UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2009MARCH 31, 2010
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
COMMISSION FILE NUMBER: 333-04066
GEOSPATIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
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 x 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 | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): YES ¨ NO x
The number of $.001 par value common shares outstanding at November 13, 2009: 29,124,369.May 10, 2010: 41,379,687.
FORWARD-LOOKING STATEMENT NOTICE
When used in this report, the words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “intend,” and similar expressions, which are not historical, constitute “Forward Looking Statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements regarding the expectations, beliefs, intentions or strategies for the future. We intend that such Forward-Looking Statements regarding events, conditions, and financial trends that may affect the Company’s future plans of operations, business strategy, operating results, and financial position be subject to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Persons reviewing this report are cautioned that any Forward-Looking Statements are not guarantees of future performance and are subject to risks and uncertainties and that actual results may differ materially from those included within the Forward-Looking Statements as a result of various factors. Such factors include general economic factors and conditions that may directly or indirectly impact the Company’s financial condition or results of operations. Readers are cautioned not to place undue reliance on these Forward-Looking Statements that speak only as of the date the statement was made.
PART I - FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
INDEX
Page | ||
FINANCIAL STATEMENTS AS OF MARCH 31, 2010 AND DECEMBER 31, 2009 AND FOR THE THREE | ||
4 | ||
5 | ||
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) (Unaudited) | 6 | |
7 | ||
Notes to Unaudited Condensed Consolidated Financial Statements | 8 |
Geospatial Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
September 30, 2009 | December 31, 2008* | March 31, 2010 | December 31, 2009* | |||||||||||||
(Unaudited) | ||||||||||||||||
ASSETS | ASSETS |
| ||||||||||||||
Current assets: | ||||||||||||||||
Cash and cash equivalents | $ | 51,255 | $ | 42,793 | $ | 3,464,386 | $ | 481,536 | ||||||||
Accounts receivable, net of allowance for doubtful accounts of $10,000 at September 30, 2009 and December 31, 2008 | 195,583 | 51,271 | ||||||||||||||
Unbilled accounts receivable | 11,064 | — | ||||||||||||||
Accounts receivable, net of allowance for doubtful accounts of $10,000 at March 31, 2010 and December 31, 2009 | 612,049 | 263,653 | ||||||||||||||
Costs and estimated earnings in excess of billings on uncompleted contracts | 58,843 | 11,479 | 23,747 | 61,624 | ||||||||||||
Notes receivable | 389,466 | 361,612 | 435,322 | 397,373 | ||||||||||||
Prepaid expenses | 167,624 | 188,358 | 487,160 | 371,772 | ||||||||||||
Total current assets | 873,835 | 655,513 | 5,022,664 | 1,575,958 | ||||||||||||
Property and equipment: | ||||||||||||||||
Field equipment | 924,786 | 905,635 | 1,105,016 | 1,090,205 | ||||||||||||
Office equipment | 103,102 | 99,616 | 107,610 | 106,832 | ||||||||||||
Vehicles | 17,530 | 17,530 | 977,491 | 920,853 | ||||||||||||
Total property and equipment | 1,045,418 | 1,022,781 | 2,190,117 | 2,117,890 | ||||||||||||
Less: accumulated depreciation | (445,420 | ) | (330,209 | ) | (614,064 | ) | (514,105 | ) | ||||||||
Net property and equipment | 599,998 | 692,572 | 1,576,053 | 1,603,785 | ||||||||||||
Other assets: | ||||||||||||||||
License fees | 1,367,000 | 1,367,000 | ||||||||||||||
Deposit on equipment | 300,000 | — | ||||||||||||||
License fees, net of amortization | 1,338,521 | 1,367,000 | ||||||||||||||
Deposits on equipment | 3,032,747 | 500,000 | ||||||||||||||
Total other assets | 1,667,000 | 1,367,000 | 4,371,268 | 1,867,000 | ||||||||||||
Total assets | $ | 3,140,833 | $ | 2,715,085 | $ | 10,969,985 | $ | 5,046,743 | ||||||||
LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) |
| ||||||||||||||
Current liabilities: | ||||||||||||||||
Accounts payable | $ | 1,258,577 | $ | 710,493 | $ | 455,292 | $ | 1,391,488 | ||||||||
Accrued expenses | 473,111 | 105,168 | 3,612,871 | 3,670,337 | ||||||||||||
Billings in excess of costs and estimated earnings on uncompleted contracts | 19,117 | 25,159 | 81,326 | — | ||||||||||||
Current portion of capital lease liabilities | 232,009 | 210,645 | ||||||||||||||
Due to stockholder | 26,000 | 32,500 | 27,425 | 26,000 | ||||||||||||
Notes payable to stockholders | 3,108,505 | 2,118,808 | 273,764 | 140,071 | ||||||||||||
Total current liabilities | 4,885,310 | 2,992,128 | 4,682,687 | 5,438,541 | ||||||||||||
Stockholders’ deficit: | ||||||||||||||||
Preferred Stock, $.001 par value; 5,000,000 shares authorized and no shares issued and outstanding at September 30, 2009 or December 31, 2008 | — | — | ||||||||||||||
Common Stock, $.001 par value; 100,000,000 shares authorized at September 30, 2009 and December 31, 2008; 27,024,369 and 23,759,806 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively | 27,024 | 23,760 | ||||||||||||||
Non-current liabilities: | ||||||||||||||||
Capital lease liabilities | 430,224 | 458,167 | ||||||||||||||
Convertible note payable to stockholder | 31,144 | 1,013,637 | ||||||||||||||
Total non-current liabilities | 461,368 | 1,471,804 | ||||||||||||||
Total liabilities | 5,144,055 | 6,910,345 | ||||||||||||||
Stockholders’ equity (deficit): | ||||||||||||||||
Preferred stock, $.001 par value; 5,000,000 shares authorized at March 31, 2010 and 2009; 1,575,000 and 0 shares issued and outstanding at March 31, 2010 and 2009, respectively | 1,575 | 1,575 | ||||||||||||||
Common stock, $.001 par value; 100,000,000 shares authorized at March 31, 2010 and 2009; 41,339,373 and 24,114,444 shares issued and outstanding at December 31, 2009 and 2008, respectively | 41,339 | 31,124 | ||||||||||||||
Additional paid-in capital | 9,134,460 | 7,270,611 | 22,643,822 | 13,473,089 | ||||||||||||
Stock subscriptions receivable | (100,000 | ) | — | |||||||||||||
Accumulated deficit | (10,905,961 | ) | (7,571,414 | ) | (16,760,806 | ) | (15,369,390 | ) | ||||||||
Total stockholders’ deficit | (1,744,477 | ) | (277,043 | ) | ||||||||||||
Total stockholders’ equity (deficit) | 5,825,930 | (1,863,602 | ) | |||||||||||||
Total liabilities and stockholders’ deficit | $ | 3,140,833 | $ | 2,715,085 | ||||||||||||
