Notes to Consolidated
Financial Statements
December 31,
2016 and 2015
Note 1 – Summary of Significant
Accounting Policies
This
summary of significant accounting policies of Geospatial Corporation, a Nevada corporation, and subsidiaries (the “Company”)
is presented to assist in the understanding of the Company’s financial statements. The financial statements and notes are
representations of the Company’s management, which is responsible for the integrity and objectivity of the financial statements.
These accounting policies conform to accounting principles generally accepted in the United States of America, and have been consistently
applied in the preparation of the financial statements.
Nature of
Operations
The
Company utilizes innovative technologies to acquire and manage data related to underground assets. The Company’s services
include pipeline data acquisition and professional data management. The Company is located in Sarver, Pennsylvania, and provides
services throughout the United States.
Consolidation
The
Company’s financial statements include its wholly-owned subsidiaries Geospatial Mapping Systems, Inc., and Utility Services
and Consulting Corporation, which ceased operations in 2011. All material intercompany accounts and transactions have been eliminated
in consolidation.
Use of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management 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. Accordingly, actual results could differ from those estimates.
Estimates
and assumptions which, in the opinion of management, 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:
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Estimated
useful lives of property and equipment;
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Estimated
costs to complete fixed-price contracts;
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Realization
of deferred income tax assets;
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●
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Estimated
number and value of shares to be issued pursuant to registration payment arrangements;
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These
estimates are discussed further throughout these Notes to Financial Statements.
Geospatial
Corporation and Subsidiaries
Notes to Consolidated
Financial Statements
December 31,
2016 and 2015
Note 1
– Summary of Significant Accounting Policies (continued)
Going Concern
Since
its inception, the Company has incurred net losses. In addition, the Company’s operations and capital requirements
have been funded since its inception by sales of its common and preferred stock, issuances of notes payable, and advances
from its chief executive officer. At December 31, 2016, the Company’s current liabilities exceeded its current assets
by $2,705,750, and total liabilities exceeded total assets by $2,661,011. At December 31, 2016, we owed
approximately $1.3 million under a Secured Promissory Note that is secured by substantially all our assets. On January 31,
2017, we failed to repay the Secured Promissory Note as required. Consequently, we are in default under the terms of
the Secured Promissory Note. Those factors create an uncertainty about the
Company’s ability to continue as a going concern. The Company’s management has implemented plans to secure
financing sufficient for the Company’s operating and capital requirements, and to negotiate settlements or extensions
of existing liabilities. There can be no assurance that such efforts will be successful. The financial statements do not
include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Accounting
Method
The
Company’s financial statements are prepared on the accrual method of accounting.
Cash and
Cash Equivalents
The
Company considers all highly liquid debt investments with a maturity of three months or less when purchased to be cash equivalents.
Accounts
Receivable
Accounts
receivable are presented in the balance sheet net of estimated uncollectible amounts. The Company records an allowance for estimated
uncollectible accounts in an amount approximating anticipated losses. Individual uncollectible accounts are written off against
the allowance when collection of the individual accounts appears doubtful. The Company had no allowance for doubtful accounts
at December 31, 2016 and 2015.
Geospatial
Corporation and Subsidiaries
Notes to Consolidated
Financial Statements
December 31,
2016 and 2015
Note 1
– Summary of Significant Accounting Policies (continued)
Property
and Equipment
Property
and equipment are carried at cost. Depreciation of property and equipment is provided using the straight-line method for financial
reporting purposes, and accelerated methods for tax purposes, based on estimated useful lives ranging from three to ten years.
Depreciation expense was $110,408 and $118,344 for the years ended December 31, 2016 and 2015, respectively.
Expenditures
for major renewals and betterments that materially extend the useful lives of assets are capitalized. Expenditures for maintenance
and repairs are charged to expense as incurred.
The
Company leases equipment under leases with terms of three years. Each lease is analyzed using the criteria in Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 840,
Leases
, to determine whether
the lease is a capital or operating lease. Capital leases are recorded at the inception of the lease as property and equipment,
and a capital lease liability of the same amount, at the lesser of the fair value of the leased asset or the present value of
the minimum lease payments. Assets recorded under capital lease agreements are depreciated over their estimated useful lives.
Depreciation of assets recorded under capital leases is included with depreciation expense related to owned assets. At December
31, 2016, assets under capital leases and the related accumulated depreciation amounted to $16,870 and $13,918, respectively.
At December 31, 2015, assets under capital leases and the related accumulated depreciation amounted to $16,870 and $10,544, respectively.
Geospatial
Corporation and Subsidiaries
Notes to Consolidated
Financial Statements
December 31,
2016 and 2015
Note 1
– Summary of Significant Accounting Policies (continued)
Revenue Recognition
The
Company records revenue when all of the following criteria are met:
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Persuasive
evidence of an arrangement exists;
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Delivery
has occurred or services have been rendered;
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The
price to the buyer is fixed or determinable; and
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Collectability
is reasonably assured.
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Substantially
all of the Company’s services are rendered under fixed-price contracts in which the Company’s clients are billed at
defined milestones for an agreed amount negotiated in advance for a specified scope of work. Revenues for fixed-price contracts
are recognized under the percentage-of-completion method of accounting, whereby revenues are recognized ratably as those contracts
are performed. 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.
