GSPH Geospatial Corporation (CE)

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

Note 1 – Summary of Significant Accounting Policies

This summary of significant accounting policies of Geospatial Corporation, a Nevada corporation, and subsidiaries (the “Company”) is presented to assist in the understanding of the Company’s financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for the integrity and objectivity of the financial statements. These accounting policies conform to accounting principles generally accepted in the United States of America, and have been consistently applied in the preparation of the financial statements.

Nature of Operations

The Company utilizes innovative technologies to acquire and manage data related to underground assets. The Company’s services include pipeline data acquisition and professional data management. The Company is located in Sarver, Pennsylvania, and provides services throughout the United States.

Consolidation

The Company’s financial statements include its wholly-owned subsidiaries Geospatial Mapping Systems, Inc., and Utility Services and Consulting Corporation, which ceased operations in 2011. All material intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates.

Estimates and assumptions which, in the opinion of management, are significant to the underlying amounts included in the financial statements and for which it would be reasonably possible that future events or information could change those estimates include:

 Estimated useful lives of property and equipment; 

 Estimated costs to complete fixed-price contracts; 

 Realization of deferred income tax assets; 

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

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

Going Concern

Since its inception, the Company has incurred net losses. In addition, the Company’s operations and capital requirements have been funded since its inception by sales of its common and preferred stock and advances from its chief executive officer. At December 31, 2018, the Company’s current liabilities exceeded its current assets by $3,437,617, and total liabilities exceeded total assets by $3,435,325. 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.

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Geospatial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

Cash and Cash Equivalents

The Company considers all highly liquid debt investments with a maturity of three months or less when purchased to be cash equivalents.

Accounts Receivable

Accounts receivable are presented in the balance sheet net of estimated uncollectible amounts. The Company records an allowance for estimated uncollectible accounts in an amount approximating anticipated losses. Individual uncollectible accounts are written off against the allowance when collection of the individual accounts appears doubtful. The Company had no allowance for doubtful accounts at December 31, 2018 and 2017.

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 $8,328 and $34,784 for the years ended December 31, 2018 and 2017, 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. The capital lease expired during 2017.

Revenue Recognition

The Company records revenue in accordance with ASC 606, Revenue from Contracts With Customers (“ASC 606”). The Company applies the following methodology to recognize revenue:

i. Identify the contract with a customer. 

ii. Identify the performance obligations in the contract. 

iii. Determine the transaction price. 

iv. Allocate the transaction price to the performance obligations in the contract. 

v. Recognize revenue when the Company satisfies a performance obligation. 

Advance customer payments are recorded as deferred revenue until such time as the related performance obligations are met.

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. The deferred debt issuance costs were fully amortized at December 31, 2018 and 2017.

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Geospatial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

Convertible Securities with Beneficial Conversion Features

During 2015, the Company issued a Secured Promissory Note of $1,000,000. The Company took additional loans of $350,000 against the Secured Promissory Note in 2016. The Secured Promissory Note is convertible at the lender’s option to the Company’s common stock at a price per share of 75% of the average bid price of the Company’s common stock for the ten trading days preceding the conversion. The Company recorded the Secured Promissory Note in accordance with FASB ASC 470-20, Debt with Conversion and Other Options . The Company determined that the discount to market price on the conversion feature was a beneficial conversion feature, and that the intrinsic value of the conversion feature of loans taken and interest accrued during the years ended December 31, 2018 and 2017 was $52,269 and $50,152, respectively. These amounts were recognized as additional paid-in capital and as a discount on the Secured Promissory Note. Amortization of the discount on the Secured Promissory Note totaled $52,269 and $65,969 during the years ended December 31, 2018 and 2017, respectively.

Accounting for Derivatives

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

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

Income Taxes

The Company accounts for income taxes in accordance with FASB ASC 740, Income Taxes, which requires the Company to provide a net deferred tax asset or liability equal to the expected future tax benefit or expense of temporary reporting differences between book and tax accounting methods and any available operating loss or tax credit carryovers.

The Company currently has a deferred tax asset resulting from differences in accounting methods for financial reporting and income tax reporting purposes. This deferred tax asset is completely offset by a valuation allowance due to the uncertainty of realization.

The Company is subject to taxation in various jurisdictions. The Company continues to remain subject to examination by U.S. federal authorities and various state authorities for the years 2009 through 2017. Due to financial constraints, the Company has not filed its federal tax returns for 2009 through 2017.

