We have filed with the SEC
a Registration Statement on Form S-1 under the Securities Act with respect to the common stock offered in this offering. This prospectus
does not contain all of the information set forth in the registration statement. For further information with respect to us and
the Common Stock offered in this offering, we refer you to the registration statement and to the attached exhibits. With respect
to each such documents filed as an exhibit to the registration statement, we refer you to the exhibit for a more complete description
of the matters involved.
You may inspect our registration
statement and the attached exhibits and schedules without charge at the public reference facilities maintained by the SEC at 100
F Street, N.E., Washington, D.C. 20549, on official business days during the hours of 10:00 am to 3:00 pm. You may obtain copies
of all or any part of our registration statement from the SEC upon payment of prescribed fees. You may obtain information on the
operation of the public reference room by calling the SEC at 1-800-SEC-0330.
Our SEC filings, including
the registration statement and the exhibits filed with the registration statement, are also available from the SEC’s website at
www.sec.gov, which contains reports, proxy and information statements and other information regarding issuers that file electronically
with the SEC.
As a result of the registration,
we are subject to the full informational requirements of the Exchange Act and are required to file periodic reports and other information
with the SEC. We intend to furnish our stockholders with annual reports containing consolidated financial statements certified
by an independent public accounting firm.
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited), and December
31, 2012 and 2011 (audited)
Note 1 – Summary of Significant Accounting Policies
This summary of significant
accounting policies of Geospatial Corporation, a Nevada corporation, formerly known as Geospatial Holdings, Inc., (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 also provided utility locating services through March, 2011. The Company is located
in Sarver, Pennsylvania, and provides services throughout the United States.
Consolidation
The Company’s financial
statements include wholly-owned subsidiaries Geospatial Mapping Systems, Inc. and Utility Services and Consulting Corporation (“USCC”).
USCC ceased operations in March, 2011. All material intercompany accounts and transactions have been eliminated in consolidation.
Unaudited Interim Financial Information
The accompanying consolidated
balance sheet as of September 30, 2013, the consolidated statements of operations and statements of cash flows for the nine months
ended September 30, 2013 and 2012 and the consolidated statement of changes in stockholders’ deficit for the nine months ended
September 30, 2013 are unaudited. The interim unaudited financial statements have been prepared on the same basis as the annual
audited financial statements; and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments
necessary for the fair statement of the Company’s financial position as of September 30, 2013, and the results of its operations
and its cash flows for the nine months ended September 30, 2013 and 2012. The financial data and other information disclosed in
these notes related to the nine months ended September 30, 2013 and 2012 are unaudited. The results for the nine months ended September
30, 2013 are not necessarily indicative of results to be expected for the year ending December 31, 2013, or any other interim
periods, or any future year or period.
Geospatial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited), and December
31, 2012 and 2011 (audited)
Note 1 – Summary of Significant
Accounting Policies (continued)
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 stock and advances from its chief executive officer. At September 30, 2013, the Company’s current liabilities
exceeded its current assets by $5,635,189, and total liabilities exceeded total assets by $6,852,160. 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.
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.
Geospatial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited), and December
31, 2012 and 2011 (audited)
Note 1 – Summary of Significant
Accounting Policies (continued)
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 September 30,
2013, and December 31, 2012 and 2011.
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 $15,427 for the nine months ended September 30, 2013, and $3,760 and $0 for the years ended December 31, 2012 and 2011,
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 September 30, 2013, assets under capital leases and the
related accumulated depreciation amounted to $16,870 and $2,952, respectively. At December 31, 2012, assets under capital leases
and the related accumulated depreciation amounted to $16,870 and $422, respectively. The Company had no assets under capital lease
at December 31, 2011.
Geospatial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited), and December
31, 2012 and 2011 (audited)
Note 1 – Summary of Significant
Accounting Policies (continued)
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
|
|
·
|
Collectibility 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.
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.
Geospatial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited), and December
31, 2012 and 2011 (audited)
Note 1 – Summary of Significant
Accounting Policies (continued)
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 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 2012. Due to financial constraints, the Company has not filed its federal and state
tax returns for 2009 through 2013.