Advance
customer payments are recorded as deferred revenue until such time as the related services are rendered or performed.
Revenues
are recorded net of sales taxes collected.
Deferred
Debt Issuance Costs
Debt
issuance costs are capitalized and amortized over the term of the related debt. The deferred debt issuance costs were fully amortized
at December 31, 2016 and 2015.
Geospatial
Corporation and Subsidiaries
Notes to Consolidated
Financial Statements
December 31,
2016 and 2015
Note 1
– Summary of Significant Accounting Policies (continued)
Convertible Securities with Beneficial
Conversion Features
During
2015, the Company issued a Secured Promissory Note of $1,000,000. The Company took additional loans of $350,000 against the Secured
Promissory Note in 2016. The Secured Promissory Note is convertible at the lender’s option to the Company’s common
stock at a price per share of 75% of the average bid price of the Company’s common stock for the ten trading days preceding
the conversion. The Company recorded the Secured Promissory Note in accordance with FASB ASC 470-20,
Debt with Conversion and
Other Options
. The Company determined that the discount to market price on the conversion feature was a beneficial conversion
feature, and that the intrinsic value of the conversion feature of loans taken and interest accrued during the years ended December
31, 2016 and 2015 was $137,184 and $250,000, respectively. These amounts were recognized as additional paid-in capital and as
a discount on the Secured Promissory Note. Amortization of the discount on the Secured Promissory Note totaled $121,368 and $250,000
during the years ended December 31, 2016 and 2015, respectively. The option to settle the Secured Promissory Note in shares of the Company's common stock is considered to be a derivative instrument. No additional liability has been recorded for the derivative instrument. A potentially infinite number of shares could be required to settle the Secured Promissory Note.
Income Taxes
The
Company accounts for income taxes in accordance with FASB ASC 740,
Income Taxes,
which requires the Company to provide
a net deferred tax asset or liability equal to the expected future tax benefit or expense of temporary reporting differences between
book and tax accounting methods and any available operating loss or tax credit carryovers.
The
Company currently has a deferred tax asset resulting from differences in accounting methods for financial reporting and income
tax reporting purposes. This deferred tax asset is completely offset by a valuation allowance due to the uncertainty of realization.
The
Company is subject to taxation in various jurisdictions. The Company continues to remain subject to examination by U.S. federal
authorities and various state authorities for the years 2009 through 2015. Due to financial constraints, the Company has not filed
its federal and state tax returns for 2009 through 2016.
Geospatial
Corporation and Subsidiaries
Notes to Consolidated
Financial Statements
December 31,
2016 and 2015
Gains on
Extinguishment of Debt
Due
to significant cash flow problems, the Company has negotiated concessions on the amounts of certain liabilities and
extensions of payment terms. The Company accounts for such concessions in accordance with FASB ASC 470-60,
Troubled Debt
Restructurings by Debtors
, and FASB ASC 405-20,
Extinguishment of Liabilities
, and recognizes gains to the extent
that the carrying value of the liability exceeds the fair value of the restructured payment plan. Such gains are included as
“Gains on extinguishment of debt” in “other income and expenses” on the Company’s Consolidated
Statement of Operations. In addition, the Company has accounts payable that has aged or is expected to age beyond the statute
of limitations. The Company is amortizing those liabilities over the remaining term of the statute of limitations. Such
amortization amounted to $248,460 and $292,724 during the years ended December 31, 2016 and 2015,
respectively.
Stock-Based
Payments
The
Company accounts for its stock-based compensation in accordance with FASB ASC 718,
Stock Compensation
. The Company records
compensation expense for employee stock options at the fair value of the stock options at the grant date, amortized over the vesting
period. The Company records expense for stock options, warrants, and similar grants issued to non-employees at their fair value
at the grant date, or the fair value of the consideration received, whichever is more readily available.
Registration Payment Arrangements
The
Company is contractually obligated to issue shares of its common stock to certain investors for failure to register shares of
its common stock under the Securities Act of 1933, as amended (the “Securities Act”). The Company records such obligations
in accordance with FASB ASC 825-20,
Registration Payment Arrangements
. The Company has recorded a liability for the estimated
number of shares to be issued at the fair value of the stock to be issued. The Company measures fair value by the price of its
common stock at its most recent sale. The Company reviews its estimate of the number of shares to be issued and the fair value
of the stock to be issued quarterly. The liability is included on the Consolidated Balance Sheet under the heading “accrued
registration payment arrangement,” and amounted to $522,115 and $547,315 at December 31, 2016 and 2015, respectively. Gains
or losses resulting from changes in the carrying amount of the liability are included in the Consolidated Statement of Operations
in other income and expense under the heading “registration payment arrangements” which amounted to gains of $9,720
and $1,857,760 during the years ended December 31, 2016 and 2015, respectively.
Segment Reporting
The Company operates
as one segment. Accordingly, no segment reporting is presented.
Geospatial
Corporation and Subsidiaries
Notes to Consolidated
Financial Statements
December 31,
2016 and 2015
Note 1
– Summary of Significant Accounting Policies (continued)
Recent Accounting Pronouncements
The
Company has reviewed accounting pronouncements and interpretations thereof that have effective dates during the periods reported
and in future periods. The Company believes that the following impending standards may have an impact on its future filings. The
applicability of any standard will be evaluated by the Company and is still subject to review by the Company.
