UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

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FORM 10-Q

 

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☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2015

 

OR

 

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

COMMISSION FILE NUMBER: 333-04066

 

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GEOSPATIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

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NEVADA		87-0554463
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

229 Howes Run Road, Sarver, PA 16055

(Address of principal executive offices)

 

(724) 353-3400

(Registrant’s telephone number, including area code)

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ☒    NO  ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files):    YES  ☒    NO  ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer	☐		Accelerated filer	☐
Non-accelerated filer	☐	(Do not check if a smaller reporting company)	Smaller reporting company	☒

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):    YES  ☐    NO  ☒

 

The number of $.001 par value common shares outstanding at November 16, 2015: 141,066,264.

 

 

 

FORWARD-LOOKING STATEMENT NOTICE

The statements set forth in this report which are not historical constitute "Forward-Looking Statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder, including statements regarding the expectations, beliefs, intentions or strategies for the future. When used in this report, the terms "anticipate," "believe," "estimate," "expect" and "intend" and words or phrases of similar import, as they relate to our business or our subsidiaries or our management, are intended to identify Forward-Looking Statements. These Forward-Looking Statements are only predictions and reflect our views as of the date they are made with respect to future events and financial performance. Forward-Looking Statements are subject to many risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the Forward-Looking Statements.

 

Because our common stock is considered to be a "penny stock", the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995 do not apply to such Forward Looking Statements.

 

Our business involves various risks, including, but not limited to, our ability to implement our business strategies as planned in a timely manner or at all; our lack of operating history; our ability to protect our proprietary technologies; our ability to obtain financing sufficient to meet our capital needs; our inability to use historical financial data to evaluate our financial performance; and the other risk factors identified in our filings with the Securities and Exchange Commission.

. '

Because the risk factors referred to above could cause actual results or outcomes to differ materially from those expressed or implied in any forward-looking statements made by us or on our behalf, readers of this report should not place undue reliance on any forward-looking statement. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligations to update any Forward-Looking Statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of future events or developments. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any Forward-Looking Statements.

 

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION	4
ITEM 1. FINANCIAL STATEMENTS	4
ITEM 2. MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	21
ITEM 4. CONTROLS AND PROCEDURES	21
PART II - OTHER INFORMATION	22
ITEM 2. SALES OF UNREGISTERED EQUITY SECURITIES AND USE OF PROCEEDS	22
ITEM 6. EXHIBITS	22

 

PART I - FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

GEOSPATIAL CORPORATION INDEX

	Page
FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 2015 AND DECEMBER 31, 2014 AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014
Consolidated Balance Sheets (Unaudited)	5
Consolidated Statements of Operations (Unaudited)	6
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) (Unaudited)	7
Consolidated Statements of Cash Flows (Unaudited)	8
Notes to Unaudited Consolidated Financial Statements	9

 

 

 

 

Geospatial Corporation and Subsidiaries

Consolidated Balance Sheets

 

		September 30,				December 31,
		2015				2014
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	23,202			$	17,723
Accounts receivable			—				32,800
Prepaid expenses and other current assets			210,569				180,689
Total current assets			233,771				231,212
Property and equipment:
Field equipment			339,079				339,079
Field vehicles			43,285				43,285
Total property and equipment			382,364				382,364
Less:  accumulated depreciation			(217,720	)			(126,864	)
Net property and equipment			164,644				255,500
Total assets		$	398,415			$	486,712
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable		$	636,284			$	740,151
Accrued expenses			1,930,645				1,353,532
Due to related parties			179,172				137,910
Notes payable to related parties			6,893				29,047
Current portion of capital lease liability to related party			3,453				3,379
Senior convertible redeemable notes, net of deferred debt issue costs			—				1,525,025
Notes payable, net of deferred debt issue costs			1,545,410				232,892
Accrued registration payment arrangement			1,334,629				2,525,075
Total current liabilities			5,636,486				6,547,011
Non-current liabilities:
Notes payable			3,667				39,741
Capital lease liability to related party			4,158				6,757
Total non-current liabilities			7,825				46,498
Total liabilities			5,644,311				6,593,509
Stockholders' deficit:
Preferred stock:
Undesignated, $0.001 par value;  20,000,000 shares authorized at September 30, 2015 and December 31, 2014; no shares issued and outstanding September 30, 2015 and December 31, 2014			—				—
Series B Convertible Preferred Stock, $0.001 par value;  5,000,000 shares authorized at September 30, 2015 and December 31, 2014;  0 and 530,049 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively			—				530
Common stock, $.001 par value; 350,000,000 shares authorized at September 30, 2015 and December 31, 2014;   138,456,264 and 126,235,177 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively			138,456				126,235
Additional paid-in capital			35,313,551				33,596,411
Accumulated deficit			(40,697,903	)			(39,829,973	)
Total stockholders' deficit			(5,245,896	)			(6,106,797	)
Total liabilities and stockholders' deficit		$	398,415			$	486,712