Total liabilities and stockholders’ equity (deficit) | $ | 10,969,985 | $ | 5,046,743 | ||||||||||||
* | Condensed from audited financial statements. |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Geospatial Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | For the Three Months Ended March 31, | ||||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | 2010 | 2009 | |||||||||||||||||||
Sales | $ | 230,648 | $ | 155,375 | $ | 487,127 | $ | 1,469,803 | $ | 917,966 | $ | 70,193 | ||||||||||||
Cost of sales | 225,189 | 121,556 | 506,573 | 548,641 | 719,837 | 107,057 | ||||||||||||||||||
Gross profit | 5,459 | 33,819 | (19,446 | ) | 921,162 | 198,129 | (36,864 | ) | ||||||||||||||||
Selling, general and administrative expenses | 1,214,087 | 1,009,713 | 3,175,895 | 3,235,349 | 1,547,123 | 914,512 | ||||||||||||||||||
Loss from operations | (1,208,628 | ) | (975,894 | ) | (3,195,341 | ) | (2,314,187 | ) | ||||||||||||||||
Net loss from operations | (1,348,994 | ) | (951,376 | ) | ||||||||||||||||||||
Other income (expense): | ||||||||||||||||||||||||
Interest income | 7,430 | 6,048 | 22,465 | 14,009 | 7,950 | 7,448 | ||||||||||||||||||
Interest expense | (62,216 | ) | (18,268 | ) | (163,004 | ) | (24,612 | ) | (50,372 | ) | (46,446 | ) | ||||||||||||
Other income | — | — | 1,333 | 171 | — | 1,283 | ||||||||||||||||||
Gain (loss) on foreign currency exchange | — | 126,928 | — | (36,521 | ) | |||||||||||||||||||
Total other income and expenses | (54,786 | ) | 114,708 | (139,206 | ) | (46,953 | ) | (42,422 | ) | (37,715 | ) | |||||||||||||
Net loss before income taxes | (1,263,414 | ) | (861,186 | ) | (3,334,547 | ) | (2,361,140 | ) | (1,391,416 | ) | (989,091 | ) | ||||||||||||
Provision for (benefit from) income taxes | — | — | — | — | — | — | ||||||||||||||||||
Net loss | $ | (1,263,414 | ) | $ | (861,186 | ) | $ | (3,334,547 | ) | $ | (2,361,140 | ) | $ | (1,391,416 | ) | $ | (989,091 | ) | ||||||
Basic and fully-diluted net loss per share of Common Stock | $ | (0.05 | ) | $ | (0.04 | ) | $ | (0.13 | ) | $ | (0.11 | ) | ||||||||||||
Basic and fully-diluted net loss per share of common stock | $ | (0.04 | ) | $ | (0.04 | ) | ||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Geospatial Holdings, Inc. and Subsidiaries
Condensed Consolidated StatementStatements of Changes in Stockholders’ DeficitEquity (Deficit)
For the NineThree Months Ended September 30, 2009
(Unaudited)March 31, 2010
Preferred Stock |
Common Stock | Additional Paid-In Capital | Accumulated Deficit | Total | |||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||
Balance, December 31, 2008 | — | $ | — | 23,759,806 | $ | 23,760 | $ | 7,270,611 | $ | (7,571,414 | ) | $ | (277,043 | ) | |||||||
Issuance of Common Stock for cash at $1.00 per share | — | — | 250,000 | 250 | 249,750 | — | 250,000 | ||||||||||||||
Issuance of Common Stock for cash at $0.50 per share | — | — | 2,794,900 | 2,795 | 1,394,655 | — | 1,397,450 | ||||||||||||||
Issuance of Common Stock in settlement of note at $1.00 per share | — | — | 104,638 | 104 | 104,534 | — | 104,638 | ||||||||||||||
Issuance of Common Stock for services at $1.00 per share | — | — | 115,025 | 115 | 114,910 | — | 115,025 | ||||||||||||||
Net loss for the nine months ended September 30, 2009 | — | — | — | — | — | (3,334,547 | ) | (3,334,547 | ) | ||||||||||||
Balance, September 30, 2009 | — | $ | — | 27,024,369 | $ | 27,024 | $ | 9,134,460 | $ | (10,905,961 | ) | $ | (1,744,477 | ) | |||||||
Preferred Stock |
Common Stock | Additional Paid-In Capital | Stock Subscriptions Receivable | Accumulated Deficit | Total | ||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||
Balance, December 31, 2009 | 1,575,000 | $ | 1,575 | 31,124,369 | $ | 31,124 | $ | 13,473,089 | $ | — | $ | (15,369,390 | ) | $ | (1,863,602 | ) | |||||||||
Issuance of common stock for cash at $1.00 per share, less offering costs | — | — | 9,013,233 | 9,013 | 7,970,164 | (100,000 | ) | — | 7,879,177 | ||||||||||||||||
Issuance of common stock in settlement of liabilities at $1.00 per share | — | — | 1,051,771 | 1,052 | 1,050,719 | — | — | 1,051,771 | |||||||||||||||||
Issuance of common stock for services at $1.00 per share | — | — | 150,000 | 150 | 149,850 | — | — | 150,000 | |||||||||||||||||
Net loss for the three months ended March 31, 2010 | — | — | — | — | — | — | (1,391,416 | ) | (1,391,416 | ) | |||||||||||||||
Balance, March 31, 2010 | 1,575,000 | $ | 1,575 | 41,339,373 | $ | 41,339 | $ | 22,643,822 | $ | (100,000 | ) | $ | (16,760,806 | ) | $ | 5,825,930 | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Geospatial Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended September 30, | For the Three Months Ended March 31, | |||||||||||||||
2009 | 2008 | 2010 | 2009 | |||||||||||||
Cash flows from operating activities: | ||||||||||||||||
Net loss | $ | (3,334,547 | ) | $ | (2,361,140 | ) | $ | (1,391,416 | ) | $ | (989,091 | ) | ||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||||
Depreciation | 115,211 | 112,971 | ||||||||||||||
Rent expensed through increase in due to stockholder | 45,500 | — | ||||||||||||||
Depreciation and amortization | 128,438 | 38,066 | ||||||||||||||
Accrued interest receivable | (22,408 | ) | (13,900 | ) | (7,949 | ) | (7,421 | ) | ||||||||
Accrued interest payable | 160,335 | 21,193 | 21,200 | 45,780 | ||||||||||||
Issuance of Common Stock for reverse acquisition | — | 316,226 | ||||||||||||||
Issuance of Common Stock for services | 115,025 | — | ||||||||||||||
Issuance of common stock for services | 150,000 | — | ||||||||||||||
Rent expensed through increase in due to stockholder | — | 19,500 | ||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | (144,312 | ) | (78,132 | ) | (348,396 | ) | 8,345 | |||||||||
Unbilled accounts receivable | (11,064 | ) | — | |||||||||||||
Costs and estimated earnings in excess of billings on uncompleted contracts | (47,364 | ) | (61,718 | ) | 37,877 | (969 | ) | |||||||||
Prepaid expenses | 20,734 | (63,757 | ) | (115,388 | ) | 62,497 | ||||||||||
Accounts payable | 548,084 | 340,983 | (936,196 | ) | 62,989 | |||||||||||
Accrued expenses | 367,943 | (77,758 | ) | (5,695 | ) | 101,004 | ||||||||||
Billings in excess of costs and estimated earnings on contracts in progress | (6,042 | ) | 13,022 | |||||||||||||
Billings in excess of costs and estimated earnings on uncompleted contracts | 81,326 | (7,607 | ) | |||||||||||||
Due to stockholder | 1,425 | — | ||||||||||||||
Net cash used in operating activities | (2,192,905 | ) | (1,852,010 | ) | (2,384,774 | ) | (666,907 | ) | ||||||||
Cash flows from investing activities: | ||||||||||||||||