Recent Accounting Pronouncements
(continued)
In
May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
, a new revenue recognition standard
that supersedes the existing standard and eliminates all industry-specific standards. The largely principles-based standard provides
a comprehensive framework that can be applied to all contracts with customers, regardless of industry-specific or transaction-specific
fact patterns. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services
to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods
or services. Entities should apply the five-step model outlined in the standard to achieve that core principal. The standard will
be effective for the Company on January 1, 2017, and may be applied retrospectively to each period presented or as a cumulative-effect
adjustment as of the date of adoption. The Company does not expect that the adoption of ASU 2014-09 will have a material impact
on the Company’s consolidated financial statements.
In
June 2014, FASB issued ASU 2014-12
, Compensation – Stock Compensation (Topic 718)
, an update regarding accounting
for share-based payments for which the terms of an award provide that a performance target could be achieved after the requisite
service period. That is the case when an employee is eligible to retire or otherwise terminate employment before the end of the
period in which a performance target could be achieved and still be eligible to vest in the award if and when the performance
target is achieved. The updated standard clarifies that such awards should be treated as a performance condition that affects
vesting. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. Compensation
cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent
the compensation cost attributable to the periods for which the requisite service has already been rendered. The Company adopted
the standard on January 1, 2016. Implementation of ASU 2014-12 did not have a material impact on the Company’s consolidated
financial statements.
Geospatial
Corporation and Subsidiaries
Notes to Consolidated
Financial Statements
December 31,
2016 and 2015
Note 1
– Summary of Significant Accounting Policies (continued)
Recent Accounting Pronouncements
(continued)
In
August 2014, the FASB issued ASU 2014-15,
Presentation of Financial Statements – Going Concern (Subtopic 205-40)
,
which provides authoritative guidance regarding management’s evaluation of conditions or events that raise substantial doubts
about an entity’s ability to continue as a going concern, management’s plans to mitigate the effect of the conditions
or events that raise such doubts, and disclosure requirements for entities in which there exists a substantial doubt about the
entity’s ability to continue as a going concern. ASU 2014-15 will be effective for the Company on January 1, 2017. Early
application is permitted. The Company does not expect that the implementation of ASU 2014-15 will have a material effect on its
consolidated financial statements.
In
January 2015, the FASB issued ASU 2015-01,
Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying
Income Statement Presentation by Eliminating the Concept of Extraordinary Items
, which eliminates the concept of an extraordinary
item from GAAP. As a result, an entity is no longer required to separately classify, present, or disclose extraordinary events
and transactions; however, the presentation and disclosure guidance for items that are unusual in nature or occur infrequently
will be retained. ASU 2015-01 will be effective for the Company beginning in fiscal 2017 and interim reporting periods within
that year. The Company does not expect that the implementation of ASU 2015-01 will have a material effect on the Company’s
financial position or results of operations.
In
April 2015, the FASB issued ASU 2015-03,
Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation
of Debt Issuance Costs
, which requires debt issuance costs to be presented as a direct deduction from the associated debt
liability on the balance sheet. ASU 2015-03 will be effective for the Company in fiscal 2017 and interim reporting periods within
that year, using the retrospective method. The Company does not expect that the implementation of ASU 2015-03 will have a material
effect on its consolidated financial statements.
In
November 2015, the FASB issued ASU 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
. ASU
2015-17 eliminates the current requirement for an entity to separate deferred income tax liabilities and assets into current and
non-current amounts in a classified statement of financial position. To simplify the presentation of deferred income taxes, ASU
2015-17 requires that deferred tax liabilities and assets be classified as non-current in a classified statement of financial
position. ASU 2015-17 will be effective for the Company on January 1, 2018. Early adoption is permitted as of the beginning of
an interim or annual reporting period. The Company is currently evaluating the effect of the adoption of this guidance on the
Company’s consolidated financial statements.
Geospatial
Corporation and Subsidiaries
Notes to Consolidated
Financial Statements
December 31,
2016 and 2015
Note 1
– Summary of Significant Accounting Policies (continued)
Recent Accounting Pronouncements
(continued)
In
February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842
. ASU 2016-02 substantially retains the classification for
leasing transactions as finance or operating leases. The new guidance establishes a right-of-use model that requires a lessee
to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms greater than 12 months. Leases
will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income
statement. For finance leases the lessee would recognize interest expense and amortization of the right-of-use asset and for operating
leases the lessee would recognize straight-line total lease expense. ASU 2016-02 will be effective for the Company on January
1, 2019. The Company is currently evaluating the effect of the adoption of this guidance on the Company’s consolidated financial
statements.
Note 2
– Capital Stock
The
Company has authorized 750,000,000 shares of common stock with a par value of $0.001 per share. Each outstanding share of common
stock entitles the holder to one vote on all matters. Stockholders do not have preemptive rights to purchase shares in any future
issuance of common stock. Upon the Company’s liquidation, common stockholders are entitled to a pro-rata share of assets,
if any, after payment of creditors and preferred stockholders.