Gains on Extinguishment of Debt

Due to significant cash flow problems, the Company has negotiated concessions on the amounts of certain liabilities and extensions of payment terms. The Company accounts for such concessions in accordance with FASB ASC 470-60, Troubled Debt Restructurings by Debtors , and FASB ASC 405-20, Extinguishment of Liabilities , and recognizes gains the extent that the carrying value of the liability exceeds the fair value of the restructured payment plan. Such gains are included as “Gains on extinguishment of debt” in “other income and expenses” on the Company’s Consolidated Statement of Operations. In addition, the Company has accounts payable that has aged or is expected to age beyond the statute of limitations. The Company is amortizing those liabilities over the remaining term of the statute of  

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Geospatial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

limitations. Such amortization amounted to $47,852 during the year ended December 31, 2017. There was no such amortization during the year ended December 31, 2018.

Stock-Based Payments

The Company accounts for its stock-based compensation in accordance with FASB ASC 718, Stock Compensation . The Company records compensation expense for employee stock options at the fair value of the stock options at the grant date, amortized over the vesting period. The Company records expense for stock options, warrants, and similar grants issued to non-employees at their fair value at the grant date, or the fair value of the consideration received, whichever is more readily available.

Registration Payment Arrangements

The Company is contractually obligated to issue shares of its common stock to certain investors for failure to register shares of its common stock under the Securities Act of 1933, as amended (the “Securities Act”). The Company records such obligations in accordance with FASB ASC 825-20, Registration Payment Arrangements . The Company has recorded a liability for the estimated number of shares to be issued at the fair value of the stock to be issued. The Company measures fair value by the price of its common stock at its most recent sale. The Company reviews its estimate of the number of shares to be issued and the fair value of the stock to be issued quarterly. The liability is included on the Consolidated Balance Sheet under the heading “accrued registration payment arrangement,” and amounted to $76,337 at December 31, 2018 and 2017. Gains or losses resulting from changes in the carrying amount of the liability are included in the Consolidated Statement of Operations in other income and expense under the heading “registration payment arrangements” which amounted to gains of $432,578 during the year ended December 31, 2017. There was no such gain or loss during the year ended December 31, 2018. 

Segment Reporting

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

Recent Accounting Pronouncements

The Company has reviewed accounting pronouncements and interpretations thereof that have effective dates during the periods reported and in future periods. The Company believes that the following impending standards may have an impact on its future filings. The applicability of any standard will be evaluated by the Company and is still subject to review by the Company. 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), a new revenue recognition standard that supersedes the existing standard and eliminates all industry-specific standards. The largely principles-based standard provides a comprehensive framework that can be applied to all contracts with customers, regardless of industry-specific or transaction-specific fact patterns. The core principle is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Entities should apply the five-step model outlined in the standard to achieve that core principal. The Company adopted ASU 2014-09 on January 1, 2017. The adoption of ASU 2014-09 did not have a material impact on the Company’s consolidated financial statements. 

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40), which provides authoritative guidance regarding management’s evaluation of conditions or events that raise substantial doubts about an entity’s ability to continue as a going concern, management’s plans to mitigate the effect of the conditions or events that raise such doubts, and disclosure requirements for entities in which there exists a substantial doubt about the entity’s ability to continue as a going concern. ASU 2014-15 was implemented by the Company on January 1, 2017. The implementation of ASU 2014-15 did not have a material effect on its consolidated financial statements.

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Geospatial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

In January 2015, the FASB issued ASU 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items, which eliminates the concept of an extraordinary item from GAAP. As a result, an entity is no longer required to separately classify, present, or disclose extraordinary events and transactions; however, the presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained. ASU 2015-01 was adopted by the Company in 2017. The implementation of ASU 2015-01 did not have a material effect on the Company’s financial position or results of operations.

In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented as a direct deduction from the associated debt liability on the balance sheet. The Company adopted ASU 2015-03 in 2017. The implementation of ASU 2015-03 did not have a material effect on its consolidated financial statements.