Purchase of property and equipment | (22,637 | ) | (37,169 | ) | ||||||||||||
Expenditures for license fees | — | (781,900 | ) | |||||||||||||
Purchase of property, plant and equipment | (25,871 | ) | (3,486 | ) | ||||||||||||
Deposit on equipment | (300,000 | ) | (608,410 | ) | (2,532,747 | ) | — | |||||||||
Notes receivable issued | (5,446 | ) | (217,932 | ) | (30,000 | ) | — | |||||||||
Net cash used in investing activities | (328,083 | ) | (1,645,411 | ) | (2,588,618 | ) | (3,486 | ) | ||||||||
Cash flows from financing activities: | ||||||||||||||||
Proceeds from sale of Common Stock | 1,647,450 | 1,265,000 | ||||||||||||||
Proceeds from sale of common stock, net of offering costs | 7,879,177 | 250,000 | ||||||||||||||
Net borrowings from stockholders | 882,000 | 2,061,003 | 130,000 | 390,000 | ||||||||||||
Principal payments on capital lease liabilities | (52,935 | ) | — | |||||||||||||
Net cash provided by financing activities | 2,529,450 | 3,326,003 | 7,956,242 | 640,000 | ||||||||||||
Net change in cash and cash equivalents | 8,462 | (171,418 | ) | 2,982,850 | (30,393 | ) | ||||||||||
Cash and cash equivalents at beginning of period | 42,793 | 183,448 | 481,536 | 42,793 | ||||||||||||
Cash and cash equivalents at end of period | $ | 51,255 | $ | 12,030 | $ | 3,464,386 | $ | 12,400 | ||||||||
Supplemental disclosures: | ||||||||||||||||
Cash paid during period for interest | $ | 2,669 | $ | 3,401 | $ | 29,172 | $ | 666 | ||||||||
Cash paid during period for income taxes | — | — | — | — | ||||||||||||
Non-cash transactions: | ||||||||||||||||
Issuance of Common Stock in settlement of liabilities | 104,639 | 903,469 | ||||||||||||||
Issuance of Common Stock for reverse acquisition | — | 316,226 | ||||||||||||||
Issuance of Common Stock for services | 115,025 | — | ||||||||||||||
Issuance of common stock in settlement of liabilities | 1,051,771 | 104,639 | ||||||||||||||
Issuance of common stock for services | 150,000 | — | ||||||||||||||
Capital lease liabilities incurred | 46,356 | — | ||||||||||||||
Reclassification of due to stockholder to note payable to stockholder | 52,000 | — | — | 52,000 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Geospatial Holdings, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2009March 31, 2010
Note 1 – Basis of Presentation
On April 25, 2008, Kayenta Kreations, Inc. (“Kayenta”) acquired all the outstanding Common Stock of Geospatial Mapping Systems, Inc. (“GMSI”) pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) dated March 25, 2008. Upon consummation of the Merger Agreement, GMSI became a fully-owned subsidiary of Kayenta, which was subsequently renamed “Geospatial Holdings, Inc.” (the “Company”). Because GMSI’s stockholders owned the majority of the Company upon consummation of the Merger Agreement, GMSI was deemed to be the acquiring entity. Accordingly, all historical financial information prior to the consummation of the Merger Agreement contained in these Unaudited Condensed Consolidated Financial Statements is that of GMSI.
The Unaudited Condensed Consolidated Financial Statements included herein have been prepared by the CompanyGeospatial Holdings, Inc. (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 Condensed 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 Condensed Consolidated Financial Statements as of and for the ninethree months ended September 30, 2009March 31, 2010 should be read in conjunction with the Company’s Financial Statements as of and for the year ended December 31, 2008.2009. In the opinion of the Company’s management, all adjustments considered necessary for a fair statement of the accompanying Unaudited Condensed 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, 2009March 31, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.2010.
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.
From GMSI’s inception on May 26, 2006 through December 31, 2007, the Company was considered a development stage company as defined by Statement of Financial Accounting Standards No. 7,Accounting and Reporting by Development Stage Enterprises. As such, the Company devoted substantially all its efforts to establishing a new business. During 2008, the Company began to generate revenues from its planned operations, and ceased to be a development stage company.
The Condensed Consolidated Financial Statements include the accounts of the Company and its subsidiaries, GMSIGeospatial Mapping Systems, Inc., Utility Services and Consulting Corporation, and Geospatial Pipeline Services, LLC. All intercompany accounts and transactions have been eliminated.
Geospatial Holdings, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2009March 31, 2010
Note 2 – Merger
On April 25, 2008, Kayenta acquired all the outstanding Common Stock of GMSI pursuant to the Merger Agreement.
Pursuant to the Merger Agreement, Kayenta shareholders approved a 2.8 for 1 forward stock split, resulting in 3,685,618 shares of Kayenta Common Stock outstanding at the closing of the Merger Agreement. Further, Kayenta issued one share of Kayenta’s Common Stock in exchange for each outstanding share of GMSI’s Common Stock, resulting in 20,074,188 shares of Kayenta Common Stock, for a total aggregate number of shares of Kayenta Common Stock of 23,759,806 outstanding upon consummation of the merger. Upon consummation of the merger, GMSI became a fully-owned subsidiary of Kayenta, which was subsequently renamed “Geospatial Holdings, Inc.,” and GMSI’s shareholders obtained majority ownership of the shares of Common Stock of Geospatial Holdings, Inc. After the merger, GMSI’s former stockholders owned approximately 84.5% of the Common Stock of the Company, and Kayenta’s stockholders owned approximately 15.5% of the Common Stock of the Company.
In accordance with Accounting and Financial Reporting Interpretations and Guidance issued by the staff of the United States Securities and Exchange Commission, the merger was accounted for as a recapitalization. Accordingly, all consideration paid and costs incurred pursuant to the merger were charged to expense, and no goodwill or other intangible asset was recorded. All historical financial information prior to the consummation of the Merger Agreement is that of GMSI. Kayenta’s results of operations have been included in the Company’s Consolidated Statements of Operations since the completion of the merger on April 25, 2008.
Prior to the merger, Kayenta was a public shell company as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended. The acquisition was undertaken to provide the Company a public shell.