The
Company has authorized 25,000,000 shares of preferred stock with a par value of $0.001 per share. All powers and rights of the
shares of preferred stock are determined by the Company’s Board of Directors at issuance.
On
August 20, 2013, the Company filed a Certificate of Designation to designate 5,000,000 shares of Series B Convertible Preferred
Stock (“Series B Stock”) for issuance by the Company. Each share of Series B Stock is convertible to ten shares of
common stock at the option of the holder, or automatically upon the occurrence of certain events. The holders of Series B Stock
have the same voting rights and dividend participation rights as common stockholders in proportion to the number of shares of
common stock the holders of Series B Stock would hold if those shares were converted to common stock. The holders of Series B
Stock are entitled to a liquidation preference of 150% of the original issue price, after payment of which they participate in
liquidation with the holders of common stock.
Geospatial
Corporation and Subsidiaries
Notes to Consolidated
Financial Statements
December 31,
2016 and 2015
Note 2 – Capital Stock
(continued)
On
March 16, 2016, the Company filed a Certificate of Designation to designate 10,000,000 shares of Series C Convertible Preferred
Stock (“Series C Stock”) for issuance by the Company. Each share of Series C Stock is convertible to twenty shares
of common stock at the option of the holder, or automatically upon the occurrence of certain events. The holders of Series C Stock
have voting rights equal to five times the number of whole shares of common stock into which such shares of common stock the holders
of Series C Stock would hold if those shares were converted to common stock. The holders of Series C Stock have the same dividend
participation rights as common stockholders in proportion to the number of shares of common stock the holders of Series C Stock
would have if those shares were converted to common stock. The holders of Series C Stock are entitled to a liquidation preference
of 100% of the original issue price, after payment of which they participate in liquidation with the holders of common stock.
The
Company entered into a series of Subscription and Purchase Agreements with certain investors dated October 9, 2009 (the “October
2009 Subscription Agreement”) in connection with the sale of 2,000,000 shares of the Company’s common stock (the “October
2009 shares”). Pursuant to the October 2009 Subscription Agreement, the Company agreed to register the October 2009 shares
under the Securities Act by March 1, 2010. The Company failed to register the October 2009 shares by March 1, 2010, and consequently
each investor that invested pursuant to the October 2009 Subscription Agreement is entitled to receive an additional allocation
of 2% of its portion of the October 2009 Shares for each 30-day period that elapses after March 1, 2010, subject to certain restrictions.
The
Company entered into a series of Subscription and Purchase Agreements with certain investors dated March 10, 2010 (the “March
2010 Subscription Agreement”) in connection with the sale of 8,589,771 shares of the Company’s common stock (the “March
2010 shares”). Pursuant to the March 2010 Subscription Agreement, the Company agreed to register the March 2010 shares under
the Securities Act by September 1, 2010. The Company failed to register the March 2010 shares by September 1, 2010, and consequently
each investor that invested pursuant to the March 2010 Subscription Agreement is entitled to receive an additional allocation
of 2% of its portion of the March 2010 Shares for each 30-day period that elapses after September 1, 2010, subject to certain
restrictions.
The
Company entered into a series of Subscription and Purchase Agreements with certain investors dated April 6, 2010 (the “April
2010 Subscription Agreement”) in connection with the sale of 112,000 shares of the Company’s common stock (the “April
2010 shares”). Pursuant to the April 2010 Subscription Agreement, the Company agreed to register the April 2010 shares under
the Securities Act by September 1, 2010. The Company failed to register the April 2010 shares by September 1, 2010, and consequently
each investor that invested pursuant to the April 2010 Subscription Agreement is entitled to receive an additional allocation
of 2% of its portion of the April 2010 Shares for each 30-day period that elapses after September 1, 2010, subject to certain
restrictions.
Geospatial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 2 – Capital Stock (continued)
The Company has recorded
a liability for its obligation to issue shares for failure to register shares pursuant to the October 2009 Subscription
Agreement, the March 2010 Subscription Agreement, and the April 2010 Subscription Agreement (collectively, the
“Subscription Agreements”). There is no limitation to the maximum potential consideration to be paid for failure
to register shares pursuant to the Subscription Agreements. The Company registered the shares as required by the Subscription
Agreements during 2015. The liability for accrued registration payment arrangements was $522,115 and $547,315 at December 31,
2016 and 2015, respectively. At December 31, 2016, the Company anticipates that it will need to issue approximately 5.2
million shares to satisfy its liability for accrued registration payment arrangements.
Note 3 – Accrued Expenses
Accrued expenses consisted
of the following:
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December 31,
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December 31,
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2016
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2015
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Payroll and taxes
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$
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632,678
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$
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1,832,937
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Accounting
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62,792
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50,737
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Insurance
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—
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34,014
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Contractors and subcontractors
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10,227
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20,227
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Interest
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2,150
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7,800
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Other
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105,350
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82,505
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Accrued expenses
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$
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813,197
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$
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2,028,220
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Note 4 – Related-Party Transactions
The Company leases its headquarters
building from Mark A. Smith, the Company’s chairman and chief executive officer. The building has approximately 3,200 square
feet of office space, and is used by the Company’s corporate, technical, and operations staff. The lease is cancellable by
either party upon 30 days’ notice. Mr. Smith has agreed to suspend collection of rent effective April 1, 2016. No rent will accrue during the suspension. The Company
incurred lease expense of $19,500 and $78,000 during the years ended December 31, 2016 and 2015, respectively.