In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. ASU 2015-17 eliminates the current requirement for an entity to separate deferred income tax liabilities and assets into current and non-current amounts in a classified statement of financial position. To simplify the presentation of deferred income taxes, ASU 2015-17 requires that deferred tax liabilities and assets be classified as non-current in a classified statement of financial position. The Company adopted ASU 2015-17 on January 1, 2018. The implementation of ASU 2015-17 did not have a material effect on the Company’s consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ASU 2016-02 substantially retains the classification for leasing transactions as finance or operating leases. The new guidance establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms greater than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. For finance leases the lessee would recognize interest expense and amortization of the right-of-use asset and for operating leases the lessee would recognize straight-line total lease expense. ASU 2016-02 will be effective for the Company on January 1, 2019. The Company does not expect that the implementation of ASU 2016-02 will have a material effect on the Company’s consolidated financial statements.

Note 2 – Capital Stock

The Company has authorized 750,000,000 shares of common stock with a par value of $0.001 per share. Each outstanding share of common stock entitles the holder to one vote on all matters. Stockholders do not have preemptive rights to purchase shares in any future issuance of common stock. Upon the Company’s liquidation, common stockholders are entitled to a pro-rata share of assets, if any, after payment of creditors and preferred stockholders.

The Company has authorized 25,000,000 shares of preferred stock with a par value of $0.001 per share. All powers and rights of the shares of preferred stock are determined by the Company’s Board of Directors at issuance.

On August 20, 2013, the Company filed a Certificate of Designation to designate 5,000,000 shares of Series B Convertible Preferred Stock (“Series B Stock”) for issuance by the Company. Each share of Series B Stock is convertible to ten shares of common stock at the option of the holder, or automatically upon the occurrence of certain events. The holders of Series B Stock have the same voting rights and dividend participation rights as common stockholders in proportion to the number of shares of common stock the holders of Series B Stock would hold if those shares were converted to common stock. The holders of Series B Stock are entitled to a liquidation preference of 150% of the original issue price, after payment of which they participate in liquidation with the holders of common stock.

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Geospatial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

On March 16, 2016, the Company filed a Certificate of Designation to designate 10,000,000 shares of Series C Convertible Preferred Stock (“Series C Stock”) for issuance by the Company. Each share of Series C Stock is convertible to twenty shares of common stock at the option of the holder, or automatically upon the occurrence of certain events. The holders of Series C Stock have voting rights equal to five times the number of whole shares of common stock into which such shares of common stock the holders of Series C Stock would hold if those shares were converted to common stock. The holders of Series C Stock have the same dividend participation rights as common stockholders in proportion to the number of shares of common stock the holders of Series C Stock would have if those shares were converted to common stock. The holders of Series C Stock are entitled to a liquidation preference of 100% of the original issue price, after payment of which they participate in liquidation with the holders of common stock.

The Company entered into a series of Subscription and Purchase Agreements with certain investors dated October 9, 2009 (the “October 2009 Subscription Agreement”) in connection with the sale of 2,000,000 shares of the Company’s common stock (the “October 2009 shares”). Pursuant to the October 2009 Subscription Agreement, the Company agreed to register the October 2009 shares under the Securities Act by March 1, 2010. The Company failed to register the October 2009 shares by March 1, 2010, and consequently each investor that invested pursuant to the October 2009 Subscription Agreement is entitled to receive an additional allocation of 2% of its portion of the October 2009 Shares for each 30-day period that elapses after March 1, 2010, subject to certain restrictions.

The Company entered into a series of Subscription and Purchase Agreements with certain investors dated March 10, 2010 (the “March 2010 Subscription Agreement”) in connection with the sale of 8,589,771 shares of the Company’s common stock (the “March 2010 shares”). Pursuant to the March 2010 Subscription Agreement, the Company agreed to register the March 2010 shares under the Securities Act by September 1, 2010. The Company failed to register the March 2010 shares by September 1, 2010, and consequently each investor that invested pursuant to the March 2010 Subscription Agreement is entitled to receive an additional allocation of 2% of its portion of the March 2010 Shares for each 30-day period that elapses after September 1, 2010, subject to certain restrictions.

The Company entered into a series of Subscription and Purchase Agreements with certain investors dated April 6, 2010 (the “April 2010 Subscription Agreement”) in connection with the sale of 112,000 shares of the Company’s common stock (the “April 2010 shares”). Pursuant to the April 2010 Subscription Agreement, the Company agreed to register the April 2010 shares under the Securities Act by September 1, 2010. The Company failed to register the April 2010 shares by September 1, 2010, and consequently each investor that invested pursuant to the April 2010 Subscription Agreement is entitled to receive an additional allocation of 2% of its portion of the April 2010 Shares for each 30-day period that elapses after September 1, 2010, subject to certain restrictions.