Note 32 – Accounts Receivable
Accounts receivable consisted of the following at September 30, 2009:March 31, 2010:
Billed: | ||||
Completed contracts | $ | 118,334 | ||
Contracts in progress | 84,268 | |||
Retainage | 2,981 | |||
Unbilled | 11,064 | |||
216,647 | ||||
Less: allowance for doubtful accounts | (10,000 | ) | ||
$ | 206,647 | |||
Geospatial Holdings, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2009
Billed: | ||||
Fixed-price contracts: | ||||
Completed contracts | $ | 110,275 | ||
Contracts in progress | 17,461 | |||
Time-and-materials contracts | 47,247 | |||
Units of delivery contracts | 320,000 | |||
Retainage | 2,981 | |||
Unbilled | 124,085 | |||
Less: allowance for doubtful accounts | (10,000 | ) | ||
$ | 612,049 | |||
Note 43 – Uncompleted Contracts
Costs, estimated earnings, and billings on uncompleted contracts are summarized as follows at September 30, 2009:March 31, 2010:
Costs incurred on uncompleted contracts | $ | 51,815 | $ | 134,068 | ||||
Estimated earnings | 72,179 | 74,702 | ||||||
123,994 | 208,770 | |||||||
Billings to date | (84,268 | ) | (266,350 | ) | ||||
$ | 39,726 | $ | (57,579 | ) | ||||
Included in the accompanying balance sheet under the following captions:
Costs and estimated earnings in excess of billings on uncompleted contracts | $ | 58,843 | $ | 23,747 | ||||
Billings in excess of costs and estimated earnings on uncompleted contracts | (19,117 | ) | (81,326 | ) | ||||
$ | 39,726 | $ | (57,579 | ) | ||||
Geospatial Holdings, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2010
Note 54 – Backlog
The following schedule summarizes changes in backlog on fixed-price contracts during the three and nine months ended September 30, 2009.March 31, 2010. Backlog represents the amount of revenue the Company expects to realize from work to be performed on uncompleted contracts in progress at quarter end, and from contractual agreements on which work has not yet begun. Backlog does not include any amounts from signed units of delivery or time-and-materials contracts.
Three Months Ended September 30, 2009 | Nine Months Ended September 30, 2009 | |||||||
Backlog balance at beginning of the period | $ | 995,130 | $ | 838,627 | ||||
New contracts awarded during period | 333,166 | 773,622 | ||||||
Contract adjustments | 17 ,707 | (10,142 | ) | |||||
1,346,003 | 1,602,107 | |||||||
Less: contract revenue earned during the period | (230,348 | ) | (486,452 | ) | ||||
Backlog balance at September 30, 2009 | $ | 1,115,655 | $ | 1,115,655 | ||||
Three Months Ended March 31, 2010 | ||||
Backlog balance at beginning of the period | $ | 280,650 | ||
New fixed-price contracts awarded during period | 210,250 | |||
Fixed-price contract adjustments | (1 ,900 | ) | ||
489,000 | ||||
Less: contract revenue earned during the period | (189,937 | ) | ||
Backlog balance at March 31, 2010 | $ | 299,063 | ||
Geospatial Holdings, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2009March 31, 2010
Note 65 – 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 and engineering/operations staff. The Company incurred $58,500$19,500 of lease expense for this building during each of the nine monthsperiods ended September 30,March 31, 2010 and 2009.
At December 31, 2008, notes payable byDuring 2009, Mr. Smith and the Company entered into a Note Conversion Agreement, pursuant to which, the Company issued to Mr. Smith for advances to the Company were $2,015,772. During the nine months ended September 30, 2009, Mr.a $1,000,000, 8% Unsecured Convertible Promissory Note (the “Smith Convertible Note”) and a $128,263, 8% Unsecured Promissory Note (the “Smith Demand Note”).
The Smith loaned the Company $934,000, including unpaid rent, for working capital purposes. InterestConvertible Note bears interest at 8% per annum, compounded monthly. The Smith Convertible Note is payable on the loan at 8% amounted to $158,733 during the nine months ended September 30, 2009. At September 30, 2009, the balance due on the note, including accrued interest, was $3,108,505.
During 2008 another stockholder, who owns approximately 14%earlier of the Company’s closing of a round of convertible preferred or common stock financing of at least $10,000,000 or December 31, 2011. At any time prior to December 31, 2011, Mr. Smith may convert the outstanding Common Stock, loanedprincipal balance of the Company $100,000 for working capital purposes. Interest onSmith Convertible Note to the loanCompany’s common stock at 8% amounted to $1,603 duringa conversion price of $1.00 per share. During the three months ended March 31, 2009. On2010, Mr. Smith converted $1,000,000 of the Smith Demand Note to 1,000,000 shares of the Company’s common stock. Interest on the Smith Convertible Note was $17,508 for the three months ended March 10, 2009,31, 2010. The balance due on the Smith Convertible Note, including accrued interest, was $31,134 at March 31, 2010.
The Smith Demand Note bears interest at 8% per annum, compounded monthly, and is payable upon demand. Interest on the Smith Demand Note was $2,582 for the year ended March 31, 2010. At March 31, 2010, the balance due on the note of $104,638Smith Demand Note was converted to 104,638 shares of$132,593.
At December 31, 2009, the Company’s Common Stock and warrants to purchase 20,927 shares ofCompany owed Mr. Smith $10,059 for other notes payable. During the Company’s Common Stock at $1.50 per share, exercisablethree months ended March 31, 2010, Mr. Smith advanced the Company $130,000. Interest on other notes for ten years.the three months ended March 31, 2010 was $1,112. At March 31, 2010, the balance due on other notes payable was $141,171.
Geospatial Holdings, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2009March 31, 2010
Note 76 – Income Taxes
The Company’s provision for (benefit from) income taxes is summarized below:
For the Three Months Ended March 31, | ||||||||||||||||||||||||
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | 2010 | 2009 | |||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||
Current: | ||||||||||||||||||||||||
Federal | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
State | — | — | — | — | — | — | ||||||||||||||||||
— | — | — | — | |||||||||||||||||||||
— | — | |||||||||||||||||||||||
Deferred: | ||||||||||||||||||||||||
Federal | 396,329 | 270,484 | 1,046,207 | 641,394 | 434,153 | 310,364 | ||||||||||||||||||
State | 125,819 | 85,868 | 332,129 | 203,617 | 137,826 | 98,528 | ||||||||||||||||||
522,148 | 356,352 | 1,378,336 | 845,011 | 571,979 | 408,892 | |||||||||||||||||||
Total income taxes | 522,148 | 356,352 | 1,378,336 | 845,011 | 571,979 | 408,892 | ||||||||||||||||||
Less: valuation allowance | (522,148 | ) | (356,352 | ) | (1,378,336 | ) | (845,011 | ) | (571,979 | ) | (408,892 | ) | ||||||||||||
Net income taxes | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||
The reconciliation of the federal statutory income tax rate to the effective income tax rate is as follows:
For the Three Months Ended September 30, | For the Nine Months Ended September 30, | For the Three Months Ended March 31, | ||||||||||||||||
2009 | 2008 | 2009 | 2008 | 2010 | 2009 | |||||||||||||
Federal statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | 35.0 | % | ||||||
State income taxes (net of federal benefit) | 6.5 | 6.5 | 6.5 | 6.5 | 6.5 | 6.5 | ||||||||||||
Valuation allowance | (41.5 | ) | (41.5 | ) | (41.5 | ) | (41.5 | ) | (41.5 | ) | (41.5 | ) | ||||||
Effective rate | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||||
Geospatial Holdings, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2009March 31, 2010
Note 76 – Income Taxes (continued)
Significant components of the Company’s deferred tax assets and liabilities are summarized below as of September 30, 2009March 31, 2010 and 2008.2009. A valuation allowance has been established as realization of such assets has not met the more-likely-than-not threshold requirement under Statement of Financial Accounting Standards No. 109,Board Accounting for Standards Codification 740,Income Taxes.