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 has recorded a liability for the estimated number
of shares to be issued at the fair value of the stock to be issued. This liability is included on the Consolidated Balance Sheet
under the heading “accrued registration payment arrangement,” and amounted to $997,599 at September 30, 2013, and $1,066,977,
and $1,070,127 at December 31, 2012 and 2011, 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”. There were no such gains or losses during the nine months ended September 30, 2013, or the years ended
December 31, 2012 and 2011.
Segment Reporting
The Company operates as one segment. Accordingly,
no segment reporting is presented.
Geospatial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited), and December
31, 2012 and 2011 (audited)
Note 1 – Summary of Significant
Accounting Policies (continued)
Discontinued Operations
In March, 2011, USCC ceased
operations, and the Company sold substantially all of the assets of USCC. All results of operations for USCC are reported on the
Statement of Operations as discontinued operations. No gain or loss on disposal of the assets of USCC was recorded because the
assets were written down to their realizable value during 2010.
Recent Accounting Pronouncements
In July, 2012, FASB issued
Accounting Standards Update No. 2012-02,
Intangibles-Goodwill and Other (Topic 350):
Testing Indefinite-Lived
Intangible Assets for Impairment
(“ASU 2012-02”). ASU 2012-02 amends Topic 350 by establishing an optional two-step
analysis for impairment testing of indefinite-lived intangibles other than goodwill. This update allows an entity the option to
first assess qualitative factors to determine whether it is necessary to perform the quantitative impairment test. Under that option,
an entity no longer would be required to calculate the fair value of the intangible asset unless the entity determines, based on
that qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. ASU 2012-02
is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012 and early adoption
is permitted. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.
In July, 2013, the FASB
issued Accounting Standards Update No. 2013-11,
Liabilities (Topic 405): Income Taxes (Topic 740): Presentation of an Unrecognized
Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists
(“ASU
2013-11”). ASU 2013-11 provides guidance on the financial statement presentation of unrecognized tax benefits when a
net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. To the extent a net operating loss
carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law
of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position
or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use,
the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a
liability and should not be combined with deferred tax assets. The assessment of whether a deferred tax asset is available
is based on the unrecognized tax benefit and deferred tax asset that exist at the reporting date and should be made presuming disallowance
of the tax position at the reporting date. ASU 2013-11 is effective for annual and interim periods for fiscal years beginning after December
15, 2013. The Company is currently evaluating the potential impact of ASU 2013-11 on its consolidated financial statements.
Geospatial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited), and December
31, 2012 and 2011 (audited)
Note 2 – Capital Stock
The Company has authorized
100,000,000 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
5,000,000 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 December 11, 2009, the Company filed a Certificate
of Designations, Powers, Preferences and Rights of the Series A Preferred Stock of Geospatial Holdings, Inc. (the “Certificate
of Designations”) with the State of Nevada. The Certificate of Designations designated 1,575,000 shares of Series A Convertible
Preferred Stock (“Series A Stock”) for issuance by the Company. Each share of Series A Stock was convertible to shares
of common stock in accordance with the terms of the Certificate of Designations. Each holder of Series A Stock was entitled to
the number of votes equal to the number of shares of common stock into which the Series A Stock may be converted. The holders of
Series A Stock were entitled to a liquidation preference equal to the original issue price, and a dividend preference over the
holders of common stock. All shares of Series A were automatically converted to common stock on June 7, 2010. On August 20, 2013,
the Company filed a Certificate of Withdrawal of Certificate of Designation to withdraw the Series A Stock.
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.
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.
Geospatial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited), and December
31, 2012 and 2011 (audited)
Note 2 – Capital Stock (continued)
The Company entered into
a series of Subscription and Purchase Agreements with certain investors dated December 14, 2009 (the “December 2009 Subscription
Agreement”) in connection with the sale of 1,500,000 shares of the Company’s Series A Stock (the “December 2009 shares”).
The Series A Stock subsequently converted to 1.25 shares of the Company’s common stock. Pursuant to the December 2009 Subscription
Agreement, the Company agreed to register the December 2009 shares under the Securities Act by March 1, 2010. The Company failed
to register the December 2009 shares by March 1, 2010, and consequently each investor that invested pursuant to the December 2009
Subscription Agreement is entitled to receive an additional allocation of 2% of its portion of the December 2009 Shares for each
30-day period that elapses after March 1, 2010, subject to certain restrictions.
