Notes to Unaudited Consolidated Financial Statements
June 30, 2017
Notes to Unaudited Consolidated Financial Statements
Note 1 – Basis of Presentation
The Unaudited Consolidated Financial Statements included herein have been prepared by Geospatial Corporation (the “Company”) in accordance with accounting principles generally accepted in the United States of America for interim financial information and regulations issued pursuant to the Securities Exchange Act of 1934, as amended. Accordingly, the accompanying Unaudited Consolidated Financial Statements do not include all the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. The accompanying Unaudited Consolidated Financial Statements as of and for the three months ended June 30, 2017 should be read in conjunction with the Company’s Financial Statements as of and for the year ended December 31, 2016. In the opinion of the Company’s management, all adjustments considered necessary for a fair statement of the accompanying Unaudited Consolidated Financial Statements have been included, and all adjustments, unless otherwise discussed in the Notes to the Unaudited Consolidated Financial Statements, are of a normal and recurring nature. Operating results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017, or any other interim periods, or any future year or period.
The use of accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The Consolidated Financial Statements include the accounts of the Company and its subsidiaries, Geospatial Mapping Systems, Inc. and Utility Services and Consulting Corporation, which ceased operations in 2011. All intercompany accounts and transactions have been eliminated.
Note 2 – Accrued Expenses
Accrued expenses consisted of the following:
|
June 30,
|
|
December 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
|
|
|
|
|
Payroll and taxes
|
$ 780,569
|
|
$ 632,678
|
|
|
Accounting
|
81,376
|
|
62,792
|
|
|
Contractors and subcontractors
|
10,227
|
|
10,227
|
|
|
Interest
|
2,043
|
|
2,150
|
|
|
Insurance
|
5,521
|
|
-
|
|
|
Other
|
104,793
|
|
105,350
|
|
|
|
|
|
|
|
|
Accrued expenses
|
$ 984,529
|
|
$ 813,197
|
|
|
Note 3 – 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. Mr. Smith has agreed to suspend collection of rent effective April 1, 2016. No rent will accrue during the suspension. The lease is cancellable by either party upon 30 days’ notice. The Company incurred no lease expense during the three and six months ended June 30, 2017, and $0 and $19,500 of lease expense during the three and six months ended June 30, 2016, respectively.
On November 9, 2012, the Company and Mr. Smith entered into a Lease Agreement, pursuant to which the Company
9
Geospatial Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
June 30, 2017
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 $15 and $41 for the three months ended June 30, 2017 and 2016, respectively, and $37 and $88 for the six months ended June 30, 2017 and 2016, respectively. The lease is recorded as a capital lease. At June 30, 2017, gross assets recorded under the lease and associated accumulated depreciation were $16,870 and $15,605, respectively. Future minimum payments under the capital lease are as follows as of June 30, 2017:
Balance of 2017
|
|
$ 1,512
|
Thereafter
|
|
--
|
Total minimum payments
|
|
1,512
|
Less: minimum interest payments
|
|
(11)
|
Minimum principal payments
|
|
$ 1,501
|
Note 4 – Notes Payable
Current notes payable consisted of the following:
|
June 30,
2017
|
|
December 31,
2016
|
Secured Promissory Note, payable to an individual, bearing interest at
10% per annum, due January 31, 2017, net of discount.