The Company has recorded a liability for its obligation to issue shares for failure to register shares pursuant to the October 2009 Subscription Agreement, the March 2010 Subscription Agreement, and the April 2010 Subscription Agreement (collectively, the “Subscription Agreements”). The Company registered the shares as required by the Subscription Agreements during 2015. The liability for accrued registration payment arrangements was $76,337 at December 31, 2018 and 2017.

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Note 4 – Related-Party Transactions

The Company leases its headquarters building from Mark A. Smith, the Company’s chairman and chief executive officer. The building has approximately 3,200 square feet of office space, and is used by the Company’s corporate, technical, and operations staff. The lease is cancellable by either party upon 30 days’ notice. Mr. Smith has agreed to suspend collection of rent effective April 1, 2016. The Company did not incur lease expense during the years ended December 31, 2018 and 2017.

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

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Geospatial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

Note 6 – Commitments and Contingencies

Bank Deposits

The Company maintains its cash in bank deposit accounts at financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. The bank accounts at times exceed FDIC limits. The Company has not experienced any losses on such accounts.

Legal Matters

The Company is subject to various claims and legal proceedings covering a wide range of matters that arise in the ordinary course of its business activities. The Company believes that any liability that may ultimately result from the resolution of these matters will not have a material adverse effect on the financial condition or the results of operations of the Company.

Concentrations

The Company derived substantially all its revenues from a fewer than ten customers during each of the years ended December 31, 2018 and 2017.

The reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows for the years ended December 31:

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.

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At December 31, 2018, the Company had federal and state net operating loss carryforwards of approximately $42,985,000. The federal and state net operating loss carryforwards will expire beginning in 2021. The amount of the federal and state net operating loss carryforwards that can be utilized each year to offset taxable income is limited by the Internal Revenue Code and applicable state laws.

Note 8 – 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 for the years ended December 31:

The following securities were not included in the computation of diluted net loss per share, as their effect would have been anti-dilutive for the years ended December 31: 

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Geospatial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

Note 9 – Stock-Based Payments

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 did not grant any options to purchase shares of the Company’s common stock pursuant to the 2007 Plan during the years ended December 31, 2018 and 2017.

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 granted stock appreciation rights on 500,000 shares of the Company’s common stock to eligible employees and consultants pursuant to the 2013 Plan during the year ended December 31, 2017. The Company made no such grants during the year ended December 31, 2018.

During the year ended December 31, 2018, the Company granted options to purchase 112,000,000 shares of common stock to employees. The options have a term of three years, and are exercisable upon attainment of certain performance benchmarks.

Using the Black-Scholes option pricing model, management has determined that the stock appreciation rights granted in 2018 and 2017 had no value. Accordingly, no compensation cost or other expense was recorded for the stock appreciation rights.

The assumptions used and the weighted average calculated value of the stock options are as follows at December 31:

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The following is an analysis of nonvested options:

The Company granted warrants to purchase 7,061,165 and 22,333,335 shares of common stock to investors and contractors during the years ended December 31, 2018 and 2017, respectively, at prices ranging from $0.01 to $0.04 per share. The warrants were granted for periods ranging from three to ten years. 

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 2018 and 2017 had a fair value of

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Geospatial Corporation and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2018 and 2017

$37,963 and $170,000, respectively. The fair value of warrants issued pursuant to the issuance of notes payable was recorded as deferred debt issuance cost and amortized over the remaining term of the associated debt. The fair value of warrants issued pursuant to the sale of common stock was recorded as additional paid-in capital. No expense was recorded upon the grants of the warrants to purchase the Company’s common stock during 2018 and 2017.

The assumptions used and the weighted average calculated value of the stock purchase rights are as follows for the year ended December 31:

The following is an analysis of the warrants to purchase the Company’s common stock.

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 were vested upon issuance, and expired on August 20, 2018.

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During 2018 and 2017, the Company issued 7,180,000 and 8,750,000 shares, respectively, of the Company’s common stock as payment for services. The Company recorded expense of $107,700 and $226,250, respectively, the fair value of the services received.

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