The Company entered into
a series of Subscription and Purchase Agreements with certain investors dated March 19, 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 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 dated October 15, 2010 (the “October 2010 Subscription Agreement”) in
connection with the issuance of $1,155,000 of 10% Senior Secured Redeemable Notes (the “Senior Notes”). Pursuant to the
October 2010 Subscription Agreement, the Company agreed to register the common stock into which the Senior Notes are convertible
(the “Conversion Shares”) by April 15, 2011. The Company failed to register the Conversion Stock by April 15, 2011, and
consequently each investor that invested pursuant to the October 2010 Subscription Agreement is entitled to receive an additional
allocation of 2% of its portion of the Conversion Shares for each 30-day period that elapses after April 15, 2011, subject to certain
restrictions.
Geospatial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited), and December
31, 2012 and 2011 (audited)
Note 2 – Capital Stock (continued)
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 December 2009 Subscription Agreement, the March 2010 Subscription Agreement, the April 2010 Subscription Agreement, and the
October 2010 Subscription Agreement (collectively, the “Subscription Agreements”). There is no limitation to the maximum
potential consideration to be paid for failure to register shares pursuant to the Subscription Agreements. The liability for accrued
registration payment arrangements was $997,599, $1,066,977, and $1,070,127 at September 30, 2013, December 31, 2012, and December
31, 2011, respectively.
Note 3 – Accrued Expenses
Accrued expenses consisted
of the following at September 30, 2013 and December 31, 2012 and 2011:
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
License fees
|
|
$
|
3,000,000
|
|
|
$
|
3,000,000
|
|
|
$
|
3,000,000
|
|
Payroll and taxes
|
|
|
602,187
|
|
|
|
1,419,295
|
|
|
|
1,564,160
|
|
Damage claims
|
|
|
12,645
|
|
|
|
46,804
|
|
|
|
61,711
|
|
Accounting
|
|
|
36,910
|
|
|
|
112,101
|
|
|
|
112,101
|
|
Insurance
|
|
|
63,758
|
|
|
|
24,131
|
|
|
|
28,071
|
|
Subcontractors
|
|
|
—
|
|
|
|
—
|
|
|
|
20,000
|
|
Other
|
|
|
41,686
|
|
|
|
234,265
|
|
|
|
402,654
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
3,757,186
|
|
|
$
|
4,836,596
|
|
|
$
|
5,188,697
|
|
Geospatial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited), and December
31, 2012 and 2011 (audited)
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 Company incurred $58,500
of lease expense for this building in the nine months ended September 30, 2013, and $78,000 of lease expense in each of the years
ended December 31, 2012 and 2011. The lease is cancellable by either party upon 30 days’ notice.
At December 31, 2010, the
Company owed Mr. Smith $149,911 on a note payable (the “Smith Note”). Interest on the Smith Note at 8% amounted to $8,336
for the nine months ended September 30, 2013, and $13,514, and $12,443 for the years ended December 31, 2012 and 2011, respectively.
The balance due on the Smith Note was $175,867 and $162,354 at December 31, 2012 and 2011, respectively.
At December 31, 2010, the
Company owed Mr. Smith $33,073 on a convertible note payable (the “Convertible Note”). The Convertible Note was convertible
to the Company’s common stock at a price of $1.00 per share. Interest on the Convertible Note at 8% amounted to $1,839 for the
nine months ended September 30, 2013, and $2,981, and $2,745 for the years ended December 31, 2012 and 2011, respectively. The
balance due on the note was $38,799 and $35,818 at December 31, 2012 and 2011, respectively.
At December 31, 2010, the
Company owed Mr. Smith $140,803 on a demand note payable (the “Demand Note”). Interest on the Demand Note at 8% amounted
to $7,830 for the nine months ended September 30, 2013, and $12,692, and $11,687 for the years ended December 31, 2012 and 2011,
respectively. The balance due on the note was $165,182 and $152,489 at December 31, 2012 and 2011, respectively.