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

Geospatial Corporation and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

 

		For the Three Months								For the Nine Months
		Ended September 30,								Ended September 30,
		2015				2014				2015				2014
Sales		$	—			$	58,400			$	20,800			$	254,151
Cost of sales			33,545				49,809				113,114				145,626
Gross profit (loss)			(33,545	)			8,591				(92,314	)			108,525
Selling, general and administrative expenses			698,559				724,098				2,021,897				1,967,784
Net loss from operations			(732,104	)			(715,507	)			(2,114,211	)			(1,859,259	)
Other income (expense):
Interest expense			(41,794	)			(40,346	)			(163,709	)			(119,254	)
Gain on extinguishment of debt			73,181				74,528				219,544				310,002
Registration payment arrangements			—				—				1,190,446				—
Total other income (expenses)			31,387				34,182				1,246,281				190,748
Net loss before income taxes			(700,717	)			(681,325	)			(867,930	)			(1,668,511	)
Provision for income taxes			—				—				—				—
Net loss		$	(700,717	)		$	(681,325	)		$	(867,930	)		$	(1,668,511	)
Basic and fully-diluted net loss per share of common stock		$	(0.01	)		$	(0.01	)		$	(0.01	)		$	(0.02	)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

Geospatial Corporation and Subsidiaries

Consolidated Statements of Changes in Stockholders' Deficit

For the Nine Months Ended September 30, 2015

(Unaudited)

 

																		Series B
																		Convertible
		Preferred Stock								Common Stock								Preferred Stock				Additional Paid-In				Accumulated
		Shares				Amount				Shares				Amount				Subscribed				Capital				Deficit				Total
Balance, December 31, 2014			530,049			$	530				126,235,177			$	126,235			$	—			$	33,596,411			$	(39,829,973	)		$	(6,106,797	)
Sale of common stock, net of issuance
costs			—				—				770,000				770				—				159,032				—				159,802
Conversion of Series B Convertible
Preferred Stock to common stock			(530,049	)			(530	)			5,300,500				5,300				—				(4,770	)			—				—
Conversion of senior convertible
redeemable notes to common stock			—				—				6,150,587				6,151				—				1,562,878				—				1,569,029
Net loss for the nine months ended
September 30, 2015			—				—				—				—				—				—				(867,930	)			(867,930	)
																											.
Balance, September 30, 2015			—			$	—				138,456,264			$	138,456			$	—			$	35,313,551			$	(40,697,903	)		$	(5,245,896	)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

Geospatial Corporation and Subsidiaries

Consolidated Statements of Cash Flows

 