During 2014, Mr. Smith advanced
the Company $29,000. Interest on the note at 8% amounted to $47 for the year ended December 31, 2015. No interest expense was incurred
during 2016. The note was repaid during 2015.
Geospatial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 4 – Related-Party
Transactions (continued)
On November 9, 2012, the Company
and Mr. Smith entered into a Lease Agreement, pursuant to which the Company leases a field vehicle from Mr. Smith. The lease is
for 60 months, and is for substantially the same terms for which Mr. Smith leases the vehicle from the manufacturer. Interest on
the lease amounted to $150 and $249 for the years ended December 31, 2016 and 2015, respectively. The lease is recorded as a capital
lease. At December 31, 2016, gross assets recorded under the lease and associated accumulated depreciation were $16,870 and $13,918,
respectively. Future minimum payments under the capital lease were $3,326 at December 31, 2016, which included $48 of minimum interest
payments.
On May 18, 2016, the
Company and Mr. Smith entered into a Conversion Agreement (the “Smith Conversion Agreement”), pursuant to which Mr.
Smith converted accrued salaries totaling $766,833 to 19,170,831 shares of the Company’s common stock and warrants to purchase
23,004,998 shares of the Company’s common stock at an exercise price of $0.04 per share. Mr. Smith also converted pursuant
to the Smith Conversion Agreement, $156,782 of unreimbursed business expenses and unpaid rent on the Company’s offices to
783,912 shares of the Company’s Series C Convertible Preferred Stock.
On May 18, 2016, the
Company and Troy G. Taggart, the Company’s President, entered into a Conversion Agreement, pursuant to which Mr. Taggart
converted accrued salaries totaling $215,490 to 5,387,241 shares of the Company’s common stock and warrants to purchase
6,464,689 shares of the Company’s common stock at an exercise price of $0.04 per share.
During 2015, Thomas
R. Oxenreiter, the Company’s chief financial officer, advanced the Company $18,891. Interest on the note at 10% amounted
to $448 for the year ended December 31, 2015. In addition, Mr. Oxenreiter received warrants to purchase 18,891 shares of the Company’s
common stock in connection with the note. The note was repaid during 2015.
On May 18, 2016,
the Company and Mr. Oxenreiter entered into a Conversion Agreement (the “Oxenreiter Conversion Agreement”),
pursuant to which Mr. Oxenreiter converted accrued salaries totaling $226,458 to 5,661,460 shares of the Company’s
common stock and warrants to purchase 6,793,753 shares of the Company’s common stock at an exercise price of $0.04 per
share. Mr. Oxenreiter also converted, pursuant to the Oxenreiter Conversion Agreement, $5,000 of unreimbursed business
expenses to 25,000 shares of the Company’s Series C Convertible Preferred Stock.
Note 5 – Senior Convertible Redeemable
Notes
On October 15, 2010, the Company
entered into a series of Senior Notes with certain investors. The initial principal amount of the Senior Notes totaled $1,155,000.
Interest accrues on the Senior Notes at 10% per annum, payable quarterly by increasing the principal amounts of the Senior Notes.
Upon certain instances of default, the interest rate may increase to 12% per annum. The principal and unpaid interest on the Senior
Notes was due after 15 months, and was extendable for three additional six-month periods. The principal and unpaid interest on
the Senior Notes is convertible at the option of the holders of the Senior Notes into the Company’s common stock at $0.50
per share.
On February 26, 2015, a Senior
Note was converted into 6,150,587 shares of the Company’s common stock.
No Senior Notes were outstanding
at December 31, 2016 and 2015.
Geospatial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 6 – Notes Payable
Current notes payable consisted
of the following:
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December 31, 2016
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December 31, 2015
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Secured Promissory Note, payable to an individual, bearing interest at 10% per annum, due January 31, 2017, net of discount. The note is convertible to common stock at 75% of the weighted average trading price, and is secured by substantially all the assets of the Company
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$
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1,332,920
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$
|
1,075,833
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Unsecured Promissory Note, payable to an individual, bearing interest at 10% per annum
|
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—
|
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67,817
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Unsecured Convertible Promissory Notes, payable to individuals, bearing interest at 10% per annum, convertible to common stock at prices ranging from $0.20 to $0.25 per share
|
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—
|
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190,453
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Notes payable under settlement agreements with former employees, payable monthly with terms of up to 39 months, with interest rates ranging from 0% to 20%
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32,818
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154,645
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Current notes payable
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$
|
1,365,738
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|
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$
|
1,488,748
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Geospatial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 6 – Notes Payable (continued)
Long-term notes payable consisted
of the following:
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December 31, 2016
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December 31, 2015
|
|
Notes payable under settlement agreements with former employees, payable monthly with terms of up to 39 months, with interest rates ranging from 0% to 20%
|
|
$
|
32,818
|
|
|
$
|
154,645
|
|
Total long-term notes payable
|
|
|
32,818
|
|
|
|
154,645
|
|
|
|
|
|
|
|
|
|
|
Less: current portion
|
|
|
(32,818
|
)
|
|
|
(154,645
|
)
|
Long-term notes payable, less current portion
|
|
$
|
—
|
|
|
$
|
—
|
|
Geospatial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 7 – Commitments and Contingencies
Bank Deposits
The Company maintains its cash
in bank deposit accounts at financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation
(“FDIC”) up to $250,000. The bank accounts at times exceed FDIC limits. The Company has not experienced any losses
on such accounts.
