UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q


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

FOR THE QUARTERLY PERIOD ENDED: JUNESEPTEMBER 30, 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

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 AugustNovember 10, 2010: 43,870,373.

44,701,898.




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 PrivatePrivat e 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.



TABLE OF CONTENTS

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ITEM 6. EXHIBITS.EXHIBITS

  2125


PART I - FINANCIAL INFORMATION

ITEMITEM 1.
FINANCIAL STATEMENTS

GEOSPATIAL HOLDINGS, INC.

INDEX

   Page
FINANCIAL STATEMENTS AS OF JUNESEPTEMBER 30, 2010 AND DECEMBER 31, 2009 AND FOR THE THREE AND SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2010 AND 2009  
 
 
 
 
 

3

Geospatial Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

   June  30,
2010
  December 31,
2009*
 
    
   (Unaudited)    

ASSETS

   

Current assets:

   

Cash and cash equivalents

  $106,412   $481,536  

Accounts receivable, net of allowance for doubtful accounts of $10,000 at June 30, 2010 and December 31, 2009

   525,479    263,653  

Costs and estimated earnings in excess of billings on uncompleted contracts

   84,014    61,624  

Notes receivable

   450,162    397,373  

Prepaid expenses

   470,987    371,772  
         

Total current assets

   1,637,054    1,575,958  
         

Property and equipment, net of accumulated depreciation

   2,001,705    1,603,785  

License fees, net of accumulated amortization

   1,310,042    1,367,000  

Deposits on equipment

   5,460,000    500,000  
         

Total non-current assets

   8,771,747    3,470,785  
         

Total assets

  $10,408,801   $5,046,743  
         

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

   

Current liabilities:

   

Accounts payable

  $1,016,687   $1,391,488  

Accrued expenses

   3,709,892    3,670,337  

Billings in excess of costs and estimated earnings on uncompleted contracts

   492    —    

Current portion of capital lease liabilities

   313,942    210,645  

Due to stockholder

   78,646    26,000  

Notes payable to stockholder

   279,261    140,071  
         

Total current liabilities

   5,398,920    5,438,541  
         

Non-current liabilities:

   

Capital lease liabilities

   481,386    458,167  

Convertible note payable to stockholder

   31,770    1,013,637  
         

Total non-current liabilities

   513,156    1,471,804  
         

Total liabilities

   5,912,076    6,910,345  
         

Stockholders’ equity (deficit):

   

Preferred stock, $.001 par value; 5,000,000 shares authorized at June 30, 2010 and December 31, 2009; 0 and 1,575,000 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively

   —      1,575  

Common stock, $.001 par value; 100,000,000 shares authorized at June 30, 2010 and December 31, 2009; 43,784,998 and 31,124,369 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively

   43,785    31,124  

Additional paid-in capital

   22,688,452    13,473,089  

Accumulated deficit

   (18,235,512  (15,369,390
         

Total stockholders’ equity (deficit)

   4,496,725    (1,863,602
         

Total liabilities and stockholders’ equity (deficit)

  $10,408,801   $5,046,743  
         

*Condensed from audited financial statements.


  September 30,  December 31, 
  2010   2009* 
  (Unaudited)     
ASSETS 
        
Current assets:       
Cash and cash equivalents $756,125  $481,536 
Accounts receivable, net of allowance for doubtful accounts of $10,000 at September 30, 2010 and December 31, 2009  515,498   263,653 
Costs and estimated earnings in excess of billings on uncompleted contracts  52,234   61,624 
Notes receivable  -   397,373 
Prepaid expenses  323,495   371,772 
         
Total current assets  1,647,352   1,575,958 
         
Non-current assets:        
Property and equipment, net of accumulated depreciation  1,900,506   1,603,785 
License fees, net of accumulated amortization  1,281,562   1,367,000 
Notes receivable  459,301   - 
Deposits on equipment  5,450,000   500,000 
         
Total non-current assets  9,091,369   3,470,785 
         
Total assets $10,738,721  $5,046,743 
         
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 
         
Current liabilities:        
Accounts payable $1,466,846  $1,391,488 
Accrued expenses  4,007,758   3,670,337 
Billings in excess of costs and estimated earnings on uncompleted contracts  5,702   - 
Current portion of capital lease liabilities  325,983   210,645 
Due to stockholder  130,221   26,000 
Notes payable to stockholder  284,930   140,071 
         
Total current liabilities  6,221,440   5,438,541 
         
Non-current liabilities:        
Capital lease liabilities  423,165   458,167 
Senior convertible redeemable notes  949,878   - 
Convertible note payable to stockholder  32,415   1,013,637 
         