As of September 30, | As of March 31, | |||||||||||||||
2009 | 2008 | 2010 | 2009 | |||||||||||||
Start-up costs | $ | 98,950 | $ | 108,783 | $ | 94,033 | $ | 103,867 | ||||||||
License fees | (78,792 | ) | (40,972 | ) | (85,884 | ) | (59,882 | ) | ||||||||
Depreciation | (94,832 | ) | (77,348 | ) | (110,414 | ) | (86,449 | ) | ||||||||
Allowance for doubtful accounts | 4,150 | 4,150 | 4,150 | 4,150 | ||||||||||||
Unrealized foreign currency losses | — | 449 | ||||||||||||||
Accrued expenses | 1,402,060 | — | ||||||||||||||
Uncompleted contracts | (29,954 | ) | (32,846 | ) | (61,471 | ) | (21,179 | ) | ||||||||
Net operating loss carryforward | 4,479,622 | 2,145,472 | 5,557,921 | 3,469,192 | ||||||||||||
Deferred income taxes | 4,379,144 | 2,107,688 | 6,800,395 | 3,409,699 | ||||||||||||
Less: valuation allowance | (4,379,144 | ) | (2,107,688 | ) | (6,800,395 | ) | (3,409,699 | ) | ||||||||
Net deferred income taxes | $ | — | $ | — | $ | — | $ | — | ||||||||
At September 30, 2009,March 31, 2010, the Company had federal and state net operating loss carryforwards of approximately $10,794,000.$13,393,000. The federal and state net operating loss carryforwards 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 Holdings, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
March 31, 2010
Note 87 – Commitments and Contingencies
On March 31, 2009,January 29, 2010, the Company entered into a Letter of Agreement with Delta Networks, SA (“Delta”) and Reduct, NV (“Reduct”) entered into the First Amendment to change the termsAmended and Restated Exclusive License and Distribution Agreement, which extended the date for payment of the Company’s advance payment for Smart Probe™ equipment of $4,950,000 under the Amended and Restated Exclusive License and Distribution Agreement dated August 3, 2006. PursuantDecember 15, 2009 (the “Amended Reduct License Agreement”) from January 31, 2010 to March 31, 2010 in consideration for a payment by the Company of $100,000. On March 12, 2010, the Company and Reduct entered into the Second Amendment to the Letter ofAmended and Restated Exclusive License and Distribution Agreement, which extended the Company must make minimum purchases of Smart Probes™ of €6,000,000 during 2009. Adate for payment on the minimum purchase requirement of $500,000 was due by June 1, 2009. The Company made payments towards the minimum purchase requirements totaling $300,000 through September 30, 2009. The Company, Delta, and Reduct are currently in negotiations regarding a restructuring of the Company’s advance payment obligations.
for Smart ProbeGeospatial Holdings, Inc.™ equipment of $4,950,000 under the Amended Reduct License Agreement from March 31, 2010 to $2,500,000 by March 17, 2010, and Subsidiaries$2,450,000 by April 30, 2010. The Company paid Reduct $2,500,000 on March 12, 2010 and $2,450,000 on April 30, 2010. The Amended Reduct License Agreement is now effective.
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2009
Note 98 – Stock-Based Payments
During the ninethree months ended September 30, 2009,March 31, 2010, the Company granted options to purchase 550,00030,000 shares of the Company’s Common Stockcommon stock to an eligible employeesemployee under the 2007 Stock Option Plan, and optionsPlan.
On January 1, 2010, the Company issued warrants to purchase 50,000150,000 shares of common stock to a contractor. The warrants have an exercise price of $1.00 per share, and vest over twelve months. The warrants expire on January 1, 2020.
On January 7, 2010, the Company cancelled a warrant to purchase 250,000 shares of the Company’s Common Stock under the 2007 Stock Option Plan were forfeited.
During the nine months ended September 30, 2009, the Company grantedcommon stock exercisable at $2.15 per share due to a contractor, and issued warrants to purchase 70,927250,000 shares of the Company’s Common Stockcommon stock at $1.50an exercise price of $1.38 per share for five years to certain stockholders in connection with the sale of Common Stock. No expense was recognized upon the grant of these warrants.share. The warrants expire on January 7, 2020.
During the nine months ended September 30, 2009,On March 2, 2010, the Company grantedentered 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 Global Energy Services, LLC and Ridge Global, LLC warrants to purchase 217,8001,600,000 and 2,400,000 shares, respectively, of the Company’s Common Stockcommon stock at $0.55an exercise price of $1.00 per share for ten yearsshare. The warrants expire on March 2, 2012. Further, pursuant to certain contractors in settlement of contractual obligations. No expense was recognized upon the grant of these warrants.
On March 6, 2009,Strategic Advisory Agreement, the Company granted warrantsagreed to purchase 2,000,000 sharesexpand the number of members of the Company’s Common Stock at $1.23 for ten yearsboard of directors from three to the Company’s President. Warrantsfive, and to purchase 1,000,000 sharesappoint Timothy F. Sutherland, Chairman and Chief Executive Officer of Pace, and Thomas J. Ridge, President and Chief Executive Officer of Ridge, as members of the Company’s Common Stock vested immediately uponboard of directors to fill the grant, and the balance vest over twelve months. No expense was recognized upon the grant of these warrants.newly-created vacancies.
Geospatial Holdings, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2009March 31, 2010
Note 10 – Fair Value Measurement
The FASB’s accounting standard for fair value measurements establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of September 30, 2009:
Total Carrying Value at September 30, 2009 | Fair Value Measurements at September 30, 2009 | |||||||||||
Quoted prices in active markets (Level 1) | �� | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||
Intangible Asset – License Fees | $ | 1,367,000 | $ | — | $ | — | $ | 1,367,000 |
The license fee intangible asset is measured at fair value using undiscounted cash flows and is classified within Level 3 of the valuation hierarchy. There was no change to the fair value of the asset during the nine months ended September 30, 2009.
Geospatial Holdings, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2009
Note 119 – 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:
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, 2010 | Three Months Ended March 31, 2009 | |||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||
Net loss | $ | (1,263,414 | ) | $ | (861,186 | ) | $ | (3,334,547 | ) | $ | (2,361,140 | ) | $ | (1,391,416 | ) | $ | (989,091 | ) | ||||||
Divided by: | ||||||||||||||||||||||||
Weighted average shares outstanding | 28,890,406 | 23,759,806 | 24,756,581 | 23,361,140 | 32,471,436 | 23,962,555 | ||||||||||||||||||
Basic and fully-diluted net loss per share | ($ | 0.05 | ) | ($ | 0.04 | ) | ($ | 0.13 | ) | ($ | 0.11 | ) | ($ | 0.04 | ) | ($ | 0.04 | ) | ||||||
At March 31, 2010, the shares of Series A Preferred Stock were convertible into 1,968,750 shares of the Company’s common stock. The effect of the potential conversion of the shares of Series A Preferred Stock was not included in the computation of diluted earnings per share for the three months ended March 31, 2010 because the effect of their conversion would be antidilutive.
The effect of the potential conversion of the Smith Convertible Note to 31,134 shares of common stock was not included in the computation of diluted earnings per share for the year ended December 31, 2009 because the effect of its conversion would be antidilutive.
The effects of options to purchase 12,070,00012,225,000 shares of Common Stock,common stock, and warrants to purchase 6,126,2729,866,272 shares of Common Stockcommon stock were not included in the computation of diluted earnings per share for the three months ended March 31, 2010 because the effect of their conversion would be antidilutive.
