|
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 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
March 31, 2017, we had current assets of $220,779, and current liabilities of $2,866,612.
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 March 31, 2017, current liabilities
exceeded current assets by $2,645,833. We had no non-current liabilities at March 31, 2017. Those factors raise doubts about our
ability to continue as a going concern.
In
2015, we 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 the lender warrants to purchase 1.5 million shares of our common
stock in consideration for it purchasing the Horberg Note. Proceeds from the issuance of the Horberg Note were used for working
capital purposes. We repaid the Horberg Note on April 3, 2015.
On
April 2, 2015, we issued a Secured Promissory Note to David M. Truitt (the “Truitt Note”) in the principal amount
of $1.0 million. The Truitt Note was originally due on October 2, 2015, and 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 the option of the holder. We also issued
Mr. Truitt warrants to purchase 2.0 million shares of our common stock in consideration for him purchasing the Truitt Note. Proceeds
from the issuance of the Truitt Note were used to repay the Horberg Note and for working capital purposes.
On
January 27, 2016, we entered into an Agreement and Amendment with Mr. Truitt (the “Amended Truitt Note”), pursuant
to which Mr. Truitt loaned us an additional $250,000 and extended the due date of the Truitt Note to July 31, 2016. We also issued
Mr. Truitt warrants to purchase 25.0 million shares of our common stock in connection with the Amended Truitt Note.
On
March 16, 2016, we designated 10.0 million shares of preferred stock as Series C Convertible Preferred Stock (“Series C
Stock”). Series C Stock is convertible to common stock at a conversion ratio of 20 shares of common stock for each share
of Series C Stock, subject to adjustment for stock dividends, splits, and similar events. Series C Stock has a liquidation preference
equal to its original issue price, and has voting rights equal to five times the number of shares of common stock into which the
Series C Stock is convertible.
During
the second quarter of 2016, we sold 1.5 million 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 received $110,000 for the exercise of warrants to purchase
1.1 million shares of common stock, and converted liabilities of approximately $88,000 to approximately 2.8 million shares of
common stock.
In
the fourth quarter of 2016, we received $362,000 for the exercise of warrants to purchase 36.2 million shares of common stock.
We also issued 1.0 million shares of common stock for services with a value of $100,000.
In
the first quarter of 2017, we sold 5.0 million shares of common stock for $250,000. We failed to repay the Amended Truitt Note
as required on January 31, 2017, and are in default under the terms of the Amended 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 repay the Amended Truitt Note and to fund general working capital needs.
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 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.
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 $98,200 and $181,200 during the three months ended March 31, 2017 and 2016, respectively. Cost of sales were $42,054 and $57,933 for
the three months ended March 31, 2017 and 2016, respectively. 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 $482,643 and $379,823 for the three months ended March 31, 2017 and 2016, respectively.
The increase in SG&A costs for the three months ended March 31, 2017 compared to the three months ended March 31, 2016 was due to increases in payroll cost related to an increase in staffing, and professional fees
due to investor relations 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 months ended March 31, 2017
and 2016 were net income of $195,692 and $504,282, respectively, which included
interest expense of $72,469 and $63,219, respectively, gains on extinguishment of debt of $13,693 and $74,918, respectively, and
gains related to registration payment arrangements of $254,458 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 register the shares of common stock under
the Securities Act
timely
resulted in our obligation to issue additional shares (“Penalty
Shares”) to investors who purchased shares pursuant to the Stock Subscription Agreements. We recorded a liability on our
books for the value of the estimated number of shares to be issued. We incur losses on our registration payment arrangements when
the estimated number of Penalty Shares to be issued increases, or when the value of our common stock increases. We record gains
on our registration payment arrangements when the estimated number of Penalty Shares to be issued decreases, or when the value
of our common stock decreases.
During
the three months ended March 31, 2017 and 2016, we had gains related to registration payment arrangements of $254,458 and $492,583,
respectively, due to decreases in the value of our common stock in both periods. 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
March
31
, 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
March 31
, 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 register their shares of our common stock under the Securities Act. We have recorded a liability for the estimated number of
shares to be issued at the fair value of the stock to be issued. We review on a quarterly basis our estimate of the number of
shares to be issued and the fair value of the stock to be issued.
Realization
of Deferred Income Tax Assets.
We provide a net deferred tax asset or liability equal to the expected future tax benefit or
expense of temporary reporting differences between financial reporting and tax accounting methods and any available operating
loss or tax credit carryovers. At March 31, 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.
Estimated
Costs to Complete Fixed-Price Contracts.
We record revenues for fixed-price contracts under the percentage-of-completion method
of accounting, whereby revenues are recognized ratably as those contracts are completed. This rate is based primarily on the proportion
of contract costs incurred to date to total contract costs projected to be incurred for the entire project, or the proportion
of measurable output completed to date to total output anticipated for the entire project. We review our estimates of costs to
complete each contract quarterly, and make adjustments if necessary. At
March 31, 2017, we
had no open contracts
.