Total non-current liabilities  1,405,458   1,471,804 
         
Total liabilities  7,626,898   6,910,345 
         
Stockholders' equity (deficit):        
Preferred stock:        
Undesignated, $0.001 par value; 3,425,000 shares authorized at September 30, 2010 and December 31, 2009, respectively;  no shares issued and outstanding at September 30, 2010 and December 31, 2009  -   - 
Series A Convertible Preferred Stock, $0.001 par value;  1,575,000 shares authorized at September 30, 2010 and December 31, 2009;  0 and 1,575,000 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively  -   1,575 
Common stock, $.001 par value; 100,000,000 shares authorized at September 30, 2010  and December 31, 2009; 44,220,423 and 31,124,369 shares issued and outstanding at September 30, 2010 and December 31, 2009, respectively  44,220   31,124 
Additional paid-in capital  22,688,016   13,473,089 
Accumulated deficit  (19,620,413)  (15,369,390)
         
Total stockholders' equity (deficit)  3,111,823   (1,863,602)
         
Total liabilities and stockholders' equity (deficit) $10,738,721  $5,046,743 
* Condensed from audited financial statements.

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

GeospatialGeospatial Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited)

   For the Three Months
Ended June 30,
  For the Six Months
Ended June 30,
 
   
   2010  2009  2010  2009 

Sales

  $1,213,544   $186,286   $2,131,510   $256,479  

Cost of sales

   943,286    174,327    1,663,123    281,384  
                 

Gross profit

   270,258    11,959    468,387    (24,905

Selling, general and administrative expenses

   1,723,558    1,047,296    3,270,681    1,961,808  
                 

Loss from operations

   (1,453,300  (1,035,337  (2,802,294  (1,986,713
                 

Other income (expense):

     

Interest income

   8,841    7,587    16,791    15,035  

Interest expense

   (31,683  (54,342  (82,055  (100,788

Other income

   1,436    50    1,436    1,333  
                 

Total other income and expenses

   (21,406  (46,705  (63,828  (84,420
                 

Net loss before income taxes

   (1,474,706  (1,082,042  (2,866,122  (2,071,133

Provision for (benefit from) income taxes

   —      —      —      —    
                 

Net loss

  $(1,474,706 $(1,082,042 $(2,866,122 $(2,071,133
                 

Basic and fully-diluted net loss per share of Common Stock

  $(0.04 $(0.04 $(0.08 $(0.09
                 


  For the Three Months  For the Nine Months 
  Ended September 30,  Ended September 30, 
  2010  2009  2010  2009 
             
Sales $981,047  $230,648  $3,112,557  $487,127 
Cost of sales  908,649   225,189   2,571,772   506,573 
                 
Gross profit  72,398   5,459   540,785   (19,446)
                 
Selling, general and administrative expenses  1,433,717   1,214,087   4,704,398   3,175,895 
                 
Loss from operations  (1,361,319)  (1,208,628)  (4,163,613)  (3,195,341)
                 
Other income (expense):                
Interest income  9,138   7,430   25,929   22,465 
Interest expense  (32,784)  (62,216)  (114,839)  (163,004)
Other income  64   -   1,500   1,333 
                 
Total other income and expenses  (23,582)  (54,786)  (87,410)  (139,206)
                 
Net loss before income taxes  (1,384,901)  (1,263,414)  (4,251,023)  (3,334,547)
                 
Provision for (benefit from) income taxes  -   -   -   - 
                 
Net loss $(1,384,901) $(1,263,414) $(4,251,023) $(3,334,547)
                 
Basic and fully-diluted net loss per share of common stock $(0.03) $(0.05) $(0.11) $(0.13)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
GeospatialGeospatial Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders’Stockholders' Equity (Deficit)

For the SixNine Months Ended JuneSeptember 30, 2010

(Unaudited)

   Preferred Stock  Common Stock  

Additional

Paid-In

  Accumulated    
  Shares  Amount  Shares  Amount  Capital  Deficit  Total 

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

  —      —     9,063,233   9,064   8,015,614    —      8,024,678  

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  

Conversion of Series A Convertible

Preferred Stock to common stock

  (1,575,000  (1,575 2,126,250   2,126   (551  —     

 

—  

  

Issuance of common stock in settlement of contractual obligations

  —      —     269,375   269   (269  —      —    

Net loss for the six months ended June 30, 2010

  

—  

  

 

 

—  

  

 

—  

  

 

—  

  

 

—  

  

 

 

(2,866,122

 