		For the Nine Months
		Ended September 30,
		2015				2014
Cash flows from operating activities:
Net income (loss)		$	(867,930	)		$	(1,668,511	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation			90,856				71,026
Amortization of deferred debt issuance costs			53,114				—
Gain on extinguishment of debt			(219,543	)			(310,002	)
Issuance of common stock for services			—				82,500
Accrued registration payment arrangement			(1,190,446	)			—
Accrued interest payable			104,207				108,812
Changes in operating assets and liablities:
Accounts receivable			32,800				102,450
Prepaid expenses and other current assets			(29,880	)			(152,082	)
Accounts payable			115,676				73,265
Accrued expenses			575,099				10,832
Due to related parties			41,262				29,619
Other long-term liabilities			—				(19,887	)
Net cash used in operating activities			(1,294,784	)			(1,671,978	)
Cash flows from investing activities:
Purchase of property, plant and equipment			—				(197,188	)
Net cash used in investing activities			—				(197,188	)
Cash flows from financing activities:
Proceeds from issuance of notes payable			1,780,000				—
Proceeds from issuance of notes payable to related parties			6,891				—
Principal payments on notes payable			(590,655	)			(119,175	)
Principal payments on capital lease liabilities			(2,525	)			(2,453	)
Deferred debt issuance costs paid			(53,250	)			—
Proceeds from sale of common stock, net of offering costs			159,802				2,236,086
Proceeds from exercise of warrants to purchase common stock, net of offering costs			—				5,332
Proceeds from exercise of warrants to purchase Series B Convertible Preferred Stock,
net of offering costs			—				266,571
Repurchase of shares of common stock for cancellation			—				(1,114,688	)
Net cash provided by financing activities			1,300,263				1,271,673
Net change in cash and cash equivalents			5,479				(597,493	)
Cash and cash equivalents at beginning of period			17,723				778,597
Cash and cash equivalents at end of period		$	23,202			$	181,104
Supplemental disclosures:
Cash paid during period for interest		$	6,386			$	10,442
Cash paid during period for income taxes			—				—
Non-cash transactions:
Issuance of common stock for services			—				82,500
Issuance of common stock in settlement of liabilities			—				50,000
Conversion of senior convertible redeemable notes to common stock			1,569,029				—

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

Geospatial Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

September 30, 2015

 

Note 1 – Basis of Presentation

 

The Unaudited Consolidated Financial Statements included herein have been prepared by Geospatial Corporation (the “Company”) in accordance with generally accepted accounting principles for interim financial information and regulations contained in the Securities Exchange Act of 1934, as amended. Accordingly, the accompanying Unaudited Consolidated Financial Statements do not include all of 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 and nine months ended September 30, 2015 should be read in conjunction with the Company’s Financial Statements as of and for the year ended December 31, 2014. 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 Condensed Consolidated Financial Statements, are of a normal and recurring nature. Operating results for the three and nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015, 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 Condensed Consolidated Financial Statements include the accounts of the Company and its subsidiary, Geospatial Mapping Systems, Inc. All intercompany accounts and transactions have been eliminated.

 

Note 2 – Accrued Expenses

 

Accrued expenses consisted of the following:

 

		September 30,				December 31,
		2015				2014
Payroll and taxes		$	1,529,075			$	1,134,918
Accounting			56,893				67,280
Insurance			74,352				33,902
Contractors and subcontractors			191,384				60,848
Other			78,941				56,584
Accrued expenses		$	1,930,645			$	1,353,532

 

 

Geospatial Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

September 30, 2015

 

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. The Company incurred $19,500 of lease expense during the three months ended September 30, 2015 and 2014, and $58,500 of lease expense during the nine months ended September 30, 2015 and 2014. The lease is cancellable by either party upon 30 days’ notice.

 

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 $59 and $196, respectively, for the three months and nine months ended September 30, 2015, and $77 and $346, respectively, for the three and nine months ended September 30, 2014. The lease is recorded as a capital lease. At September 30, 2015, gross assets recorded under the lease and associated accumulated depreciation were $16,870 and $9,700, respectively. Future minimum payments under the capital lease are as follows as of September 30, 2015:

 

Balance of 2015		$	907
Year ending December 31, 2016			3,628
Year ending December 31, 2017			3,326
Thereafter			—
Total minimum payments			7,861
Less:  minimum interest payments			(250	)
Minimum principal payments		$	7,611

 

During the three months ended September 30, 2015, Thomas R. Oxenreiter, the Company’s Chief Financial Officer, loaned the Company $6,891. During the three and nine months ended September 30, 2015, interest on the loan at 10% per annum totaled $2. The Company issued warrants to purchase 6,891 shares of the Company’s common stock at $0.20 per share in connection with the loan.