Geospatial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited), and December
31, 2012 and 2011 (audited)
Note 4 – Related-Party Transactions
(continued)
On November 9, 2012, the
Company and Mr. Smith entered into a Lease Agreement, pursuant to which the Company leases a 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 $338 for the nine months ended September 30, 2013, and $41 for the year ended December 31, 2012. The lease
is recorded as a capital lease. At September 30, 2013, gross assets recorded under the lease and associated accumulated depreciation
were $16,870 and $2,952, respectively. Future minimum payments under the capital lease are as follows as of September 30, 2013:
Balance of 2013
|
|
$
|
907
|
|
Year ending December 31, 2014
|
|
|
3,628
|
|
Year ending December 31, 2015
|
|
|
3,628
|
|
Year ending December 31, 2016
|
|
|
3,628
|
|
Year ending December 31, 2017
|
|
|
3,326
|
|
Thereafter
|
|
|
—
|
|
Total minimum payments
|
|
|
15,117
|
|
Less: minimum interest payments
|
|
|
(893
|
)
|
Minimum principal payments
|
|
$
|
14,224
|
|
On August 20, 2013, the
Company and Mr. Smith entered into a Conversion Agreement (the “Smith Conversion Agreement”), pursuant to which liabilities
totaling $1,253,644 were converted to 17,909,203 shares of the Company’s common stock and warrants to purchase 1,790,920 shares
of the Company’s common stock at an exercise price of $0.25 per share. The liabilities to Mr. Smith included $573,635 of accrued
salary, $282,156 of unreimbursed business expenses and unpaid rent for the Company’s offices, $184,204 for unpaid principal and
accrued interest on the Smith Note, $40,638 for unpaid principal and accrued interest on the Convertible Note, and $173,011 for
unpaid principal and accrued interest on the Demand Note. As required by the Smith Conversion Agreement, the Company paid taxes
owed by Mr. Smith as a result of the conversion in the amount of $57,887. In addition to the liabilities to Mr. Smith converted
pursuant to the Smith Conversion Agreement, the Company agreed to use reasonable commercial efforts to pay additional accrued salary
of $97,500, and additional unreimbursed business expenses and unpaid rent of $21,366.
On August 20, 2013, the
Company and Thomas R. Oxenreiter, the Company’s Chief Financial Officer, entered into a Conversion Agreement (the “Oxenreiter
Conversion Agreement”), pursuant to which accrued salary of $223,959 and unreimbursed business expenses of $12,062 were converted
to 3,371,719 shares of the Company’s common stock and warrants to purchase 337,172 shares of the Company’s common stock at an exercise
price of $0.25 per share. As required by the Oxenreiter Conversion Agreement, the Company paid taxes owed by Mr. Oxenreiter as
a result of the conversion in the amount of $18,925. In addition to the liabilities to Mr. Oxenreiter converted pursuant to the
Conversion Agreement, the Company agreed to use reasonable commercial efforts to pay additional accrued salary of $31,250, and
additional unreimbursed business expenses of $1,759.
Geospatial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited), and December
31, 2012 and 2011 (audited)
Note 4 – Related-Party Transactions
(continued)
In 2010, the Company entered
into a Strategic Advisory Agreement (the “Strategic Advisory Agreement”) with Pace Global Energy Services, LLC (“Pace”)
and Ridge Global, LLC (“Ridge”) to provide the Company with certain strategic advisory and other support services. Pursuant
to the Strategic Advisory Agreement, the Company issued Pace and Ridge warrants to purchase 1,600,000 and 2,400,000 shares, respectively,
of the Company’s common stock. The warrants expired on March 2, 2012. Further, pursuant to the Strategic Advisory Agreement, the
Company agreed to expand the number of members of the Company’s board of directors from three to five, and to appoint Timothy F.
Sutherland, chairman and chief executive officer of Pace, and Thomas J. Ridge, president and chief executive officer of Ridge,
to fill the newly-created vacancies. The Company incurred fees pursuant to the Strategic Advisory Agreement of $480,000 during
the year ended December 31, 2011. The fees pursuant to the Strategic Advisory Agreement amounted to $560,000 at December 31, 2012
and 2011.