 

(2,866,122

                           

Balance, June 30, 2010

  —     $—     43,784,998  $43,785  $22,688,452   $(18,235,512 $4,496,725  
                           


     Additional       
  Preferred Stock  Common Stock  Paid-In  Accumulated    
  Shares  Amount  Shares  Amount  Capital  Deficit  Total 
                      
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  -   -   9,063,233   9,064   8,015,613   -   8,024,677 
                             
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 
                             
Conversion of Series A Convertible  Preferred Stock to common stock  (1,575,000)  (1,575)  2,126,250   2,126   (551)  -   - 
                             
Issuance of common stock in settlement of contractual obligations  -   -   704,800   704   (704)  -   - 
                             
Net loss for the nine months ended September 30, 2010  -   -   -   -   -   (4,251,023)  (4,251,023)
                             
Balance, September 30, 2010  -  $-   44,220,423  $44,220  $22,688,016  $(19,620,413) $3,111,823 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
GeospatialGeospatial Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

   For the Six Months
Ended June 30,
 
  
   2010  2009 

Cash flows from operating activities:

   

Net loss

  $(2,866,122 $(2,071,133

Adjustments to reconcile net loss to net cash used in operating activities:

   

Depreciation and amortization

   273,601    76,356  

Accrued interest receivable

   (16,789  (14,989

Accrued interest payable

   27,323    99,535  

Issuance of common stock for services

   150,000    —    

Rent expensed through increase in due to stockholder

   —      39,000  

Changes in operating assets and liabilities:

   

Accounts receivable

   (261,826  (19,368

Costs and estimated earnings in excess of billings on uncompleted contracts

   (22,390  (27,830

Prepaid expenses

   (99,215  (7,155

Accounts payable

   (374,801  139,698  

Accrued expenses

   91,326    533,135  

Billings in excess of costs and estimated earnings on uncompleted contracts

   492    (14,450

Due to stockholder

   52,646    —    
         

Net cash used in operating activities

   (3,045,755  (1,267,201
         

Cash flows from investing activities:

   

Purchase of property, plant and equipment

   (369,828  (13,155

Deposits on equipment

   (4,960,000  (100,000

Notes receivable issued

   (36,000  (5,446
         

Net cash used in investing activities

   (5,365,828  (118,601
         

Cash flows from financing activities:

   

Proceeds from sale of common stock, net of offering costs

   8,024,678    652,500  

Net borrowings from stockholders

   130,000    718,000  

Principal payments on capital lease liabilities

   (118,219  —    
         

Net cash provided by financing activities

   8,036,459    1,370,500  
         

Net change in cash and cash equivalents

   (375,124  (15,302

Cash and cash equivalents at beginning of period

   481,536    42,793  
         

Cash and cash equivalents at end of period

  $106,412   $27,491  
         

Supplemental disclosures:

   

Cash paid during period for interest

  $54,558   $1,252  

Cash paid during period for income taxes

   —      —    

Non-cash transactions:

   

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

   244,735    —    

Reclassification of due to stockholder to note payable to stockholder

   —      52,000  


  For the Nine Months 
  Ended September 30, 
  2010  2009 
       
Cash flows from operating activities:      
Net loss $(4,251,023) $(3,334,547)
Adjustments to reconcile net loss to net cash used in operating activities:        
Depreciation and amortization  433,115   115,211 
Accrued interest receivable  (25,928)  (22,408)
Accrued interest payable  33,637   160,335 
Issuance of common stock for services  150,000   115,025 
Rent expensed through increase in due to stockholder  -   45,500 
Changes in operating assets and liablities:        
Accounts receivable  (251,845)  (155,376)
Costs and estimated earnings in excess of billings on uncompleted contracts  9,390   (47,364)
Prepaid expenses  48,277   20,734 
Accounts payable  75,357   548,084 
Accrued expenses  389,192   367,943 
Billings in excess of costs and estimated earnings on uncompleted contracts  5,702   (6,042)
Due to stockholder  104,221   - 
         
Net cash used in operating activities  (3,279,905)  (2,192,905)
         
Cash flows from investing activities:        
Purchase of property, plant and equipment  (367,326)  (22,637)
Deposits on equipment  (4,950,000)  (300,000)
Notes receivable issued  (36,000)  (5,446)
         
Net cash used in investing activities  (5,353,326)  (328,083)
         
Cash flows from financing activities:        
Proceeds from sale of common stock, net of offering costs  8,024,678   1,647,450 
Proceeds from issuance of senior convertible redeemable notes  1,000,000   - 
Debt issuance costs  (50,122)  - 
Net borrowings from stockholders  130,000   882,000 
Principal payments on capital lease liabilities  (196,736)  - 
         