Legal Matters
The Company is subject to various
claims and legal proceedings covering a wide range of matters that arise in the ordinary course of its business activities. The
Company believes that any liability that may ultimately result from the resolution of these matters will not have a material adverse
effect on the financial condition or the results of operations of the Company.
Concentrations
The Company derives a significant
portion of its revenues from a few customers. Revenues from significant customers as a percentage of total revenues were as follows
for the years ended December 31:
|
|
2016
|
|
|
2015
|
|
Customer A
|
|
|
33.9
|
%
|
|
|
—
|
|
Customer B
|
|
|
27.4
|
%
|
|
|
54.7
|
%
|
Customer C
|
|
|
12.3
|
%
|
|
|
—
|
|
Customer D
|
|
|
—
|
|
|
|
23.2
|
%
|
Customer E
|
|
|
—
|
|
|
|
22.1
|
%
|
Geospatial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 8 – Income Taxes
The Company’s provision
for (benefit from) income taxes is summarized below for the years ended December 31:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(375,457
|
)
|
|
|
(755,350
|
)
|
State
|
|
|
(119,193
|
)
|
|
|
(239,794
|
)
|
|
|
|
(494,650
|
)
|
|
|
(995,144
|
)
|
Total income taxes
|
|
|
(494,650
|
)
|
|
|
(995,144
|
)
|
|
|
|
|
|
|
|
|
|
Less: valuation allowance
|
|
|
494,650
|
|
|
|
995,144
|
|
|
|
|
|
|
|
|
|
|
Net income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
Geospatial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 8 – Income Taxes (continued)
The reconciliation of the federal
statutory income tax rate to the effective income tax rate is as follows for the years ended December 31:
|
|
2015
|
|
|
2014
|
|
Federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income taxes (net of federal benefit)
|
|
|
6.5
|
|
|
|
6.5
|
|
Valuation allowance
|
|
|
(41.5
|
)
|
|
|
(41.5
|
)
|
|
|
|
|
|
|
|
|
|
Effective rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Significant components of the
Company’s deferred tax assets and liabilities are summarized below. A valuation allowance has been established as realization
of such assets has not met the more-likely-than-not threshold requirement under FASB ASC 740.
|
|
December
31, 2016
|
|
|
December 31, 2015
|
|
Start-up costs
|
|
$
|
27,658
|
|
|
$
|
37,491
|
|
Depreciation
|
|
|
(37,079
|
)
|
|
|
(37,759
|
)
|
Accrued expenses
|
|
|
182,629
|
|
|
|
687,212
|
|
Net operating loss carryforward
|
|
|
16,677,809
|
|
|
|
15,669,422
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
16,851,017
|
|
|
|
16,356,366
|
|
|
|
|
|
|
|
|
|
|
Less: valuation allowance
|
|
|
(16,851,017
|
)
|
|
|
(16,356,366
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
At December 31, 2016, the Company
had federal and state net operating loss carryforwards of approximately $38,820,000. The federal and state net operating loss carryforwards
will expire beginning in 2021 and 2026, respectively. The amount of the state net operating loss carryforward that can be utilized
each year to offset taxable income is limited by state law.
Geospatial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 9 – Net Loss Per Share of Common
Stock
Basic net loss per share are
computed by dividing earnings available to common stockholders by the weighted average number of shares of common stock outstanding
during the period. Diluted net loss per share reflects per share amounts that would have resulted if dilutive potential common
stock had been converted to common stock. Dilutive potential common shares are calculated in accordance with the treasury stock
method, which assumes that proceeds from the exercise of all warrants and options are used to repurchase common stock at market
value. The number of shares remaining after the proceeds are exhausted represents the potentially dilutive effect of the securities.
The following reconciles amounts
reported in the financial statements for the years ended December 31:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,191,474
|
)
|
|
$
|
(796,278
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares of common stock outstanding
|
|
|
173,757,165
|
|
|
|
137,222,159
|
|
Dilutive potential shares of common stock
|
|
|
173,757,165
|
|
|
|
137,222,159
|
|
|
|
|
|
|
|
|
|
|
Net loss per share of common stock:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
Diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
The following securities were
not included in the computation of diluted net loss per share, as their effect would have been anti-dilutive for the years ended
December 31:
|
|
2016
|
|
|
2015
|
|
Series C Convertible Preferred Stock
|
|
|
62,686,890
|
|
|
|
—
|
|
Options and warrants to purchase common stock
|
|
|
37,983,841
|
|
|
|
3,494,749
|
|
Secured Convertible Promissory Note
|
|
|
15,637,520
|
|
|
|
44,041,770
|
|
Unsecured Convertible Promissory Notes
|
|
|
—
|
|
|
|
25,050
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
116,308,251
|
|
|
|
47,561,569
|
|
Geospatial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 10 – Stock-Based Payments
In 2007, the Company adopted
the 2007 Stock Option Plan (the “2007 Plan”), pursuant to which the Compensation Committee of the Board of Directors
(the “Committee”) may award grants of options to purchase up to 15,000,000 shares of the Company’s common stock
to eligible employees, directors, and consultants, subject to exercise prices and vesting requirements determined by the Committee.