On October 19, 2010, the
Company, Pace, and Ridge entered into a Fee Deferral Agreement and Promissory Note (the “Promissory Note”), pursuant
to which the company memorialized $238,030 of unpaid accounts payable to the Promissory Note bearing interest at 10% per annum.
Interest on the Promissory Note totaled $4,864 for the nine months ended September 30, 2013, and $28,349 and $25,575 for the years
ended December 31, 2012 and 2011, respectively. The balance due on the Promissory Note was $296,781 and $268,432 at December 31,
2012 and 2011, respectively.
Mr. Sutherland resigned
his position on the Company’s Board of Directors on February 6, 2012, and Mr. Ridge resigned his position on the Company’s Board
of Directors on May 31, 2012.
On February 28, 2013, the
Company, Pace, and Ridge, Mr. Sutherland, and Mr. Ridge entered into a Mutual Termination and Release Agreement, which terminated
all prior agreements and released all parties from all obligations related to all prior agreements, including the Promissory Note.
As a result of the Mutual Termination and Release Agreement, the Company recorded a gain on extinguishment of debt of $861,645.
Geospatial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited), and December
31, 2012 and 2011 (audited)
Note 5 – Senior Convertible Redeemable
Notes
On October 15, 2010, the
Company entered into a series of Senior Notes with certain investors. The initial principal amount of the Senior Notes totaled
$1,155,000. Interest accrues on the Senior Notes at 10% per annum, payable quarterly by increasing the principal amounts of the
Senior Notes. Upon certain instances of default, the interest rate may increase to 12% per annum. The principal and unpaid interest
on the Senior Notes was due after 15 months, and was extendable for three additional six-month periods. The principal and unpaid
interest on the Senior Notes is convertible at the option of the holders of the Senior Notes into the Company’s common stock at
$0.50 per share.
On July 31, 2013, the Company
entered into a Note Conversion Agreement with a holder of a Senior Note pursuant to which the Senior Note’s outstanding principal
and interest of $132,342 were converted to 189,060 shares of the Company’s Series B Stock and warrants to purchase 18,906 shares
of the Company’s Series B Stock.
The balance due on the
Senior Notes amounted to $1,419,716 at September 30, 2013, and $1,414,331 and $1,233,624 at December 31, 2012 and 2011, respectively.
Note 6 – Notes Payable
Current notes payable consisted
of the following at September 30, 2013 and December 31, 2012 and 2011:
|
|
September 30, 2013
|
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
Note payable to an individual due February 1, 2013, bearing interest at 10% plus shares of Series B Stock
|
|
$
|
—
|
|
|
$
|
180,313
|
|
|
$
|
—
|
|
Promissory note due December 5, 2011, secured by equipment, bearing interest at 10% plus warrants to purchase common stock
|
|
|
—
|
|
|
|
—
|
|
|
|
301,583
|
|
Current portion of long-term notes payable
|
|
$
|
142,158
|
|
|
|
152,564
|
|
|
|
40,569
|
|
Current notes payable
|
|
$
|
142,158
|
|
|
$
|
332,877
|
|
|
$
|
342,152
|
|
Geospatial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited), and December
31, 2012 and 2011 (audited)
Note 6 – Notes Payable (continued)
Long-term notes payable
consisted of the following at September 30, 2013 and December 31, 2012 and 2011:
|
|
September 30, 2013
|
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
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%
|
|
$
|
371,476
|
|
|
$
|
462,526
|
|
|
$
|
40,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable under settlement agreements with vendors, payable monthly with terms of up to 60 months, with interest rates ranging from 0% to 32%
|
|
|
79,176
|
|
|
|
73,776
|
|
|
|
—
|
|
Total long-term notes payable
|
|
|
450,652
|
|
|
|
536,302
|
|
|
|
40,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: current portion
|
|
|
(142,158
|
)
|
|
|
(152,564
|
)
|
|
|
(40,569
|
)
|
Long-term notes payable, less current portion
|
|
$
|
308,494
|
|
|
$
|
383,738
|
|
|
$
|
—
|
|
Future maturities of long-term
debt are as follows as of September 30, 2013:
Balance of 2013
|
|
|
$
|
38,497
|
|
Year ending December 31, 2014
|
|
|
|
136,280
|
|
Year ending December 31, 2015
|
|
|
|
236,134
|
|
Year ending December 31, 2016
|
|
|
|
14,000
|
|
Year ending December 31, 2017
|
|
|
|
14,000
|
|
Thereafter
|
|
|
|
11,741
|
|
|
|
|
$
|
450,652
|
|
Geospatial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited), and December
31, 2012 and 2011 (audited)
Note 7 – Commitments and Contingencies
Reduct License Agreement
The Company, Reduct N.V.,
a Belgian company (“Reduct”), and Delta Networks, S.A., a Luxembourg company (“Delta”), the owner of substantially
all the stock of Reduct, were parties to an Amended and Restated Exclusive License and Distribution Agreement dated December 15,
2009 (the “License Agreement”), pursuant to which Reduct granted the Company an exclusive license to promote, market,
use, and distribute certain Reduct products and technology. On December 16, 2010, Reduct issued the Company a notice of termination
under the License Agreement, and terminated the License Agreement effective January 17, 2011. At the time of termination, the Company
owed Reduct $3.0 million under the License Agreement, and Reduct claimed the Company was liable for accelerated payments of future
license fees under the License Agreement.