Net cash provided by financing activities  8,907,820   2,529,450 
         
Net change in cash and cash equivalents  274,589   8,462 
         
Cash and cash equivalents at beginning of period  481,536   42,793 
         
Cash and cash equivalents at end of period $756,125  $51,255 
         
Supplemental disclosures:        
Cash paid during period for interest $81,202  $2,669 
Cash paid during period for income taxes  -   - 
Non-cash transactions:        
Issuance of common stock in settlement of liabilities  1,051,771   104,639 
Issuance of common stock for services  150,000   115,025 
Capital lease liabilities incurred  277,072   - 
Deferred debt issuance costs  50,000   - 
Reclassification of due to stockholder to note payable to stockholder  -   52,000 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
GeospatialGeospatial Holdings, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

June

September 30, 2010

Note 1 – Basis of Presentation


The Unaudited Condensed Consolidated Financial Statements included herein have been prepared by Geospatial 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 three and sixnine months ended JuneSeptember 30, 2010 should be read in conjunction with the Company’s Financial Statements as of and for the year ended December 31,3 1, 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 sixnine months ended JuneSeptember 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 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.


The Condensed Consolidated Financial Statements include the accounts of the Company and its subsidiaries, Geospatial 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

June

September 30, 2010


Note 2 – Accounts Receivable


Accounts receivable consisted of the following at JuneSeptember 30, 2010:

Billed:

  

Fixed-price contracts:

  

Completed contracts

  $72,271  

Contracts in progress

   23,204  

Time-and-materials contracts

   84,757  

Units of delivery contracts

   297,704  

Retainage

   2,981  

Unbilled

   54,562  

Less: allowance for doubtful accounts

   (10,000
     
  $525,479  
     

Billed:   
Fixed-price contracts:   
Completed contracts $130,532 
Contracts in progress  14,854 
Time-and-materials contracts  20,465 
Units of delivery contracts  291,893 
     
Retainage  2,981 
     
Unbilled  64,773 
     
Less:  allowance for doubtful accounts  (10,000)
     
  $515,498 

Note 3 – Uncompleted Contracts


Costs, estimated earnings, and billings on uncompleted contracts are summarized as follows at JuneSeptember 30, 2010:

Costs incurred on uncompleted contracts

  $184,633  

Estimated earnings

   110,129  
     
   294,762  

Billings to date

   (211,240
     
  $83,522  
     


Costs incurred on uncompleted contracts $201,496 
Estimated earnings  137,623 
   339,119 
     
Billings to date  (292,586)
     
  $46,532 

Included in the accompanying balance sheet under the following captions:

Costs and estimated earnings in excess of billings on uncompleted contracts

  $84,014

Billings in excess of costs and estimated earnings on uncompleted contracts

   492
    
  $83,522
    


Costs and estimated earnings in excess of billings on uncompleted contracts $52,234 
     
Billings in excess of costs and estimated earnings on uncompleted contracts  (5,702)
     
  $46,532 



Geospatial Holdings, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

June

September 30, 2010

Note 4 – Backlog


The following schedule summarizes changes in backlog on fixed-price contracts during the three and sixnine months ended JuneSeptember 30, 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 deliveryunits-of-delivery or time-and-materials contracts.

   Three Months
Ended
June 30, 2010
  Six Months
Ended
June 30, 2010
 
   
   

Backlog balance at beginning of the period

  $296,513   $280,650  

New contracts awarded during period

   276,086    483,786  

Contract adjustments

   36,446    34,546  
         
   609,045    798,982  

Less: contract revenue earned during the period

   (311,597  (501,534
         

Backlog balance at June 30, 2010

  $297,448   $297,448  
         


  Three Months  Nine Months 
  Ended  Ended 
  September 30, 2010  September 30, 2010 
       
Backlog balance at beginning of the period $297,448  $280,650 
New contracts awarded during period  445,796   929,582 
Contract adjustments  3,619   38,165 
   746,863   1,248,397 
         
Less:  contract revenue earned during the period  (204,162)  (705,696)
         
Backlog balance at September 30, 2010 $542,701  $542,701 



Note 5 – Senior Convertible Redeemable Notes

On September 23, 2010, the Company received an advance payment of $1,000,000 for a 10% Senior Convertible Redeemable Note (the “Note”).  Also on that date, the Company accrued a liability for $50,000 principal amount of the Note for fees incurred pursuant to the Note.  In accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) 309.27, the liability for the Note is presented net of debt issuance costs.