After January 31, 2017, the note bears interest at 20%. 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
|
$ 1,451,277
|
|
$ 1,332,920
|
Note payable under settlement agreement with vendor, payable monthly over
10 months, with
no
interest
|
5,560
|
|
-
|
Notes payable under settlement agreements with former employees,
payable monthly with terms of up to twelve months, with interest rates
ranging from 0% to 20%
|
15,335
|
|
32,818
|
|
|
|
|
Current portion of long-term notes payable
|
$ 30,000
|
|
$ -
|
Current notes payable
|
$ 1,502,172
|
|
$ 1,365,738
|
Long-term notes payable consisted of the following:
|
June 30,
2017
|
|
June 30,
2016
|
Note payable under settlement agreements with former employee, payable monthly with term of 16 months, with
no
interest
|
$ 36,667
|
|
$ -
|
|
|
|
|
Total long-term notes payable
|
36,667
|
|
-
|
Less: current portion
|
(30,000)
|
|
-
|
Long-term notes payable, less current portion
|
$ 6,667
|
|
$ -
|
Future maturities of long-term debt are as follows as of June 30, 2017:
Balance of 2017
|
|
$ 15,000
|
Year ending December 31, 2018
|
|
21,667
|
Thereafter
|
|
-
--
|
|
|
$ 36,667
|
10
Geospatial Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
June 30, 2017
Note 5 – Income Taxes
The Company’s provision for (benefit from) income taxes is summarized below:
|
Three Months Ended
June 30, 2017
|
|
Three Months Ended
June 30, 2016
|
|
Six Months Ended
June 30, 2017
|
|
Six Months Ended
June 30, 2016
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
$ -
|
|
$ -
|
|
$ -
|
|
$ -
|
|
State
|
-
|
|
-
|
|
-
|
|
-
|
|
|
-
|
|
-
|
|
-
|
|
-
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
(94,634)
|
|
(68,553)
|
|
(166,242)
|
|
(145,323)
|
|
State
|
(30,043)
|
|
(21,763)
|
|
(52,775)
|
|
(46,134)
|
|
|
(124,677)
|
|
(90,316)
|
|
(219,017)
|
|
(191,457)
|
|
Total income taxes
|
(124,677)
|
|
(90,316)
|
|
(219,017)
|
|
(191,457)
|
|
|
|
|
|
|
|
|
|
|
Less: valuation allowance
|
124,677
|
|
90,316
|
|
219,017
|
|
191,457
|
|
|
|
|
|
|
|
|
|
|
Net income taxes
|
$ -
|
|
$ -
|
|
$ -
|
|
$ -
|
|
The reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:
|
Three Months Ended
June 30, 2017
|
|
Three Months Ended
June 30, 2016
|
|
Six Months Ended
June 30, 2017
|
|
Six Months Ended
June 30, 2016
|
Federal statutory rate
|
35.0 %
|
|
35.0 %
|
|
35.0 %
|
|
35.0 %
|
State income taxes (net of federal benefit)
|
6.5
|
|
6.5
|
|
6.5
|
|
6.5
|
Valuation allowance
|
(41.5)
|
|
(41.5)
|
|
(41.5)
|
|
(41.5)
|
|
|
|
|
|
|
|
|
Effective rate
|
0.0 %
|
|
0.0 %
|
|
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.
|
June 30, 2017
|
|
December 31, 2016
|
Start-up costs
|
$ 22,741
|
|
$ 35,033
|
Depreciation
|
(37,326)
|
|
(37,423)
|
Accrued expenses
|
353,355
|
|
745,103
|
Net operating loss carryforward
|
16,731,262
|
|
15,714,795
|
|
|
|
|
Deferred income taxes
|
17,070,032
|
|
16,457,508
|
Less: valuation allowance
|
(17,070,032)
|
|
(16,457,508)
|
|
|
|
|
Net deferred income taxes
|
$ -
|
|
$ -
|
At June 30, 2017, the Company had federal and state net operating loss carryforwards of approximately $40,316,000. 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.
