GSPH Geospatial Corporation (CE)

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

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:

 Estimated useful lives of property and equipment; 

 Estimated costs to complete fixed-price contracts; 

 Realization of deferred income tax assets; 

 Estimated number and value of shares to be issued pursuant to registration payment arrangements;   

These estimates are discussed further throughout these Notes to Financial Statements.

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 and advances from its chief executive officer.  At December 31, 2017, the Company’s current liabilities exceeded its current assets by $2,850,971, and total liabilities exceeded total assets by $2,838,495.  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.  

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Geospatial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

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, 2017 and 2016.

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 $34,784 and $110,408 for the years ended December 31, 2017 and 2016, 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, 2017, assets under capital leases amounted to $16,870, and were fully depreciated.  At December 31, 2016, assets under capital leases and the related accumulated depreciation amounted to $16,870 and $13,918, respectively.  

Revenue Recognition

The Company records revenue when all of the following criteria are met:

 Persuasive evidence of an arrangement exists; 

 Delivery has occurred or services have been rendered; 

 The price to the buyer is fixed or determinable; and  

 Collectability is reasonably assured.   

Substantially all of the Company’s services are rendered under the following types of contracts:

Fixed-price contracts are 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.  

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Geospatial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

Units of delivery contracts are contracts in which the Company’s clients are billed an agreed amount for each unit of service, as defined in the contract, that is delivered to the client.  Revenues for units of delivery contracts are recognized as each unit of service is completed.  

Time-and-materials contracts are contracts in which the Company and the client negotiate billing rates, typically hourly, and bill based on the actual time expended, plus other direct costs incurred in connection with the contract.  Revenues for time-and-materials contracts are recognized as the services are rendered.  

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.  Unamortized deferred debt issuance costs amounted to $94,307 at December 31, 2017.  The deferred debt issuance costs were fully amortized at December 31, 2016.  

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, 2017 and 2016 was $50,152 and $137,184, 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 $65,969 and $121,368 during the years ended December 31, 2017 and 2016, respectively.  

Accounting for Derivatives

The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives.  For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value, and is revalued at each reporting date, with changes in the fair value reported in the statements of operations.   

The Company has determined that the option to settle the Secured Promissory Note in shares of the Company’s common stock is a derivative instrument.  No additional liability was recorded for the derivative instrument. From the issuance of the Secured Promissory Note through August 31, 2017, a potentially unlimited number of shares could have been required to settle the Secured Promissory Note.  On August 31, 2017, the Company and the lender entered into an Agreement and Amendment that instituted a floor on the conversion price, which limits the potential number of shares that 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

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Geospatial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

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 2017.  Due to financial constraints, the Company has not filed its federal tax returns for 2009 through 2017.  

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 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 $47,852 and $248,460 during the years ended December 31, 2017 and 2016, 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 $76,337 and $522,115 at December 31, 2017 and 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” which amounted to gains of $432,578 and $9,720 during the years ended December 31, 2017 and 2016, respectively.     

Segment Reporting

The Company operates as one segment.  Accordingly, no segment reporting is presented.  

Recent Accounting Pronouncements

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Geospatial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

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.

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 Company adopted ASU 2014-09 on January 1, 2017. The adoption of ASU 2014-09 did not have a material impact on the Companys 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 Companys consolidated financial statements.

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements Going Concern (Subtopic 205-40) , which provides authoritative guidance regarding managements evaluation of conditions or events that raise substantial doubts about an entitys ability to continue as a going concern, managements 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 entitys ability to continue as a going concern. ASU 2014-15 was implemented by the Company on January 1, 2017. The implementation of ASU 2014-15 did not 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 was adopted by the Company in 2017. The implementation of ASU 2015-01 did not have a material effect on the Companys 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. The Company adopted ASU 2015-03 in 2017. The implementation of ASU 2015-03 did not 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-

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Geospatial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

17 will be effective for the Company on January 1, 2018. The Company does not expect that the implementation of ASU 2015-17 will have a material effect on the Companys consolidated financial statements.

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 Companys 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.  

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.  

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Geospatial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2017 and 2016

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.  

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”).  The Company registered the shares as required by the Subscription Agreements during 2015.  The liability for accrued registration payment arrangements was $76,337 and $522,115 at December 31, 2017 and 2016, respectively.  

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.  The Company incurred lease expense of $0 and $19,500 during the years ended December 31, 2017 and 2016, respectively.  

On November 9, 2012, the Company and Mr. Smith entered into a Lease Agreement, pursuant to which the Company leased a field vehicle from Mr. Smith.  The lease was for 60 months, and was for substantially the same terms for which Mr. Smith leased the vehicle from the manufacturer.  Interest on the lease amounted to $48 and $150 for the years ended December 31, 2017 and 2016, respectively.  The lease was recorded as a capital lease.  The lease expired during the year ended December 31, 2017.    

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Long-term notes payable consisted of the following:

Note 6 – 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.  

Note 7 – Income Taxes

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