On October 15, 2010, the Company completed private placements of $1,100,000 aggregate principal amount of the Note with two unrelated accredited investors (the “Holders”), pursuant to Subscription Agreements, dated October 15, 2010.  Under the terms of the Subscription Agreement and the Note, the Company may issue up to an additional $1.4 million aggregate principal amount of the Note.  Interest on the Note accrues at a rate of 10% per annum by increasing the Note balance quarterly.  The Note matures fifteen months after October 15, 2010.  With the consent of the Holders of a majority of the Note, the term of the Note may be extended for up to three six-month periods.  The Holders may, at any time until the Note is fully paid, convert any outstanding principal and accru ed interest on the Note into shares of the Company’s common stock, par value $.001 per share (the “Common Stock”), at a price of $0.50 per share.  Pursuant to the terms of the Subscription Agreements, the Company granted the investors certain registration rights with respect to the Common Stock issuable upon conversion of the Note.  Upon the occurrence of certain events, the price at which the Note may be converted into shares of the Company’s Common Stock may be adjusted.  In addition, the Company may prepay in cash all or any portion of the outstanding principal amount of the Note, without penalty, on the 30th day following written notice to the Holder of the Note.


Geospatial Holdings, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

June

September 30, 2010

Note 56 – 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 $39,000$58,500 of lease expense for this building during each of the six-monthnine-month periods ended JuneSeptember 30, 2010 and 2009.


During 2009, Mr. Smith and the Company entered into a Note Conversion Agreement, pursuant to which the Company issued to Mr. Smith 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 Convertible Note bears interest at 8% per annum, compounded monthly.  The Smith Convertible Note is payable on the 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 principal balance of the Smith Convertible Note to the Company’s common stock at a conversion price of $1.00 per share.  During the sixnine months ended JuneSeptember 30, 2010, 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 $18,133$18,778 for the sixnine months ended JuneSeptember 30, 2010.  The balance due on the Smith Convertible Note, including accrueda ccrued interest, was $31,770$32,415 at JuneSeptember 30, 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 $5,244$7,989 for the sixnine months ended JuneSeptember 30, 2010.  At JuneSeptember 30, 2010, the balance due on the Smith Demand Note was $135,256.

$138,001.


At December 31, 2009, the Company owed Mr. Smith $10,059 for other notes payable.  During the sixnine months ended JuneSeptember 30, 2010, Mr. Smith advanced the Company $130,000.  Interest on other notes for the sixnine months ended JuneSeptember 30, 2010 was $3,946.$6,870.  At December 31, 2009,September 30, 2010, the balance due on other notes payable was $144,005.

$146,929.




Geospatial Holdings, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

June

September 30, 2010

Note 6 – Related Party Transactions (continued)

At September 30, 2010, the Company owed Mr. Smith $130,221 for unreimbursed expenditures made by Mr. Smith on behalf of the Company.
On March 2, 2010, the Company entered into a Strategic Advisory Agreement (the “Strategic Advisory Agreement”) with Pace Global Energy Services, LLC (“Pace”) and Ridge Global, LLC (“Ridge”) to provide the Company with certain strategic advisory and other support services.  Pursuant to the Strategic Advisory Agreement, the Company issued Pace and Ridge warrants to purchase 1,600,000 and 2,400,000 shares, respectively, of the Company’s common stock at an exercise price of $1.00 per share.  The warrants expire on March 2, 2012.  Further, pursuant to the Strategic Advisory Agreement, the Company agreed to expand the number of members of the Company’s board of directors from three to five, and to appoint Timothy F. Sutherland, Chairman and Chief Executive Officer of Pace, and Thomas J. Ridge, President and Chief Executive Officer of Ridge, as members of the Company’s board of directors to fill the newly-created vacancies.  During the nine months ended September 30, 2010, the Company incurred $280,000 in fees pursuant to the Strategic Advisory Agreement.