Note 1210 – Subsequent Events
On October 29, 2009April 30, 2010, the Company issuedpaid Reduct an 8% Unsecured Promissory Note (the “Note”) inadvance payment on equipment of $2,450,000. Upon this payment, the amount of $2,866,700.00 due December 31, 2011 to Mark A. Smith, the Company’s Chairman and CEO, to evidence Mr. Smith’s periodic loans to the Company. The amounts outstanding under the Note bear interest at a rate of 8% per annum from the date such periodic loans were made, compounded monthly, which interest will accrue until the Note is satisfied in full. As of October 29, the total principal amount of the Note together with accrued interest thereon equaled $3,128,262.70. If the Note is not satisfied in full by December 31, 2011, then Mr. Smith may demand payment of the principal and interest due under the Note. Failure by the Company to make payments of principal or interest or certain other events of bankruptcy shall be events of default under the Note. Upon the occurrence and during the continuance of any event of default, the Note shall bear interest at a rate of 17% per annum, compounded monthly.
On October 30, 2009 the Company entered into a Note ConversionAmended Reduct License Agreement with Mr. Smith whereby Mr. Smith presented the Note to the Company and the Company converted $2,000,000 of the Note into two million shares of Common Stock at $1.00 per share (the “Note Conversion”). The issuance of shares of the Company’s common stock took place in a private placement transaction pursuant to the exemption from the registration requirements of the Securities Act provided by Regulation D.
Geospatial Holdings, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2009
On October 30, 2009, in connection with the Note Conversion, the Company also issued Mr. Smith the following replacement notes to account for the remaining outstanding balance on the Note of $1,128,262.00: (i) an unsecured Convertible Note (the “Convertible Note”) in the amount of $1,000,000.00 due on the earlier of (a) December 31, 2011 or (b) the closing by the Company of a round of convertible preferred or common stock financing in an amount equal to or greater than $10,000,000.00 (the earlier occurrence of either (a) or (b), the “Convertible Note Maturity Date”) and (ii) an Unsecured Promissory Note (the “Demand Note”) in the amount of $128,262.70 due upon demand.
The Convertible Note bears interest at a rate of 8% per annum, compounded monthly, from the date of issuance, which interest will accrue until the Convertible Note is satisfied in full. If the Convertible Note is not satisfied in full by the Convertible Note Maturity Date, then Mr. Smith may demand payment of the principal and interest due under the Convertible Note. Failure by the Company to make payments of principal or interest or certain other events of bankruptcy shall be events of default under the Convertible Note. Upon the occurrence and during the continuance of any event of default, the Convertible Note shall bear interest at a rate of 17% per annum, compounded monthly.
The Demand Note bears an interest rate of 8% per annum, compounded monthly, from the date of issuance which interest will accrue until the Demand Note is satisfied in full. If the Demand Note is not satisfied in full by December 31, 2009, then Mr. Smith may demand payment of the principal and interest due under the Demand Note. Failure by the Company to make payments of principal or interest or certain other events of bankruptcy shall be events of default under the Demand Note. Upon the occurrence and during the continuance of any event of default, the Demand Note shall bear interest at a rate of 17% per annum, compounded monthly.
On October 30, 2009, the Company entered into an Agreement by and between the Company and Mr. David Vosbein (the “Vosbein Warrant Agreement”). In connection with the Vosbein Warrant Agreement, the Company and Mr. Vosbein agreed to cancel Warrant No. 1, which was previously issued under an employment agreement dated March 6, 2009, and the Company issued Mr. Vosbein a new Warrant No. 16 for one million, five hundred ninety thousand shares of the Company’s Common Stock at an exercise price of $1.00 per share (“Warrant No. 16”). Pursuant to the Vosbein Warrant Agreement, the warrant awards shall vest as follows: warrants to purchase one million, one hundred seventy-three thousand, three hundred thirty-three shares of the Company’s common stock shall be vested and exercisable immediately upon grant; warrants to purchase eighty-three thousand, three hundred thirty-three shares of the Company’s common stock shall be vested and exercisable on November 6, 2009; warrants to purchase eighty-three thousand, three hundred thirty-four shares of the Company’s common stock shall be vested and exercisable on December 6, 2009; warrants to purchase eighty-three thousand, three hundred thirty-three shares of the Company’s common stock shall be vested and exercisable on January 6, 2010; warrants to purchase eighty-three thousand, three hundred thirty-three shares of the Company’s common stock shall be vested and exercisable on February 6, 2010; warrants to purchase eighty-three thousand, three hundred thirty-four shares of the Company’s common stock shall be vested and exercisable on March 6, 2010. Vested shares are exercisable until March 6, 2019. This award of warrants is outside of 2007 Stock Option Plan of the Company
Geospatial Holdings, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2009
dated December 1, 2007 dated December 1, 2007. The issuance of warrants to Vosbein were done pursuant to the exemption from the registration requirements of the Securities Act provided by Regulation D.became effective.
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, 2008,2009, filed with our Annual Report on Form 10-K as amended, on October 9, 2009,April 16, 2010, and our financial statements and notes thereto as of and for the three and nine months ended September 30, 2009,March 31, 2010, which appear elsewhere in this Quarterly Report on Form 10-Q.
On April 25, 2008, Kayenta Kreations, Inc. (“Kayenta”) acquired all the outstanding Common Stock of Geospatial Mapping Systems, Inc. (“GMSI”) pursuant to an Agreement and Plan of Merger (the “Merger Agreement”) dated March 25, 2008. Upon consummation of the Merger Agreement, GMSI became a fully-owned subsidiary of Kayenta, which was subsequently renamed “Geospatial Holdings, Inc.” (the “Company”). Because GMSI’s stockholders owned the majority of the Company upon consummation of the Merger Agreement, GMSI was deemed to be the acquiring entity. Accordingly, all historical financial information prior to the consummation of the Merger Agreement contained in this MD&A, and in our financial statements and notes thereto, is that of GMSI.
Prior to the Merger, Kayenta was a shell company as that term is defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Upon consummation of the Merger Agreement, the Company adopted GMSI’s business, and ceased to be a shell company as defined in the Exchange Act. The Company’s services include pipeline data acquisition, professional data management, and pipeline field services.
Liquidity and Capital Resources
At September 30, 2009,March 31, 2010, we had current assets of $873,835,$5,022,664, and current liabilities of $4,885,310.$4,682,687.
We are a party to theOur business depends largely on patent pending Smart Probe™ technology that we license from Reduct License Agreement to license the Smart Probe™ technology from Reduct,NV (“Reduct”), the developer of the technology. The Reduct License Agreement grantsWe are the Company exclusive control over the rights tolicensee of the Smart Probe™ technology throughoutin North America, South America, and Australia.Australia pursuant to the Amended and Restated Exclusive License and Distribution Agreement dated December 15, 2009 (as amended, the “Amended Reduct License Agreement”) which became effective on April 30, 2010, upon the Company’s second installment payment of $2,450,000 for the purchase of SmartProbe™ equipment which, together with the Company’s first installment payment of $2,500,000 in March, 2010, totals the $4,950,000 Advance Payment previously due by April 30, 2010.
