the second quarter of 2016, we converted
notes payable totaling approximately $197,000 to shares of Series C Stock, and we converted a note payable of approximately $54,000
to warrants to purchase common stock. We also converted approximately $1.3 million of our officers’ accrued salaries to shares
of common stock, and approximately $162,000 of other liabilities to our officers to shares of Series C Stock.
Management is continuing efforts
to secure funding sufficient for the Company’s operating and capital requirements through private sales of Series C Stock
and common stock, and to negotiate settlements or extensions of existing liabilities. The proceeds of such sales of stock, if any,
will be used to fund general working capital needs.
Beginning in 2012, we changed
the focus of our company to position us to generate revenue from data acquisition and data management. We expanded our service
offerings to provide data acquisition services utilizing twelve different technologies. We developed new, cloud-based mapping software
to be marketed under our existing name GeoUndergound that replaced our previous version of GeoUnderground. We currently utilize
GeoUnderground to deliver data to customers. We intend to offer GeoUnderground as a subscription-based stand-alone product beginning
in 2016. We believe that our changes to our operating focus will enable us to begin to generate significant revenue from operations.
We believe that our actions and planned actions will
enable us to finance our operations beyond the next twelve months.
We do not believe that inflation
and changing prices will have a material impact on our net sales and revenues, or on income from continuing operations.
Results of Operations
We had sales of $181,200 during
the three months ended March 31, 2016, and no sales during the three months ended March 31, 2015. Cost of sales were $57,933 and
$37,593 for the three months ended March 31, 2016 and 2015, respectively. Our sales have fluctuated throughout 2016 and 2015 as
our ability to market and perform jobs was hampered by our financial condition. We expect sales and cost of sales to continue to
fluctuate as our business continues to mature.
Selling, general, and administrative
(“SG&A”) expenses were $379,823 and $666,642 for the three months ended March 31, 2016 and 2015, respectively.
The decrease in SG&A costs for the three months ended March 31, 2016 compared to the three months ended March 31, 2015 was
due to decreases in payroll cost and professional fees due to reductions in staffing necessitated by our financial position.
Other income and expense for
the three months ended March 31, 2016 and 2015 was a net income of $504,282 and $710,489, respectively, which included interest
expense of $63,219 and $84,142, respectively, gains on extinguishment of debt of $74,918 and $73,181, respectively, and gains related
to registration payment arrangements of $492,583 and $721,450, respectively. The decrease in interest expense in 2016 was due to
interest on Senior Secured Redeemable Note in 2015 prior to its conversion to common stock.
Gains or expense related to registration
payment arrangements result from a series of Stock Subscription Agreements we entered into in 2009 and 2010 (the “Stock Subscription
Agreements”). We are required to register the shares of common stock sold pursuant to the Stock Subscription Agreements under
the Securities Act. Our failure to register the shares of common stock under the Securities Act timely resulted in our obligation
to issue additional shares (“Penalty Shares”) to investors who purchased shares pursuant to the Stock Subscription
Agreements. We recorded a liability on our books for the value of the estimated number of shares to be issued. We incur losses
on our registration payment arrangements when the estimated number of Penalty Shares to be issued increases, or when the value
of our common stock increases. We record gains on our registration payment arrangements when the estimated number of Penalty Shares
to be issued decreases, or when the value of our common stock decreases.
During the three months ended
March 31, 2016 and 2015, we had gains related to registration payment arrangements due to decreases in the value of our common
stock. We expect that income or expense related to registration payment arrangements will fluctuate as the price of our common
stock and the estimate of the number of Penalty Shares to be issued fluctuate.
We had no benefit from income taxes
during the three months ended March 31, 2016 and 2015, as our deferred tax benefit was completely offset by a valuation allowance
due to the uncertainty of realization of the benefit.
Off-Balance Sheet Arrangements
The Company had no off-balance sheet arrangements
as of March 31, 2016.
Application of Critical Accounting Policies
We prepare our financial statements
in conformity with accounting principles generally accepted in the United States of America, which requires us to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities
at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Estimates and assumptions which, in our opinion, are significant to the underlying amounts
included in the financial statements and for which it would be reasonably possible that future events or information could change
those estimates include:
Registration
Payment Arrangements
. We are contractually obligated to issue shares of our common stock to certain investors for failure to
register their shares of our common stock under the Securities Act. We have recorded a liability for the estimated number of shares
to be issued at the fair value of the stock to be issued. We review on a quarterly basis our estimate of the number of shares to
be issued and the fair value of the stock to be issued.
Realization of Deferred
Income Tax Assets.
We provide a net deferred tax asset or liability equal to the expected future tax benefit or expense of
temporary reporting differences between financial reporting and tax accounting methods and any available operating loss or tax
credit carryovers. At March 31, 2016, we had a deferred tax asset resulting principally from our net operating loss deduction carryforward
available for tax purposes in future years. This deferred tax asset is completely offset by a valuation allowance due to the uncertainty
of realization. We evaluate the necessity of the valuation allowance quarterly.
Estimated Costs to Complete
Fixed-Price Contracts.
We record revenues for fixed-price contracts under the percentage-of-completion method of accounting,
whereby revenues are recognized ratably as those contracts are completed. This rate is based primarily on the proportion of contract
costs incurred to date to total contract costs projected to be incurred for the entire project, or the proportion of measurable
output completed to date to total output anticipated for the entire project. We review our estimates of costs to complete each
contract quarterly, and make adjustments if necessary. At March 31, 2016, we do not believe that material changes to contract cost
estimates at completion for any of our open contracts are reasonably likely to occur.