 

 

Geospatial Corporation and Subsidiaries Notes to Unaudited Consolidated Financial Statements

September 30, 2015

 

Note 4 – Notes Payable

 

Current notes payable consisted of the following:

 

		September 30, 2015				December 31, 2014
Secured Promissory Note payable to an individual, due October 2, 2015, bearing interest at 10% per annum, plus warrants to purchase the common stock		$	1,050,142			$	—
Unsecured Convertible Promissory Notes payable to individuals, due at various times through November 4, 2015, bearing interest at 10% plus warrants to purchase common stock			287,786				—
Current portion of long-term notes payable			207,482				232,892
Current notes payable		$	1,545,410			$	232,892

 

 

Geospatial Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

September 30, 2015

 

Note 4 – Notes Payable (continued)

 

Long-term notes payable consisted of the following:

 

		September 30, 2015				December 31, 2014
Notes payable under settlement agreements with former employees, payable monthly with terms of up to 39 months, with interest rates ranging from 0% to 4%		$	167,908			$	218,892
Notes payable under settlement agreements with vendors, payable monthly with terms of up to 60 months, with interest rates ranging from 0% to 32%			43,241				53,741
Total long-term notes payable			211,149				272,633
Less: current portion			(207,482	)			(272,892	)
Long-term notes payable, less current portion		$	3,667			$	39,741

 

Future maturities of long-term debt are as follows as of September 30, 2015:

 

	Balance of 2015			$	38,074
	Year ending December 31, 2016				2,000
	Year ending December 31, 2017				2,000
	Year ending December 31, 2018				1,166
	Thereafter				—
				$	43,240

 

 

Geospatial Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

September 30, 2015

 

Note 5 – Income Taxes

 

The Company’s provision for (benefit from) income taxes is summarized below:

 

		Three Months Ended September 30, 2015				Three Months Ended September 30, 2014				Nine months Ended September 30, 2015				Nine months Ended September 30, 2014
Current:
Federal		$	—			$	—			$	—			$	—
State			—				—				—				—
			—				—				—				—
Deferred:
Federal			(220,406	)			(214,109	)			(742,996	)			(523,091	)
State			(69,970	)			(67,971	)			(235,872	)			(166,061	)
			(290,376	)			(282,080	)			(978,868	)			(689,152	)
Total income taxes			(290,376	)			(282,080	)			(978,868	)			(689,152	)
Less:  valuation allowance			290,376				282,080				978,868				689,152
Net income taxes		$	—			$	—			$	—			$	—

 

The reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:

 

		Three Months Ended September 30, 2015				Three Months Ended September 30, 2014				Nine months Ended September 30, 2015				Nine months Ended September 30, 2014
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	%

 

 

Geospatial Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

September 30, 2015

 

Note 5 – Income Taxes (continued)

 

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.

 

		September 30, 2015				December 31, 2014
Start-up costs		$	39,949			$	47,325
Depreciation			(36,870	)			(37,684	)
Accrued expenses			646,482				378,020
Net operating loss carryforward			15,690,529				14,973,562
Deferred income taxes			16,340,090				15,361,223
Less:  valuation allowance			(16,340,090	)			(15,361,223	)
Net deferred income taxes		$	—			$	—

 

At September 30, 2015, the Company had federal and state net operating loss carryforwards of approximately $37,809,000. 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 Unaudited Consolidated Financial Statements

September 30, 2015

 

Note 6 – 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:

 

		Three Months Ended September 30, 2015				Three Months Ended September 30, 2014				Nine months Ended September 30, 2015				Nine months Ended September 30, 2014
Net loss		$	(700,717	)		$	(681,325	)		$	(867,930	)		$	(1,668,511	)
Weighted average number of shares of common stock outstanding			138,056,264				124,163,383				136,022,394				105,226,831
Dilutive potential shares of common stock			138,056,264				124,163,383				136,022,394				105,226,831
Net loss per share of common stock:
Basic		$	(0.01	)		$	(0.01	)		$	(0.01	)		$	(0.02	)
Diluted		$	(0.01	)		$	(0.01	)		$	(0.01	)		$	(0.02	)

 

 

Geospatial Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

September 30, 2015

 

Note 6 – Net Loss Per Share of Common Stock (continued)

 