On May 10, 2013, the parties
to the License Agreement entered into a Mutual Release and Settlement Agreement (the “Reduct Settlement”), pursuant to
which the parties agreed to terminate all obligations arising from the License Agreement and all prior agreements in consideration
for (i) the Company issuing to Delta 9,000,000 shares of common stock; (ii) the Company issuing Delta warrants to purchase 3,000,000
shares of common stock exercisable at $0.50 per share through December 31, 2015; and (iii) the Company placing orders for Reduct
equipment totaling $300,000 over nine months following the close of the Company’s Series B Stock financing. The Company must deliver
additional shares of common stock to Delta in the event that the Company sells its stock for less than $0.07 per share. This anti-dilution
provision expires if Delta’s shares become registered with the U.S. Securities and Exchange Commission and the Company raises at
least $5.0 million in cash from the sale of its capital stock, including the Series B Stock financing.
In September 2013, the
Company placed its first order for $100,000 of Reduct equipment, and paid Reduct a deposit of $50,000. At September 30, 2013, the
Company had not delivered the shares of common stock or warrants to Delta.
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.
Geospatial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited), and December
31, 2012 and 2011 (audited)
Note 7 – Commitments and Contingencies
(continued)
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.
The Company and its officers
have been sued in the Court of Common Pleas of Butler County, Pennsylvania by a group of investors alleging misrepresentation regarding
the plaintiffs’ investments in the Company. The Company denies the allegations and believes that it will prevail should the case
go to trial. The Company recorded expense in 2011 to the extent of its insurance deductible of $250,000 for the costs of its legal
defense.
Note 8 – Income Taxes
The Company’s provision
for (benefit from) income taxes is summarized below for the nine months ended September 30, 2013, and for the years ended December
31, 2012 and 2011:
|
|
Nine Months Ended September 30, 2013
|
|
|
Year Ended December 31, 2012
|
|
|
Year Ended December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(103,336
|
)
|
|
|
(455,570
|
)
|
|
|
(766,597
|
)
|
State
|
|
|
(32,815
|
)
|
|
|
(144,626
|
)
|
|
|
(243,364
|
)
|
|
|
|
(136,181
|
)
|
|
|
(600,196
|
)
|
|
|
(1,009,961
|
)
|
Total income taxes
|
|
|
(136,181
|
)
|
|
|
(600,196
|
)
|
|
|
(1,009,961
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: valuation allowance
|
|
|
136,181
|
|
|
|
600,196
|
|
|
|
1,009,961
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Geospatial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited), and December
31, 2012 and 2011 (audited)
Note 8 – Income Taxes (continued)
The reconciliation of the
federal statutory income tax rate to the effective income tax rate is as follows for the nine months ended September 30, 2013 and
for the years ended December 31, 2012 and 2011:
|
|
Nine Months Ended September 30, 2013
|
|
|
Year Ended December 31, 2012
|
|
|
Year Ended December 31, 2011
|
|
Federal statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State income taxes (net of federal benefit)
|
|
|
6.5
|
|
|
|
6.5
|
|
|
|
6.5
|
|
Valuation allowance
|
|
|
(41.5
|
)
|
|
|
(41.5
|
)
|
|
|
(41.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Significant components
of the Company’s deferred tax assets and liabilities are summarized below as of September 30, 2013, and December 31, 2012 and 2011.