PursuantWe are obligated to Amendment No. 3 tomake various payments and minimum purchases under the Amended Reduct License Agreement datedin order to satisfy our obligations thereunder. Under the Amended Reduct License Agreement, we must make a license payment of $3,000,000 by December 18, 2008, a Letter of Agreement dated March 10, 2009, and a Letter of Agreement dated March 31, 2009, we: (i) agreed to extend the payment due date for certain payments owed by the Company to Reduct; (ii) agreed to restructure certain other payments owed to Reduct; (iii) granted an option to purchase 500,000 shares of the Company’s Common Stock to Delta Networks SA (“Delta”), the owner of substantially all of the common stock of Reduct; and (iv) agreed to work in good faith with Reduct and Delta to draft and execute mutually acceptable agreements pursuant to which2010. In addition, we will acquire Reduct from Delta through the purchase of one hundred percent of Reduct’s outstanding capital stock in exchange for $40 million in the aggregate of cash and the Company’s Common Stock (the “Acquisition”).
Pursuant to the Letter of Agreement dated March 31, 2009, the Company must make minimum purchases of Smart Probes™ of €6,000,000 during 2009. Aquarterly payments totaling $6,000,000, $11,750,000, and $6,612,500 in 2010, 2011, and 2012, respectively. The first payment is due on June 30, 2010. If the Amended Reduct License Agreement is renewed, this minimum purchase requirement of $500,000 was duewill increase by June 1, 2009. The Company made payments towards the minimum purchase requirements totaling $500,000 through October 2009. The Company, Delta, and Reduct are currently in negotiations regarding a restructuring of the Company’s payment obligations.
The initial target closing date for the Acquisition was June 15, 2009, but that date may be extended for up to three successive three-month periods until March 15, 2010 (the “Reduct Closing”) and has been extended for the first two three-month periods. For each three-month extension, we are required to make a
payment to or minimum purchases from Reduct in an amount of €1.5 million. We have not yet made any such payments or purchases.
If we consummate the Acquisition by March 15, 2010, all license payments that we owe to Reduct will be discharged entirely. If we do not consummate the Acquisition by March 15, 2010, we will maintain our exclusive license and distribution rights by paying approximately €4.0 million of suspended license payments for 2008 and €5.6 million of suspended Smart Probe™ payments for 2009 (the “Suspended Payments”) and making minimum purchases of Smart Probes™ of approximately €7.9 million in 2010, €9.0 million in 2011, €10.4 million in 2012, €11.9 million in 2013, and thereafter, a minimum purchase that increases15% annually at a 15% rate over the prior year (collectively, the “Minimum Purchase Requirements”). In the event thatbeginning in 2013. If we fail to make the Suspended License Paymentsany of these payments or the Minimum Purchase Requirements, Reduct shall continue to provide services to us on all of our existing Reduct products and accessories, and shall make additional Reduct products and services available to us on a non-exclusive basis.
Ifif Reduct believes that we have failed to meet any of our other obligations under the Amended Reduct License Agreement, including our obligation to effect the Reduct Closing in a timely manner, Reduct could seek to limit or terminate our license rights, which could lead to costly and time-consuming litigation and potentially, a loss of the licensedour exclusive license rights. During the period of any such litigation, our ability to carry out the development of client relationships and provide pipeline management services could be significantly and adversely affected.
Our Company has incurred net losses since inception. Our operations and capital requirements have been funded by sales of our common stock and advances from our chief executive officer. At December 31, 2009, current liabilities exceeded current assets by $3,862,583. Those factors as well as our commitments under the Amended Reduct License Agreement raise doubts about our ability to continue as a going concern.
Management is continuing efforts to secure funds through financing and operations. The Company retained Convertible Capital as its financial advisor, and in March 2010, entered into a Strategic Advisory Agreement with Ridge Global, LLC (“Ridge”) and Pace Global Energy Services, LLC, (“Pace”) pursuant to which Pace and Ridge agreed to provide strategic advisory services to the Company, including assisting the Company and Convertible Capital in raising capital and assisting the Company in its business development efforts. The Company closed financing through sales of convertible preferred stock and common stock in the aggregate amount of $6.2 million in 2009, including conversion of $2.0 million of indebtedness to our Chief Executive Officer into common stock, and conversion of approximately $105,000 of other debt into common stock, and common stock issued for services totaling approximately $215,000. In March, 2010, the Company completed a sale of common stock with an aggregate sale price of approximately $9.7 million, including the conversion of $1.0 million of indebtedness to our Chief Executive Officer into common stock. The proceeds of the stock offering will be used to fund general working capital needs.
Furthermore, the Company is expanding into new marketing and sales channels. The Company has entered into the utility locating market, has entered into a joint marketing agreement with a strategic partner, and is exploring relationships with additional strategic partners to increase capital from operations. The Company has begun to market probes to third-parties to meet our minimum purchase requirements under the Amended Reduct License Agreement. The Company is also investigating diversifying operations by identifying potential acquisitions of technology to supplement the Reduct Smart Probe™ technology.
We believe that our actions and planned actions will enable us to finance our operations beyond December 31, 2010.
Results of Operations
From GMSI’s inception on May 26, 2006, through December 31, 2007, we were considered a development stage company as defined by Statement of Accounting Standards No. 7,Accounting and Reporting by Development Stage Enterprises. As such, we devoted substantially all of our efforts to establishing a new business. During 2008, we began to generate revenues from our planned operations, and ceased to be a development stage company.
Sales were $230,648 and $487,127$917,966 for the three and nine months ended September 30, 2009, respectively,March 31, 2010, compared to $155,375 and $1,469,803$70,193 for the three and nine months ended September 30, 2008, respectively.March 31, 2009. Cost of sales was $225,189 and $506,573$719,837 for the three and nine months ended September 30, 2009, respectively,March 31, 2010, compared to $121,556 and $548,641$107,057 for the three and nine months ended September 30, 2008, respectively.March 31, 2009. Our sales and cost of sales declinedincreased in 2010 due to improved economic conditions each quarter fromand the second quartercommencement of 2008 through the first quarter of 2009. Sales began to increase in the second and third quarters of 2009. Cost of sales as a percentage of sales increased in 2009 as our fixed costs of sales increased.utility locating business. We expect sales and cost of sales to fluctuate as our business reaches maturity.
Selling, general and administrative (“SG&A”) expenses include all costs that are not directly associated with our revenue-generating activities. SG&A expenses include payroll costs for sales, administrative, and technical personnel, sales and marketing costs, corporate costs, and facilities costs. SG&A expenses were $1,214,087 and $3,175,895$1,547,123 for the three and nine months ended September 30, 2009, respectively,March 31, 2010, compared to $1,009,713 and $3,235,349$914,512 for the three and nine months ended September 30, 2008, respectively.March 31, 2009. The increase in SG&A costs for the three months ended September 30, 2009March 31, 2010 compared to the three months ended September 30, 2008March 31, 2009 was due to increased expenses resulting from the expansion of our sales and administrative staff and facilities in 2009,2010, and marketing costsincreased professional fees due to increased legal, financial advisory, government relations, and investor relations fees. In addition, we incurred a fee of $100,000 associated with an advertising campaign in 2009. The decreaseextension of payments due under the Amended Reduct License Agreement. These increases in SG&A costs for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008expenses were primarily due to legal, accounting and other expenses incurred in 2008 related to the acquisition of Kayenta and the subsequent filing of a Registration Statement under the Securities Act of 1933, as amended, for a portion of our shares. This decrease in expense was partially offset by increased expenses resulting from the expansion of our sales and administrative staff and facilitiesa reduction in 2009, and marketing costs associated with an advertising campaign in 2009.