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 September 30, 2015				Three Months Ended September 30, 2014				Nine months Ended September 30, 2015				Nine months Ended September 30, 2014
Series B Convertible Preferred Stock			—				5,300,490				1,325,123				21,672,035
Options and warrants to purchase common stock			14,345,798				8,110,405				14,345,798				10,698,719
Warrants to purchase Series B Convertible Preferred Stock			67,646				1,689,792				67,646				2,337,517
Unsecured Convertible Promissory Notes			—				—				—				—
Secured Promissory Note			6,732,841				—				4,310,455				—
Senior Convertible Redeemable Notes			—				2,937,368				1,464,024				2,936,579
Total			21,146,285				18,038,055				21,513,046				37,644,850

 

 

Geospatial Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

September 30, 2015

 

Note 7 – Stock-Based Payments

 

During the nine months ended September 30, 2015, the Company granted stock appreciation rights on 1,362,500 shares of the Company’s common stock to eligible employees and consultants pursuant to the 2013 Equity Incentive Plan.

 

During the nine months ended September 30, 2015, the Company granted warrants to purchase 3,962,641 shares of the Company’s common stock to lenders in connection with loans to the Company, and warrants to purchase 1,300,000 shares of the Company’s common stock to consultants.

 

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 470-60, Troubled Debt Restructurings by Debtors, 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 $73,181 and $74,528 during the three months ended September 30, 2015 and 2014, respectively, and $219,544 and $310,002 during the nine months ended September 30, 2015 and 2014, respectively.

 

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 $1,334,629 at September 30, 2015, and $2,525,075 at December 31, 2014. 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 $1,190,446 during the nine months ended September 30, 2015. There were no such gains or losses during the three months ended September 30, 2015, or during the three and nine months ended September 30, 2014.

 

 

  

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, 2014, and for the three months ended March 31, 2015, filed with our Registration Statement on Form S-1 on June 12, 2015, and our financial statements and notes thereto as of and for the three and nine months ended September 30, 2015, 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 September 30, 2015, we had current assets of $486,643, and current liabilities of $5,889,358.

 

Our Company has incurred net losses since inception. Our operations and capital requirements have been funded by sales of our common and preferred stock and advances from our chief executive officer. At September 30, 2015, current liabilities exceeded current assets by $5,402,715, and total liabilities exceeded total assets by $5,245,896. Those factors raise doubts about our ability to continue as a going concern.

 

In 2012, we raised approximately $632,000 in cash through private sales of our Series B Convertible Preferred Stock (“Series B Stock”), and converted approximately $215,000 in liabilities to Series B Stock. In 2013, we raised approximately $3,246,000 through private sales of our Series B Stock and common stock, and converted approximately $4,926,000 of liabilities to Series B Stock and common stock. During 2014, we raised approximately $2,430,000 through private sales of our common stock, and approximately $272,000 through the exercise of outstanding warrants to purchase Series B Stock and common stock. In addition, we have negotiated settlements or long-term extensions on approximately $1,776,000 of liabilities from 2012 through 2014. We entered into an agreement with Reduct NV, licensor of our former exclusive technology, on May 10, 2013 that eliminates all prior liabilities to Reduct in consideration for the issuance of 9,000,000 shares of our common stock, warrants to purchase 3,500,000 shares of our common stock, and purchases of $300,000 of equipment from Reduct. The agreement allows us to purchase their products on a non-exclusive basis without the minimum purchase requirements to maintain the exclusive license. On February 26, 2015, an outstanding Senior Secured Redeemable Note with a balance due of approximately $1.6 million was converted into 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 Horberg Enterprises LLC warrants to purchase 1,500,000 shares of our common stock in consideration for its 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 $1,000,000. The Truitt Note is due on October 2, 2015, and bears interest at 10% per annum. The Truitt Note is secured by liens on all of 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 2,000,000 shares of our common stock in consideration for his purchasing the Truitt Note. Proceeds from the issuance of the Truitt Note were used to repay the Horberg Note and for working capital purposes.