Geospatial Holdings, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2010
Note 7 – Income Taxes


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

   For the Three Months
Ended June 30,
  For the Six Months
Ended June 30,
 
   
   2010  2009  2010  2009 

Current:

     

Federal

  $—     $—     $—     $—    

State

   —      —      —      —    
                 
   —      —      —      —    
                 

Deferred:

     

Federal

   458,826    339,514    892,979    649,878  

State

   145,659    107,782    283,485    206,310  
                 
   604,485    447,296    1,176,464    856,188  
                 

Total income taxes

   604,485    447,296    1,176,464    856,188  

Less: valuation allowance

   (604,485  (447,296  (1,176,464  (856,188
       ��         

Net income taxes

  $—     $—     $—     $—    
                 


  For the Three Months  For the Nine Months 
  Ended September 30,  Ended September 30, 
  2010  2009  2010  2009 
Current:            
    Federal $-  $-  $-  $- 
    State  -   -   -   - 
   -   -   -   - 
Deferred:                
    Federal  432,026   396,329   1,325,005   1,046,207 
    State  137,151   125,819   420,636   332,129 
   569,177   522,148   1,745,641   1,378,336 
Total income taxes  569,177   522,148   1,745,641   1,378,336 
Less:  valuation allowance  (569,177)  (522,148)  (1,745,641)  (1,378,336)
                 
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 June 30,
  For the Six  Months
Ended June 30,
 
   
   2010  2009  2010  2009 

Federal statutory rate

  35.0 35.0 35.0 35.0

State income taxes (net of federal benefit)

  6.5   6.5   6.5   6.5  

Valuation allowance

  (41.5 (41.5 (41.5 (41.5
             

Effective rate

  0.0 0.0 0.0 0.0
             


  For the Three Months  For the Nine Months 
  Ended September 30,  Ended September 30, 
  2010  2009  2010  2009 
Federal statutory rate  35.0%  35.0%  35.0%  35.0%
State income taxes (net of federal benefit)  6.5   6.5   6.5   6.5 
Valuation allowance  (41.5)  (41.5)  (41.5)  (41.5)
                 
Effective rate  0.0%  0.0%  0.0%  0.0%

Geospatial Holdings, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

June

September 30, 2010


Note 67 – Income Taxes (continued)


Significant components of the Company’s deferred tax assets and liabilities are summarized below as of JuneSeptember 30, 2010 and 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 Board Accounting Standards CodificationFASB ASC 740,Income Taxes.

   As of June 30, 
  2010  2009 

Start-up costs

  $91,575   $101,408  

License fees

   (83,520  (69,337

Depreciation

   (118,214  (90,921

Allowance for doubtful accounts

   4,150    4,150  

Accrued expenses

   1,309,617    —    

Uncompleted contracts

   (45,704  (23,604

Net operating loss carryforward

   6,246,976    3,935,299  
         

Deferred income taxes

   7,404,880    3,856,995  

Less: valuation allowance

   (7,404,880  (3,856,995
         

Net deferred income taxes

  $—     $—    
         


  As of September 30, 
  2010  2009 
       
Start-up costs $89,117  $98,950 
License fees  (81,156)  (78,792)
Depreciation  (121,197)  (94,832)
Allowance for doubtful accounts  4,150   4,150 
Accrued expenses  1,425,597   - 
Uncompleted contracts  (57,114)  (29,954)
Net operating loss carryforward  6,714,660   4,479,622 
         
    Deferred income taxes  7,974,057   4,379,144 
         
    Less:  valuation allowance  (7,974,057)  (4,379,144)
         
Net deferred income taxes $-  $- 

At JuneSeptember 30, 2010, the Company had federal and state net operating loss carryforwards of approximately $15,053,000.$16,180,000.  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

June

September 30, 2010


Note 78 – Commitments and Contingencies


On January 29, 2010, the Company and Reduct, NV (“Reduct”) entered into the First Amendment to the Amended 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 December 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 Amended 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 Reduct License Agreement from March 31, 2010 to $2,500,000 by March 17, 2010, and $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.  Upon the April 30, 2010 payment, the Amended Reduct License Agreement became effective.


On August 14, 2010, the Company and Reduct entered into a Letter Agreement Modifying the Amended and Restated Exclusive License and Distribution Agreement, which extended the date for payment of the Company’s advance payment for Smart Probe™ equipment of $2,500,000 under the Amended Reduct License Agreement from June 30, 2010 to September 15, 2010.

On September 15, 2010, the Company and Reduct entered into a Letter Agreement Modifying the Amended and Restated Exclusive License and Distribution Agreement, which extended the dates for payments of the Company’s advance payments for Smart Probe™ equipment of $2,500,000 and $1,750,000 under the Amended Reduct License Agreement from September 15, 2010 and September 30, 2010, respectively, to October 30, 2010.

Geospatial Holdings, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2010

Note 89 – Stock-Based Payments


During the sixnine months ended JuneSeptember 30, 2010, the Company granted options to purchase 30,000 shares of common stock to an eligible employee under the 2007 Stock Option Plan, and options to purchase 50,00075,000 shares of the Company’s common stock under the 2007 Stock Option Plan were forfeited.