On September 23, 2013, the Company reduced the number of shares of the Company’s common stock that may be subject to awards
under the 2007 Plan to 9,050,000. The Board of Directors has reserved 9,050,000 shares of the Company’s common stock for
issuance under the 2007 Plan. The Company did not grant any options to purchase shares of the Company’s common stock pursuant
to the 2007 Plan during the years ended December 31, 2016 and 2015.
On September 23, 2013, the
Company adopted the 2013 Equity Incentive Plan (the “2013 Plan”), pursuant to which up to 25,000,000 shares of the
Company’s common stock shall be available for grants of awards, including incentive stock options, non-qualified stock options,
stock appreciation rights, restricted awards, performance share awards, or performance compensation awards to eligible employees,
consultants, and directors, provided that no more than 15,000,000 shares of common stock may be granted as incentive stock options.
The Board of Directors has reserved 25,000,000 shares of the Company’s common stock for issuance under the 2013 Plan. The
Company granted stock appreciation rights on 2,362,500 and 4,500,000 shares of the Company’s common stock to eligible employees
and consultants pursuant to the 2013 Plan during the years ended December 31, 2016 and 2015, respectively.
Using the Black-Scholes option
pricing model, management has determined that the stock appreciation rights granted in 2016 and 2015 had no value. Accordingly,
no compensation cost or other expense was recorded for the stock appreciation rights. The current value of a share of the Company’s
common stock used in the Black-Scholes option pricing model was determined by an independent valuation. The value per share as
determined by the valuation was $0.0098 and $0.0074 per share as of December 31, 2016 and 2015, respectively.
The assumptions used and the
weighted average calculated value of the stock options are as follows at December 31:
|
|
2016
|
|
|
2015
|
|
Risk-free interest rate
|
|
|
1.93
|
%
|
|
|
1.73
|
%
|
Expected dividend yield
|
|
|
None
|
|
|
|
None
|
|
Expected life of options
|
|
|
5 year
|
|
|
|
5 years
|
|
Expected volatility rate
|
|
|
50
|
%
|
|
|
50
|
%
|
Weighted average fair value of options granted
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
Geospatial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2016 and 2015
Note 10 – Stock-Based Payments (continued)
The following is an analysis
of the options to purchase the Company’s common stock:
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
Contractual
|
|
|
|
Total
|
|
|
Exercise
|
|
|
Fair
|
|
|
Term
|
|
|
|
Options
|
|
|
Price
|
|
|
Value
|
|
|
(In Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total options outstanding at January 1, 2015
|
|
|
25,046,000
|
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,362,500
|
|
|
|
0.18
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Lapsed and forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Total options outstanding at December 31, 2015
|
|
|
27,408,500
|
|
|
$
|
0.23
|
|
|
$
|
—
|
|
|
|
6.0
|
|
Options vested and expected to vest at
December 31, 2015
|
|
|
24,484,602
|
|
|
$
|
0.24
|
|
|
$
|
—
|
|
|
|
5.7
|
|
Options exercisable at December 31, 2015
|
|
|
24,484,602
|
|
|
$
|
0.24
|
|
|
$
|
—
|
|
|
|
5.7
|
|
Total options outstanding at January 1, 2016
|
|
|
27,408,500
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
4,500,000
|
|
|
|
0.05
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Lapsed and forfeited
|
|
|
(796,000
|
)
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
Total options outstanding at December 31, 2016
|
|
|
31,112,500
|
|
|
$
|
0.21
|
|
|
$
|
—
|
|
|
|
5.6
|
|
Options vested and expected to vest at December 31,
2016
|
|
|
27,400,520
|
|
|
$
|
0.21
|
|
|
$
|
—
|
|
|
|
7.7
|
|
Options exercisable at December 31, 2016
|
|
|
27,400,520
|
|
|
$
|
0.21
|
|
|
$
|
—
|
|
|
|
7.7
|
|
Geospatial Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
December 31, 2016 and 2015
Note
10 – Stock-Based Payments (continued)
The following is an
analysis of nonvested options:
|
|
|
Nonvested
Options
|
|
|
Weighted
Average
Fair Value
|
|
|
|
|
|
|
|
|
|
Nonvested options at January 1, 2015
|
|
|
|
6,529,334
|
|
|
$
|
—
|
|
Granted
|
|
|
|
2,362,500
|
|
|
|
—
|
|
Vested
|
|
|
|
(5,967,936
|
)
|
|
|
—
|
|
Forfeited
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested options at December 31, 2015
|
|
|
|
2,923,898
|
|
|
|
—
|
|
Granted
|
|
|
|
4,500,000
|
|
|
|
—
|
|
Vested
|
|
|
|
(3,347,917
|
)
|
|
|
—
|
|
Forfeited
|
|
|
|
(364,001
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested options at December 31, 2016
|
|
|
|
3,711,980
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Geospatial Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
December 31, 2016 and 2015
Note 10 – Stock-Based Payments
(continued)
The Company
granted warrants to purchase 87,589,440 and 5,458,641 shares of common stock to investors and contractors during the years
ended December 31, 2016 and 2015, respectively, at prices ranging from $0.01 to $0.25 per share. The warrants were granted
for periods ranging from five to ten years.
