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, 2017, filed with our Annual Report on Form 10-K on April 16, 2018, and our financial statements and notes thereto as of and for the three months ended March 31, 2018, 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.
The unaudited consolidated financial statements for the periods ended March 31, 2018 and 2017 include a summary of our significant accounting policies and should be read in conjunction with the discussion below. In the opinion of management, all material adjustments necessary to present fairly the consolidated results of operations for such periods have been included in these audited consolidated financial statements. All such adjustments are of a normal recurring nature.
Results of Operations
The following discussion should be read in conjunction with our financial statements for the periods ended March 31, 2018 and 2017 and the related notes thereto.
Results of Operations for the Three Months ended March 31, 2018 and 2017
We had sales of $177,814 and $98,200 during the three months ended March 31, 2018 and 2017, respectively. Cost of sales were $42,639 and $42,054 for the three months ended March 31, 2018 and 2017, respectively. Our sales have fluctuated throughout 2018 and 2017 as our ability to market and perform jobs was hampered by our financial condition. We expect sales and cost of sales to continue to fluctuate as our business continues to mature.
Selling, general, and administrative (“SG&A”) expenses were $463,145 and $482,643 for the three months ended March 31, 2018 and 2017, respectively. The decrease in SG&A costs for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 was due to a decrease in professional fees due to budget constraints, which was partially offset by an increase in payroll due to a higher headcount in 2018.
Other income and expense for the three months ended March 31, 2018 and 2017 was net expense of $109,038 and net income of $195,682, respectively. Other expense for the three months ended March 31, 2018 consisted of interest expense of 110,749, and other income of $1,711. Net other income for the three months ended March 31, 2017 included interest expense of $72,469, gains on extinguishment of debt of $13,693, and gains related to registration payment arrangements of $254,458.
The increase in interest expense in 2018 was due to interest on the Truitt Note, which increased due to a higher outstanding balance, a higher interest rate incurred pursuant to a note extension agreement, and amortization of deferred debt issue costs.
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.
We had no gain or loss related to registration payment arrangements during the three months ended March 31, 2018. During the three months ended March 31, 2017, we had gains related to registration payment arrangements of $254,458 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 months ended March 31, 2018 and 2017, as our deferred tax benefit was completely offset by a
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valuation allowance due to the uncertainty of realization of the benefit.
Liquidity and Capital Resources
At March 31, 2018, we had current assets of $221,017, and current liabilities of $3,300,184.
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, 2018, current liabilities exceeded current assets by $3,079,167, and total liabilities exceeded total assets by $3,069,721. 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 (together with the Truitt Note, as amended, the “Truitt Notes”) 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. On August 31, 2017, we entered into an Agreement and Amendment with Mr. Truitt (the “August 2017 Amendment”) pursuant to which (i) the maturity date of the Truitt Notes were extended to June 1, 2018; (ii) the price at which the Truitt Notes are convertible to shares of the Company’s common stock was amended to institute a floor of $0.02 per share; (iii) the interest rate on the Truitt Notes were amended to 15% per annum effective upon the execution of the August 2017 Amendment; (iv) the events of default under the Truitt Notes were waived; and (v) the Company delivered to Mr. Truitt a warrant to purchase 20.0 million shares of the Company’s common stock at a price of $0.01 per share. We currently do not have the ability to pay the Truitt Notes.
During 2018, we sold approximately 6.7 million shares of common stock for a net consideration of $95,000, and received $100,000 for the exercise of warrants to purchase 10.0 million shares of common stock. In addition, we issued approximately 3.2 million shares of stock for services with a fair value of $44,520.
Management is continuing its efforts to secure funding sufficient for the Company’s operating and capital requirements through private sales of common stock and issuance of notes payable, and to negotiate settlements or extensions of existing liabilities. The proceeds of such sales of stock or issuances of notes payable, if any, will be used to repay the Truitt Notes 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 several 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. We believe that our changes to our operating focus will enable us to increase revenue from operations substantially.
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.
Off-Balance Sheet Arrangements
The Company had no off-balance sheet arrangements as of March 31, 2018.
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 March 31, 2018, 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
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for the entire project. We review our estimates of costs to complete each contract quarterly, and make adjustments if necessary. At March 31, 2018, we had no open contracts.