Note 6 – Net Income (Loss) Per Share of Common Stock
Basic net income (loss) per share of common stock 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 income (loss) per share reflects per share amounts that would have resulted if dilutive potential common stock had been converted to common stock. Dilutive
11
Geospatial Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
June 30, 2017
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:
|
Three Months Ended
June 30, 2017
|
|
Three Months Ended
June 30, 2016
|
|
Six Months Ended
June 30, 2017
|
|
Six Months Ended
June 30, 2016
|
Net Income (Loss)
|
$ (302,111)
|
|
$ (221,654)
|
|
$ (532,926)
|
|
$ 26,072
|
|
|
|
|
|
|
|
|
Weighted average number of shares of common stock outstanding
|
260,511,076
|
|
157,615,632
|
|
249,148,356
|
|
150,475,853
|
Dilutive potential shares of common stock
|
260,511,076
|
|
157,615,632
|
|
249,148,356
|
|
150,475,853
|
|
|
|
|
|
|
|
|
Net income (loss) per share of common stock:
|
|
|
|
|
|
|
|
Basic
|
$ (0.00)
|
|
$ (0.00)
|
|
$ (0.00)
|
|
$ (0.00)
|
Diluted
|
$ (0.00)
|
|
$ (0.00)
|
|
$ (0.00)
|
|
$ (0.00)
|
The following securities were not included in the computation of diluted net loss per share, as their effect would have been anti-dilutive:
|
Three Months Ended
June 30, 2017
|
|
Three Months Ended
June 30, 2016
|
|
Six Months Ended
June 30, 2017
|
|
Six Months Ended
June 30, 2016
|
Series B Convertible Preferred Stock
|
-
|
|
-
|
|
-
|
|
1,766,830
|
Series C Convertible Preferred Stock
|
72,891,560
|
|
63,986,319
|
|
76,865,377
|
|
34,190,962
|
Options and warrants to purchase common stock
|
5,953,003
|
|
52,778,589
|
|
12,374,734
|
|
50,034,974
|
Secured Promissory Note
|
42,139,511
|
|
6,165,741
|
|
33,939,564
|
|
6,261,574
|
Senior Convertible Redeemable Notes
|
-
|
|
1,952,032
|
|
-
|
|
769,724
|
|
|
|
|
|
|
|
|
Total
|
120,984,074
|
|
15,236,414
|
|
123,179,675
|
|
16,165,125
|
Note 7 – Stock-Based Payments
During the six months ended June 30, 2017, the Company granted warrants to purchase 833,334 shares of the Company’s common stock to investors in connection with investments in the Company’s common stock. The Company also issued 7,000,000 shares of common stock to vendors in consideration for services. The Company recorded expense of $200,000, the fair value of the services received.
Note 8 – 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 Financial Accounting Standards Board Accounting Standards Codification (“ASC”) 470-60,
Troubled Debt Restructurings by Debtors
, and 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 have aged or are expected to age beyond the statute of limitations. The Company is amortizing those liabilities over the remaining term of the statute of limitations. Gains on extinguishment of debt amounted to $0 and $58,603 during the three months ended June 30, 2017 and 2016, respectively, and $13,693 and $133,521 during the six months ended June 30, 2017 and 2016, respectively.
12
Geospatial Corporation and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
June 30, 2017
Note 9 – 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 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 $76,337 and $522,115 at June 30, 2017 and December 31, 2016, 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”. The Company had gains from registration payment arrangements of $178,120 and $0 during the three months ended June 30, 2017 and 2016, respectively, and gains of $432,578 and $492,583 during the six months ended June 30, 2017 and 2016, respectively.
13
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, 2016, filed with our Annual Report on Form 10-K on April 14, 2017, and our financial statements and notes thereto as of and for the three and six months ended June 30, 2017, 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 June 30, 2017, we had current assets of $276,216, and current liabilities of $2,804,844.
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 issuance of notes payable. At June 30, 2017, current liabilities exceeded current assets by $2,528,628, and total liabilities exceeded total assets by $2,517,102. Those factors raise doubts about our ability to continue as a going concern.