 

During 2015, we raised approximately $421,000 in cash through private sales of our common stock. Also during 2015, we issued Unsecured Convertible Promissory Notes (the “Unsecured Notes”) with principal amounts totaling approximately $299,000, which bear interest at 10% per annum. The Unsecured Notes are convertible into shares of our common stock at the option of the holder. We issued warrants to purchase 408,891 shares of our common stock in connection with the Unsecured Notes. Proceeds from the Unsecured Notes were used for working capital purposes.

 

On September 17, 2014, we entered into an Asset Purchase Agreement to acquire substantially all the assets of Select Analytics LLC, a company that operates the Shale Navigator website, and is engaged in the business of aggregating, managing, and selling infrastructure data. Pursuant to the Asset Purchase Agreement, we will be required to pay $160,000 in cash and issue 550,000 shares of the Company’s common stock to the seller during 2015.

 

Management is continuing efforts to secure funding sufficient for the Company’s operating and capital requirements through private sales of common stock, and to negotiate settlements or extensions of existing liabilities. The proceeds of such sales of stock, if any, will be used to fund general working capital needs.

 

Beginning in 2012, 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 the first quarter of 2016. 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 no sales during the three months ended September 30, 2015, and sales of $20,800 during the nine months ended September 30, 2015. Cost of sales were $33,545 and $113,114 for the three and nine months, respectively, ended September 30, 2015. For the three and nine months ended September 30, 2014, sales were $58,400 and $254,151, respectively, and cost of sales were $49,809 and $145,626, respectively. Our sales have fluctuated throughout 2015 and 2014 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 $698,559 and $2,021,897 for the three and nine months ended September 30, 2015, respectively, compared to $724,098 and $1,967,784 for the three and nine months, respectively, ended September 30, 2014. The decrease in SG&A costs for the three months ended September 30, 2015 compared to the three months ended September 30, 2014 was due to decreases in development costs associated with our software, and decreases in professional fees, which was partially offset by an increase in payroll costs related to our expanded technical staff in 2015. The increase in SG&A costs for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014 was due to increased payroll costs related to our expanded technical staff in 2015.

 

 

Other income and expense for the three and nine months ended September 30 , 2015 was a net income of $31,387 and $1,246,281, respectively, which included interest expense of $41,794 and $163,709, respectively, gains on extinguishment of debt of $73,181 and $219,544, respectively, and gains related to registration payment arrangements of $0 and $1,190,446, respectively. Other income and expense for the three and nine months ended September 30, 2014 was a net income of $34,182 and $190,748, respectively, which included interest expense of $40,346 and $119,254, respectively, and gains on extinguishment of debt of $74,528 and $310,002, respectively. The increase in interest expense in 2015 was due to interest on new loans in 2015, and interest on higher balances for existing loans. The gains on extinguishment of debt resulted from settlement agreements on prior liabilities.

 

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 are 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 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 nine months ended September 30, 2015, we had gains related to registration payment arrangements due to decreases in the value of our common stock and the estimated number of Penalty Shares to be issued. We had no gains or expense related to registration payment arrangements during the nine months ended September 30, 2014. 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 September 30, 2015 or 2014, 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 September 30, 2015.

 

Application of Critical Accounting Policies

 

We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America, which requires 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 September 30, 2015, 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 September 30, 2015, we do not believe that material changes to contract cost estimates at completion for any of our open contracts are reasonably likely to occur.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Interest Rate Risk—Interest rate risk refers to fluctuations in the value of a security resulting from changes in the general level of interest rates. We do not have significant short-term investments. Accordingly, we believe that we do not have a material interest rate exposure.

 

Foreign Currency Risk—Our functional currency is the United States dollar. We do not currently have any assets or liabilities denominated in foreign currencies. Consequently, we have no direct exposure to foreign currency risk.

 

Commodity Price Risk—Based on the nature of our business, we have no direct exposure to commodity price risk.

 

ITEM 4. CONTROLS AND PROCEDURES.