Other income and expenses include interest income, interest expense, and non-business income and expenses, and gains or losses on foreign currency exchange.expenses. Other income and expense for the three and
nine months ended September 30, 2009March 31, 2010 was a net expense of $54,786 and $139,206, respectively,$42,422, which included interest income of $7,430$7,950, and $22,465, respectively, interest expense of $62,216 and $163,004, respectively, and other income of $0 and $1,333, respectively.$50,372. Other income and expense for the three and nine months ended September 30, 2008March 31, 2009 was a net income of $114,708 and a net expense of $46,953, respectively,$37,715, which included interest income of $6,048 and $14,009, respectively,$7,448, interest expense of $18,268$46,446, and $24,612, respectively, other income of $0 and $171, respectively, and a gain on foreign currency exchange of $126,928 and a loss on foreign currency exchange of $36,521, respectively.$1,283. The increase in interest expense in 20092010 is due to the increaseinterest on capital leases, partially offset by a reduction in interest on notes payable to stockholders. The decrease in losses on foreign currency exchange from 2008stockholders, due to 2009 is because the Company had no liabilitiesconversion of notes payable to be settled in foreign currency in 2009.stockholders to common stock.
We had no net benefit from income taxes, 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, 2009.March 31, 2010.
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:
Impairment Assessment of Intangible Assets. Intangible assets consist of exclusive and perpetual license rights to the patent pending DuctRunner Smart Probe™Probe™ technology. We license the technology from Reduct NV, a Belgian company, the developer oflicensed the technology under anthe Exclusive License and Distribution Agreement as amended from time to time, thatdated August 3, 2006 (the “Original Reduct License Agreement”). On December 15, 2009, we entered into the Amended Reduct License Agreement, which restructured the payment obligations and other terms of the Original Reduct License Agreement. The Amended Reduct License Agreement became effective on April 30, 2010. The Amended Reduct License Agreement provides us with exclusive control rights to the DuctRunner Smart Probe™Probe™ technology throughout the continents of North America, South America, and Australia. We recorded an intangible asset of $1,367,000 upon use of the license.license under the Original Reduct License Agreement. In addition to the license fees, we are required to make minimum purchases of Smart Probes™. If thewe are unable to satisfy minimum purchase requirements are not met,required pursuant to the exclusivity portion ofAmended Reduct License Agreement, Reduct may terminate the license agreement, with Reduct NV becomes void, and our investment in the license rights would becomebe impaired.
TheUnder the Original Reduct License Agreement, the license rights havehad an indefinite useful life. Accordingly, the license rights arewere not amortized under accounting principles generally accepted in the United States of America. Upon the execution of the Amended Reduct License Agreement on December 15, 2009, we determined that the license rights have a finite life. We estimate the useful life of the license rights under the Amended Reduct License Agreement to be twelve years. Accordingly, we are amortizing the investment in the license rights over a twelve-year period beginning January 1, 2010. We test the carrying value of the license rights annually for impairment, and review their useful life. Should the license rights be determined to be impaired, the value of the asset will be written down, and a loss recognized in the period in which the asset’s recorded value exceeds its fair value. In our review oftest for impairment, we determine the license rights for the year ended December 31, 2008, we determined that thefair value of the license rights was not impaired.based on a five-year projection of future cash flows, which is updated annually based on management’s projections.
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, 2009,March 31, 2010, we do not believe that material changes to contract cost estimates at completion for any of our open contracts are reasonably likely to occur.
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, 2009,March 31, 2010, 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.
ITEM 3. |
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 transact business in foreign currencies. At the date a foreign currency transaction is recognized, each asset, liability, revenue, expense, gain, or loss arising from the transaction is measured and recorded in United States dollars using the exchange rate in effect at that time. At each balance sheet date, balances that will be settled in foreign currencies are adjusted to reflect the current exchange rate. Any gain or loss resulting from changes in foreign currency exchange rates is included in net income in the period in which the exchange rate changes.
MostUnder the Original Reduct License Agreement, most of our transactions with Reduct NV arewere denominated in Euros. Under the Amended Reduct License Agreement, most future transactions with Reduct will be denominated in United States dollars. At SeptemberMarch 31, 2010, other than the existing obligations under the Original Reduct License Agreement, which were superseded by the Amended Reduct License Agreement upon its effectiveness on April 30, 2009,2010, we had no liabilities denominated in Euros.
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 ninethree months ended September 30,March 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 1. | LEGAL PROCEEDINGS |
The Company is not a party to any material pending legal proceedings. No such action is contemplated by the Company nor, to the best of its knowledge, has any action been threatened against the Company.
ITEM 2. | SALES OF UNREGISTERED EQUITY SECURITIES AND USE OF PROCEEDS |
During the quarter ended September 30, 2009,On March 19, 2010, the Company sold 1,989,900entered into a series of subscription agreements (collectively, the “March 2010 Subscription Agreement”) with various investors in connection with the sale of 8,589,771 shares of our common stock at $1.00 per share for an aggregate offering price of $8,589,771. Pursuant to Section 7.1 of the March 2010 Subscription Agreement, the Company agreed to register the March 2009 Shares under the Securities Act by September 1, 2010. In the event that the Company fails to so register the March 2010 Shares each investor would be entitled to receive an additional allocation of 2% of its portion of the March 2010 Shares for each 30 day period that elapsed after September 1, 2010. Also, on March 19, 2010, Mark A. Smith, the Company’s Chief Executive Officer and the Chairman of the Board of Directors, acquired 1,000,000 shares of the Company’s Common Stock. Each sharecommon stock in exchange for the cancellation of Common Stock was sold at a price$1,000,000 of $0.50 for a total of $994,950.indebtedness owed to Mr. Smith by the Company. The Company also issued 115,025513,233 shares of its common stock to Convertible Capital as a financing fee on the Company’s Common Stock at a price of $1.00 per share in exchange for services with a value of $115,025.sale. The sales and issuances took place in a series of private placement transactions pursuant to the exemption from the registration requirements of the Securities Act of 1933, as amended, provided by 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.
On April 6, 2010, the Company entered into a series of subscription agreements (collectively, the “April 2010 Subscription Agreement”) with various investors in connection with the sale of 112,000 shares of our common stock at $1.00 per share for an aggregate offering price of $112,000. Pursuant to Section 7.1 of the April 2010 Subscription Agreement, the Company agreed to register the April 2009 Shares under the Securities Act by September 1, 2010. In the event that the Company fails to so register the April 2010 Shares each investor would be entitled to receive an additional allocation of 2% of its portion of the April 2010 Shares for each 30 day period that elapsed after September 1, 2010. The sales and issuances took place in a series of private placement transactions pursuant to the exemption from the registration requirements of the Securities Act of 1933, as amended, provided by 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.
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
ITEM 4. |
None.
ITEM 5. | OTHER INFORMATION |
None.
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 |
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 Holdings, Inc. | ||||
(Registrant) | ||||
Date: | By: | /S/ MARK A. SMITH | ||
Name: | Mark A. Smith | |||
Title: | Chief Executive Officer | |||
By: | /S/ THOMAS R. OXENREITER | |||
Name: | Thomas R. Oxenreiter | |||
Title: | Chief Financial Officer |
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