On April 2, 2015, we entered into a Note and Warrant Purchase Agreement with David M. Truitt, pursuant to which Mr. Truitt loaned us $1,000,000 pursuant to a Secured Note Payable (as amended, the “Truitt Note”) that is secured by substantially all of the Company’s assets, and is convertible at the holder’s option to shares of the Company’s common stock at a discount to our trading value. The Truitt Note was originally due on October 2, 2015. On January 26, 2016, we entered into an Agreement and Amendment with Mr. Truitt (the “January 2016 Amendment”), 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 also issued Mr. Truitt warrants to purchase 25.0 million shares of our common stock in connection with the January 2016 Amendment. On August 12, 2016, we entered into an Agreement and Amendment with Mr. Truitt (the “August 2016 Amendment”), pursuant to which Mr. Truitt agreed to extend the maturity date of the Truitt Note to January 31, 2017 in consideration for the Company issuing to Mr. Truitt warrants to purchase 12.0 million shares of the Company’s common stock. On November 9, 2016, we made a payment of $200,000 of the balance of the Truitt Note. On December 14, 2016, we entered into a Note and Warrant Purchase Agreement with Mr. Truitt, pursuant to which Mr. Truitt loaned the Company an additional $100,000 subject to the terms of the Truitt Note, and the Company issued to Mr. Truitt warrants to purchase 100,000 shares of the Company’s common stock. We failed to repay the Truitt Note as required on January 31, 2017, and are currently in default under the terms of the 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.
During 2016, we sold 1.5 million shares of Series C Stock to Mr. Truitt for $300,000, and 1.3 million shares of Series C Stock to other investors. 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. We sold 1.4 million shares of common stock for $100,000. We received $472,000 from the exercise of warrants to purchase 47.2 million shares of common stock. We issued 1.0 million shares of common stock in consideration for services with a fair value of $100,000, and converted approximately $88,000 of liabilities to 2.8 million shares of common stock.
In 2017, we sold 13.3 million shares of common stock for $400,000. We received $38,000 for exercises of warrants to purchase 4.4 million shares of common stock, and we issued 7.0 million shares of common stock in consideration for services with a fair value of $200,000.
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 repay the Truitt Note and to fund general working capital needs.
We changed the focus of our company to position us to generate revenue from both 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 replaces 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 2017. 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.
14
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 $192,935 and $291,135 during the three and six months, respectively, ended June 30, 2017. Cost of sales were $44,032 and $86,086 for the three and six months, respectively, ended June 30, 2017. Sales were $258,800 and $440,000 during the three and six months, respectively, ended June 30, 2016. Cost of sales were $72,603 and $130,536 during the three and six months, respectively, ended June 30, 2016. Our sales have fluctuated throughout 2017 and 2016 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 $555,304 and $1,037,947 for the three and six months, respectively, ended June 30, 2017. SG&A expenses were $396,901 and $776,724 for the three and six months, respectively, ended June 30, 2016. The increase in SG&A costs for the three months ended June 30, 2017 compared to the three months ended June 30, 2016 was due to increases in payroll cost related to an increase in staffing, and professional fees due to investor relations and investment banking expenses incurred in 2017. The increases in payroll cost and professional fees were partially offset by a decrease in rent expense due to a suspension of rent by effective April 1, 2016.
Other income and expense for the three and six months, respectively, ended June 30, 2017 were net income of $104,290 and $299,972, which included interest expense of $73,830 and $146,299, gains on extinguishment of debt of $0 and $13,693, and gains related to registration payment arrangements of $178,120 and $432,578, respectively. Other income and expense for the three and six months, respectively, ended June 30, 2016 were net expense of $10,950 and net income of $493,332, which included interest expense of $69,553 and $132,772, gains on extinguishment of debt of $58,603 and $133,521, and gains related to registration payment arrangements of $0 and $492,583, respectively.
The increase in interest expense in 2017 was due to interest on the Truitt Note, which increased due to a higher outstanding balance and a higher interest rate incurred after the due date of January 31, 2017.
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 timely 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 and six months, respectively, ended June 30, 2017, we had gains related to registration payment arrangements of $178,120 and $432,578, due to decreases in the value of our common stock in both periods. We had no gain or loss related to registration payment arrangements during the three months ended June 30, 2016. We had gains related to registration payment arrangements of $492,593 during the six months ended June 30, 2016 due to a decrease 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 and six months ended June 30, 2017 and 2016, 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 June 30, 2017.
Application of Critical Accounting Policies
We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America, which require 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 timely 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 June 30, 2017, 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.
15
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 June 30, 2017, we had no open contracts.