Using the Black-Scholes
option pricing model, management has determined that the warrants to purchase the Company’s common stock granted to non-employees
in 2016 and 2015 have no value. Accordingly, no expense was recorded upon the grants of the warrants to purchase the Company’s
common stock. The current value of a share of the Company’s common stock used in the Black-Scholes option pricing model was
determined by an independent appraisal.
The assumptions used
and the weighted average calculated value of the stock purchase rights are as follows for the year ended December 31:
|
|
2016
|
|
|
2015
|
|
Risk-free
interest rate
|
|
|
1.93
|
%
|
|
|
1.73
|
%
|
Expected dividend yield
|
|
|
None
|
|
|
|
None
|
|
Expected life of warrants
|
|
|
5
year
|
|
|
|
5
years
|
|
Expected volatility
rate
|
|
|
50
|
%
|
|
|
50
|
%
|
Weighted average fair value of warrants
granted
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
Geospatial Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
December 31, 2016 and 2015
Note 10 – Stock-Based Payments
(continued)
The following is an
analysis of the warrants to purchase the Company’s common stock.
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
Contractual
|
|
|
|
Total
|
|
|
Exercise
|
|
|
Fair
|
|
|
Term
|
|
|
|
Options
|
|
|
Price
|
|
|
Value
|
|
|
(In Years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total warrants outstanding at January 1, 2015
|
|
|
10,627,007
|
|
|
$
|
0.42
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
5,458,641
|
|
|
|
0.13
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Lapsed and forfeited
|
|
|
(3,225,000
|
)
|
|
|
0.48
|
|
|
|
|
|
|
|
|
|
Total warrants outstanding at December 31, 2015
|
|
|
12,860,648
|
|
|
$
|
0.29
|
|
|
$
|
—
|
|
|
|
4.7
|
|
Warrants vested and expected to vest at December 31, 2015
|
|
|
12,860,648
|
|
|
$
|
0.29
|
|
|
$
|
—
|
|
|
|
4.7
|
|
Warrants exercisable at December 31, 2015
|
|
|
12,860,648
|
|
|
$
|
0.29
|
|
|
$
|
—
|
|
|
|
4.7
|
|
Total warrants outstanding at January 1, 2016
|
|
|
12,860,648
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
87,589,440
|
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(47,200,000
|
)
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
Lapsed and forfeited
|
|
|
(3,075,000
|
)
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
Total warrants outstanding at December 31, 2016
|
|
|
50,175,088
|
|
|
$
|
0.10
|
|
|
$
|
—
|
|
|
|
4.5
|
|
Warrants vested and expected to vest at December 31, 2016
|
|
|
50,175,088
|
|
|
$
|
0.10
|
|
|
$
|
—
|
|
|
|
4.5
|
|
Warrants exercisable at December 31, 2016
|
|
|
50,175,088
|
|
|
$
|
0.10
|
|
|
$
|
—
|
|
|
|
4.5
|
|
Geospatial Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
December 31, 2016 and 2015
Note 10 – Stock-Based Payments
(continued)
On August 20, 2013,
the Company granted warrants to purchase 451,738 shares of its Series B Stock at $2.50 per share to certain investors in connection
with the sale of Series B Stock. The warrants were vested upon issuance, and expire on August 20, 2018.
The following is an
analysis of the warrants to purchase the Company’s Series B Stock.
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Weighted
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Average
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Weighted
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Remaining
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Average
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Aggregate
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Contractual
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Total
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Exercise
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Fair
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Term
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Options
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Price
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Value
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(In Years)
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Total warrants outstanding at January 1, 2015
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344,992
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$
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2.50
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Granted
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—
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—
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Exercised
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—
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2.50
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Lapsed and forfeited
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—
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—
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Total warrants outstanding at December 31, 2015
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344,992
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$
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2.50
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$
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—
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2.6
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Warrants vested and expected to vest at December 31, 2015
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344,992
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$
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2.50
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$
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—
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2.6
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Warrants exercisable at December 31, 2015
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344,992
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$
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2.50
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$
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—
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2.6
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Total warrants outstanding at January 1, 2016
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344,992
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$
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2.50
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Granted
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—
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—
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Exercised
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—
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—
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Lapsed and forfeited
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—
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—
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Total warrants outstanding at December 31, 2016
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344,992
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$
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2.50
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$
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—
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1.6
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Warrants vested and expected to vest at December 31, 2016
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344,992
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$
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2.50
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$
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—
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1.6
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Warrants exercisable at December 31, 2016
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344,992
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$
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2.50
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$
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—
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1.6
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Geospatial Corporation and Subsidiaries
Notes
to Consolidated Financial Statements
December 31, 2016 and 2015
Note 10 – Stock-Based Payments
(continued)
During 2016, the Company
issued 1,000,000 shares of the Company’s common stock as payment for services. The Company recorded expense of $100,000,
the fair value of the services received.