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, 2013
|
|
|
December 31, 2012
|
|
|
December 31, 2011
|
|
Start-up costs
|
|
$
|
59,616
|
|
|
$
|
66,991
|
|
|
$
|
76,825
|
|
License fees
|
|
|
337,232
|
|
|
|
356,597
|
|
|
|
403,417
|
|
Depreciation
|
|
|
(532
|
)
|
|
|
20,903
|
|
|
|
59,324
|
|
Accrued expenses
|
|
|
1,407,480
|
|
|
|
1,758,367
|
|
|
|
1,805,918
|
|
Uncompleted contracts
|
|
|
—
|
|
|
|
—
|
|
|
|
(11,896
|
)
|
Net operating loss carryforward
|
|
|
12,020,786
|
|
|
|
11,476,542
|
|
|
|
10,754,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
|
13,824,582
|
|
|
|
13,688,401
|
|
|
|
13,088,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: valuation allowance
|
|
|
(13,824,582
|
)
|
|
|
(13,688,401
|
)
|
|
|
(13,088,204
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred income taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
At September 30, 2013,
the Company had federal and state net operating loss carryforwards of approximately $28,966,000. 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 Consolidated Financial Statements
September 30, 2013 (unaudited), and December
31, 2012 and 2011 (audited)
Note 9 – Net Loss Per Share of
Common Stock
Basic earnings 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 earnings per share reflect per share amounts that would have resulted if dilutive potential common stock
had been converted to common stock. The following reconciles amounts reported in the financial statements:
|
|
Year Ended December 31, 2012
|
|
|
Year Ended December 31, 2011
|
|
|
Nine Months Ended September 30, 2013
|
|
|
Nine Months Ended September 30, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,391,502
|
)
|
|
$
|
(2,257,311
|
)
|
|
$
|
(333,438
|
)
|
|
$
|
(933,917
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Divided by:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
44,908,967
|
|
|
|
43,788,870
|
|
|
|
49,368,040
|
|
|
|
44,549,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and fully-diluted net loss per share
|
|
$
|
(0.03
|
)
|
|
$
|
(0.05
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.02
|
)
|
The effects of the potential
conversion of the Smith Convertible Note to 38,798, and 35,817 shares of common stock were not included in the computation of diluted
earnings per share for the year ended December 31, 2012 and 2011, respectively, because the effects of their conversion would be
antidilutive. The effect of the potential conversion of the Smith Convertible Note to 38,027 shares of common stock was not included
in the computation of diluted earnings per share for the nine months ended September 30, 2012 because the effect of its conversion
would be antidilutive.
The effects of options
to purchase 9,050,000 and 9,650,000 shares of common stock, and warrants to purchase 5,991,272 and 12,416,272 shares of common
stock were not included in the computation of diluted earnings per share for the years ended December 31, 2012 and 2011, respectively,
because the effects of their conversion would be antidilutive. The effect of options to purchase 9,050,000 shares of common stock
were not included in the computation of diluted earnings per share for the nine months ended September 30, 2013 and 2012 because
the effect of their conversion would be antidilutive. The effects of warrants to purchase 8,219,362 and 5,991,272 shares of common
stock were not included in the computation of diluted earnings per share for the nine months ended September 30, 2013 and 2012,
respectively, because the effect of their conversion would be antidilutive.
Geospatial Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2013 (unaudited), and December
31, 2012 and 2011 (audited)
Note 10 – Stock-Based Payments
On September 23, 2013,
the Company adopted the 2013 Equity Incentive Plan (the “2013 Plan”), pursuant to which up to 25,000,000 shares of the
Company’s common stock shall be available for grants of awards, including incentive stock options, non-qualified stock options,
stock appreciation rights, restricted awards, performance share awards, or performance compensation awards to eligible employees,
consultants, and directors, provided that no more than 15,000,000 shares of common stock may be granted as incentive stock options.
