|
|
ITEM 2:
|
MANAGEMENT’S DISCUSSION & ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
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 and nine months ended September 30, 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 September 30, 2016, we had current assets of $271,737, and
current liabilities of $3,193,089.
Our Company has
incurred net losses since inception. Our operations and capital requirements have been funded by sales of our common and
preferred stock, advances from our chief executive officer, and loans from external sources. At September 30, 2016,
current liabilities exceeded current assets by $2,921,352, and total liabilities exceeded total assets by $2,852,267. 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 Convertible Preferred Stock (“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 (as amended, 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 our assets, and is convertible into shares of our common
stock at a discount to market value 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.
During the first quarter of 2016, we entered
into an Agreement and Amendment with Mr. Truitt 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 Agreement and Amendment. Also during the first quarter of 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.
On August 12, 2016, we entered into an
Agreement and Amendment with Mr. Truitt pursuant to which Mr. Truitt extended the due date of the Truitt Note to January 31, 2017.
We issued Mr. Truitt warrants to purchase 12.0 million shares of our common stock in connection with the Agreement and Amendment.
During the third quarter of 2016, we sold
1,375,000 shares of common stock for an aggregate consideration of $100,000. We also received $110,000 for the exercise of warrants
to purchase 1,100,000 shares of common stock, and converted liabilities of approximately $88,000 to approximately 2.8 million shares
of common stock.
From October 1 through November 10, 2016,
we received $362,000 for the exercise of warrants to purchase 36,200,000 shares of common stock. On November 9, 2016, we repaid
$200,000 of principal of the Truitt Note.
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 $132,371 and $572,371 during
the three and nine months, respectively, ended September 30, 2016. Cost of sales were $54,838 and $185,374 for the three and nine
months, respectively, ended September 30, 2016. Sales were $0 and $20,800 during the three and nine months, respectively, ended
September 30, 2015. Cost of sales were $33,545 and $113,114 during the three and nine months, respectively, ended September 30,
2015. 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 $463,657 and $1,240,381 for the three and nine months, respectively, ended September 30, 2016. SG&A expenses
were $698,559 and $2,021,897 for the three and nine months, respectively, ended September 30, 2015. The decreases in SG&A costs
for the three and nine months ended September 30, 2016 compared to the three and nine months ended September 30, 2015 were due
to decreases in payroll cost and professional fees due to reductions in staffing and professional services necessitated by our
financial position.
Other income and expense for the three
and nine months ended September 30, 2016 was a net expense of $471,594 and a net income of $21,738, respectively, which included
interest expense of $47,334 and $180,106, respectively, gains on extinguishment of debt of $58,603 and $192,124, respectively,
and gains (losses) related to registration payment arrangements of $(482,863) and $9,720, respectively. Other income and expense
for the three and nine months ended September 30, 2015 was a net income of $31,387 and a net income of $1,246,281, respectively,
which included interest expense of $41,794 and $163,709, respectively, gains on extinguishment of debt of $73,181 and $219,544,
respectively, and gains related to registration payment arrangements of $0 and $1,190,446, respectively.
The increase in interest expense in 2016
was due to interest on the Truitt Note in 2016.
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 were 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 September
30, 2016, we had a loss related to registration payment arrangements of $482,863 due to an increase in the value of our common
stock. During the nine months ended September 30, 2016, we had a gain of $9,720 related to registration payment arrangements due
to a net decrease in the value of our common stock during the nine-month period. We had no gains or losses related to registration
payment arrangements during the three months ended September 30, 2015. During the nine months ended September 30, 2015, we had
gains related to registration payment arrangements of $1,190,446 due to decreases in the value of our common stock and the estimated
number of penalty shares to be issued. 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 and nine months ended September 30, 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 September
30, 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 September 30, 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 September 30, 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.