On January 1, 2010, the Company issued warrants to purchase 150,000 shares of common stock to a contractor.  Warrants to purchase 100,000 shares of common stock were subsequently cancelled.  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 exercisable at $2.15 per share due to a contractor, and issued warrants to purchase 250,000 shares of the Company’s common stock at an exercise price of $1.38 per share.  The warrants expire on January 7, 2020.

Geospatial Holdings, Inc. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

June 30, 2010

Note 8 – Stock-Based Payments (continued)

On March 2, 2010, the Company entered into a Strategic Advisory Agreement (the “Strategic Advisory Agreement”) with Pace Global Energy Services, LLC (“Pace”) and Ridge Global, LLC (“Ridge”) to provide the Company with certain strategic advisory and other support services.


Pursuant to the Strategic Advisory Agreement with Pace and Ridge, the Company issued Pace Global Energy Services, LLC and Ridge Global, LLC warrants to purchase 1,600,000 and 2,400,000 shares, respectively, of the Company’s common stock at an exercise price of $1.00 per share.  The warrants expire on March 2, 2012. Further, pursuant


Geospatial Holdings, Inc. and Subsidiaries
Notes to the Strategic Advisory Agreement, the Company agreed to expand the number of members of the Company’s board of directors from three to five, and to appoint Timothy F. Sutherland, Chairman and Chief Executive Officer of Pace, and Thomas J. Ridge, President and Chief Executive Officer of Ridge, as members of the Company’s board of directors to fill the newly-created vacancies.

Unaudited Condensed Consolidated Financial Statements
September 30, 2010

Note 910 – 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 June 30,  Six Months Ended June 30, 
  2010  2009  2010  2009 

Net loss

  $(1,474,706 $(1,082,042 $(2,866,122 $(2,071,133

Divided by:

     

Weighted average shares outstanding

   41,970,770    24,395,598    37,247,344    24,180,273  
                 

Basic and fully-diluted net loss per share

  ($0.04 ($0.04 ($0.08 ($0.09
                 


  Three Months Ended September 30,  Nine Months Ended September 30, 
  2010  2009  2010  2009 
             
Net loss $(1,384,901) $(1,263,414) $(4,251,023) $(3,334,547)
                 
Divided by:                
    Weighted average shares outstanding  43,890,377   25,890,406   39,486,022   24,756,581 
                 
Basic and fully-diluted net loss per share $(0.03) $(0.05) $(0.11) $(0.13)

The effect of the potential conversion of the Smith Convertible Note to 31,77032,415 shares of common stock was not included in the computation of diluted earnings per share for the three or sixnine months ended JuneSeptember 30, 2010 because the effect of its conversion would be antidilutive.


The effects of options to purchase 12,175,00012,150,000 shares of common stock, and warrants to purchase 9,766,272 shares of common stock were not included in the computation of diluted earnings per share for the three or nine months ended March 31,September 30, 2010 because the effect of their conversion would be antidilutive.



Geospatial Holdings, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2010

Note 1011 – Subsequent Events


On August 14,October 15, 2010, Company completed private placements of $1,100,000 aggregate principal amount of a 10% Senior Convertible Redeemable Note (the “Note”) with two unrelated accredited investors (the “Holders”), pursuant to Subscription Agreements, dated October 15, 2010.  Under the terms of the Subscription Agreement and the Note, the Company may issue up to an additional $1.4 million aggregate principal amount of the Note.  Interest on the Note accrues at a rate of 10% per annum by increasing the Note balance quarterly.  The Note matures fifteen months after October 15, 2010.  With the consent of the Holders of a majority of the Note, the term of the Note may be extended for up to three six-month periods.  The Holders may, at any time until the Note is fu lly paid, convert any outstanding principal and Reduct enteredaccrued interest on the Note into shares of the Company’s common stock, par value $.001 per share (the “Common Stock”), at a Letter Agreementprice of $0.50 per share.  Pursuant to extend the dateterms of payment for the advance purchaseSubscription Agreements, the Company granted the investors certain registration rights with respect to the Common Stock issuable upon conversion of equipmentthe Note.  Upon the occurrence of $2,500,000 due pursuantcertain events, the price at which the Note may be converted into shares of the Company’s Common Stock may be adjusted.  In addition, the Company may prepay in cash all or any portion of the outstanding principal amount of the Note, without penalty, on the 30th day following written notice to the Holder of the Note.