The Board of Directors has reserved 25,000,000 shares of the Company’s common stock for issuance under the 2013 Plan. The Company
did not grant any awards pursuant to the 2013 Plan during the nine months ended September 30, 2013.
In 2007, the Company adopted
the 2007 Stock Option Plan (the “2007 Plan”), pursuant to which the Compensation Committee of the Board of Directors
(the “Committee”) may award grants of options to purchase up to 15,000,000 shares of the Company’s common stock to eligible
employees, directors, and consultants, subject to exercise prices and vesting requirements determined by the Committee. On September
23, 2013, the Company reduced the number of shares of the Company’s common stock that may be subject to awards under the 2007 Plan
to 9,050,000. The Board of Directors has reserved 9,050,000 shares of the Company’s common stock for issuance under the 2007 Plan.
The Company granted options to purchase 220,000 shares of the Company’s common stock during the year ended December 31, 2011. The
Company did not grant any options to purchase shares of the Company’s common stock pursuant to the 2007 Plan during the year ended
December 31, 2012 and the nine months ended September 30, 2013.
Using the Black-Scholes
option pricing model, management has determined that the stock options granted in 2011 had no value. Accordingly, no compensation
cost or other expense was recorded for the stock options. The current value of a share of the Company’s common stock used in the
Black-Scholes option pricing model was determined by an independent valuation. The value per share as determined by the valuation
was $0.0089 per share as of December 31, 2011.
The assumptions used and
the weighted average calculated value of the stock options are as follows at December 31, 2011:
On December 5, 2011, the
Company granted warrants to purchase 3,000,000 shares of the Company’s common stock at $0.10 per share to a lender. The warrants
expire on December 5, 2016.
On December 1, 2012, the
Company granted warrants to purchase 225,000 shares of the Company’s common stock at $0.15 per share to a contractor. The warrants
expire on November 30, 2015.
On August 20, 2013, the
Company granted warrants to purchase 1,790,920 and 337,172 shares of its common stock at $0.25 per share to its chief executive
officer and its chief financial officer, respectively, in connection with debt conversion agreements. The warrants expire on August
20, 2018.
On September 30, 2013,
the Company granted warrants to purchase 149,998 shares of the Company’s common stock at $0.25 per share to certain investors in
connection with the sale of common stock. The warrants expire on September 30, 2018.
Using the Black-Scholes
option pricing model, management has determined that the warrants to purchase the Company’s Common Stock granted to non-employees
in 2012 and 2011 have no value. Accordingly, no expense was recorded upon the grants of the warrants to purchase the Company’s
common stock. The current value of a share of the Company’s common stock used in the Black-Scholes option pricing model was determined
by an independent appraisal.
The assumptions used and
the weighted average calculated value of the stock purchase rights are as follows for the year ended December 31:
On August 20, 2013, the
Company granted warrants to purchase 451,738 shares of its Series B Stock at $2.50 per share to certain investors in connection
with the sale of Series B Stock. The warrants expire on August 20, 2018.
During 2012, the Company
issued 2,000,000 shares of the Company’s common stock as payment for services. The Company recorded expense of $140,000, the fair
value of the services received.
On October 2, 2013, the
Company filed a Certificate of Amendment with the State of Nevada to amend the Company’s Articles of Incorporation to change the
Company’s name to Geospatial Corporation, to increase the aggregate number of authorized shares of common stock to 350,000,000
shares, and to increase the aggregate number of authorized shares of preferred stock to 25,000,000. The Company’s stockholders,
acting by majority written consent in lieu of a meeting, voted to approve the amendments to the Company’s Articles of Incorporation
on September 23, 2013.
On October 18, 2013, the
Company granted stock appreciation rights on 15,900,000 shares of the Company’s common stock to eligible employees and consultants
pursuant to the 2013 Plan, with an exercise price of $0.07 per share. The rights expire on October 18, 2023.
On October 22, 2013, the
Company delivered to Delta 9,000,000 shares of common stock and warrants to purchase 3,000,000 shares of common stock at $0.50
per share through December 31, 2015 pursuant to the Reduct Settlement.
From November 27, 2013
through March 20, 2014, the Company sold 5,542,860 shares of its common stock at $0.35 per share for aggregate consideration of
$1,940,116.