 

Disclosure Controls and Procedures

 

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the United States Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of Company management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to the Securities Exchange Act of 1934 (“Exchange Act”) Rules 13a-15(e) and 15d-15(e). Based upon, and as of the date of this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting during the three months ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II - OTHER INFORMATION

ITEM 2. SALES OF UNREGISTERED EQUITY SECURITIES AND USE OF PROCEEDS

Between July 9, 2015 and September 14, 2015, the Company sold 650,000 shares of its common stock to five investors at a sales price of $0.20 per share, for an aggregate sales price of $130,000. The sales took place in a series of private placement transactions pursuant to the exemption from the registration requirements of the Securities Act provided by Section 4(2) of the Securities Act and/or Regulation D. The purchasers are accredited investors, and the Company conducted the private placements without any general solicitation or advertisement, and with a restriction on resale.

 

Between October 27, 2015 and November 10, 2015, the Company sold 652,500 shares of its common stock to four investors at a sales price of $0.10 per share, for an aggregate sales price of $261,000. The sales took place in a series of private placement transactions pursuant to the exemption from the registration requirements of the Securities Act provided by Section 4(2) of the Securities Act and/or Regulation D. The purchasers are accredited investors, and the Company conducted the private placements without any general solicitation or advertisement, and with a restriction on resale.

 

Between July 8, 2015 and July 29, 2015, the Company issued Unsecured Convertible Promissory Notes to three lenders in the aggregate principal amount of $150,000, which is convertible into shares of common stock at the option of the holders, and warrants to purchase 210,000 shares of its common stock at an exercise price of $0.20 per share. The issuance was made pursuant to the exemption from the registration requirements of the Securities Act provided by Section 4(2) of the Securities Act and/or Regulation D. The recipients are accredited investors, and the Company issued the Unsecured Convertible Promissory Notes and the warrants without any general solicitation or advertisement and with a restriction on resale.

 

On August 13, 2015, the Company issued an Unsecured Convertible Promissory Note to a lender in the principal amount of $30,000, which is convertible into shares of common stock at the option of the holder, and warrants to purchase 3,000 shares of its common stock at an exercise price of $0.25 per share. The issuance was made pursuant to the exemption from the registration requirements of the Securities Act provided by Section 4(2) of the Securities Act and/or Regulation D. The recipient is an accredited investor, and the Company issued the Unsecured Convertible Promissory Note and the warrants without any general solicitation or advertisement and with a restriction on resale.

 

On September 30, 2015, the Company issued to Thomas R. Oxenreiter, the Company’s Chief Financial Officer and Director, an Unsecured Convertible Promissory Note in the principal amount of $6,891, which is convertible into shares of the Company’s common stock at the option of the holder, and warrants to purchase 6,891 shares of the Company’s common stock at an exercise price of $0.20 per share. The issuance was made pursuant to the exemption from the registration requirements of the Securities Act provided by Section 4(2) of the Securities Act and/or Regulation D. Mr. Oxenreiter is an accredited investor, and the Company issued the common stock and warrants without any general solicitation or advertisement and with a restriction on resale.

 

On October 13, 2015, the Company issued to Thomas R. Oxenreiter, the Company’s Chief Financial Officer and Director, an Unsecured Convertible Promissory Note in the principal amount of $12,000, which is convertible into shares of the Company’s common stock at the option of the holder, and warrants to purchase 12,000 shares of the Company’s common stock at an exercise price of $0.15 per share. The issuance was made pursuant to the exemption from the registration requirements of the Securities Act provided by Section 4(2) of the Securities Act and/or Regulation D. Mr. Oxenreiter is an accredited investor, and the Company issued the common stock and warrants without any general solicitation or advertisement and with a restriction on resale.

 

 

ITEM 6. EXHIBITS

  

Exhibit		Description
31.1		Rule 13a-14(a) Certification of Mark A. Smith
31.2		Rule 13a-14(a) Certification of Thomas R. Oxenreiter
32.1		Section 1350 Certification of Chief Executive Officer
32.2		Section 1350 Certification of Chief Financial Officer
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

 

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

	Geospatial Corporation (Registrant)
	(Registrant)
Date: November 20, 2015	By:	/S/   MARK A. SMITH
	Name: Title:	Mark A. Smith Chief Executive Officer
	By:	/S/ THOMAS R. OXENREITER
	Name:	Thomas R. Oxenreiter
	Title:	Chief Financial Officer