The Company failed to satisfy its obligation under the Amended Reduct License Agreement from Juneto make a payment to Reduct for the purchase of equipment in the amount of $4,250,000 by October 30, 20102010.  No event of default has been declared under the Amended Reduct License Agreement.  The Company and Reduct are currently negotiating an agreement to September 15, 2010.

extend the due date of such payment.

19

ITEMITEM 2: 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, 2009, filed with our Annual Report on Form 10-K on April 16, 2010, and our financial statements and notes thereto as of and for the three and sixnine months ended JuneSeptember 30, 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 JuneSeptember 30, 2010, we had current assets of $1,637,054,$1,647,352, and current liabilities of $5,398,920.

$6,221,440.

Our business depends largely on patent pending Smart Probe™ technology that we license from Reduct NV (“Reduct”), the developer of the technology. We are the exclusive licensee of the Smart Probe™ technology in North America, South America, and 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.

We are obligated to make various payments and minimum purchases under the Amended Reduct License Agreement in order to satisfy our obligations thereunder. Under the Amended Reduct License Agreement, we must make a license payment of $3,000,000 by December 31, 2010.  In addition, we must make minimum quarterly payments totaling $6,000,000, $11,750,000, and $6,612,500 in 2010, 2011, and 2012, respectively. If the Amended Reduct License Agreement is renewed, this minimum purchase requirement will increase by 15% annually over the prior year beginning in 2013. If we fail to make any of these payments or if Reduct believes that we have failed to meet any of our other obligations under the Amended Reduct License Agreement, Reduct could seek to limit or terminate our license rights, which could lead to costly and time-consuming litigationl itigation and potentially, a loss of our 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.

On August 14, 2010, the Company and Reduct entered into a Letter Agreement to extend the date of payment for the advance purchase of equipment of $2,500,000 due pursuant to the Amended Reduct License Agreement from June 30, 2010 to September 15, 2010.

On September 15, 2010, the Company and Reduct entered into a Letter Agreement to extend the dates of payments for the advance purchases of equipment of $2,500,000 and $1,750,000 due pursuant to the Amended Reduct License Agreement from September 15, 2010 and September 30, 2010, respectively, to October 30, 2010.

The Company failed to satisfy its obligation under the Amended Reduct License Agreement to make a payment to Reduct for the purchase of equipment in the amount of $2,500,000 by October 30, 2010.  No event of default has been declared under the Amended Reduct License Agreement.  The Company and Reduct are currently negotiating an agreement to extend the due date of such payment.

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 intoi nto 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 were used to fund general working capital needs and our advance payment to Reduct for equipment.

  On October 15, 2010, the Company completed private placements of $1.1 million aggregate principal amount of a 10% Senior Convertible Redeemable Note (the “Note”), pursuant to Subscription Agreements dated October 15, 2010.  Under the terms of the Subscription Agreement and the Note, the Company may issue up to an additional $1.4 million aggregate principal amount of the Note.  The proceeds of the Note were 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-partiesthird 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

Sales were $1,213,544$981,047 and 2,131,5103,112,557 for the three and sixnine months ended JuneSeptember 30, 2010, respectively, compared to $186,286$230,648 and $256,479$487,127 for the three and sixnine months ended JuneSeptember 30, 2009.2009, respectively.  Cost of sales was $943,286$908,649 and $1,663,123$2,571,773 for the three and sixnine months ended JuneSeptember 30, 2010, respectively, compared to $174,327$225,189 and $281,384$506,573 for the three and sixnine months ended JuneSeptember 30, 2009.2009, respectively.  Our sales and cost of sales increased in 2010 due to improved economic conditions and the commencement of our utility locating business.business, geographical expansion of our business, and growing market acceptance of our Smart Probe™ mapping.  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 $1,723,558 and $3,270,681$1,433,717 for the three and six months ended JuneSeptember 30, 2010, compared to $1,047,296 and $1,961,808$1,214,087 for the three and six months ended JuneSeptember 30, 2009.  The increasesincrease in SG&A costs from 2009 to 2010 was due to increased expenses resulting from the expansion of our sales and administrative staff and facilities in 2010, partially offset by reductions in professional fees.  SG&A expenses were $4,704,398 for the three and sixnine months ended JuneSeptember 30, 2010, compared to $3,175,895 for the three and sixni ne months ended JuneSeptember 30, 2009.  The increase from 2009 wereto 2010 was due to increased expenses resulting from the expansion of our sales and administrative staff and facilities in 2010, and increased professional fees due to increased legal, financial advisory, government relations, and investor relations fees.  In addition, in 2010 we incurred a fee of $100,000 associated with an extension of payments due under the Amended Reduct License Agreement.

Other income and expenses include interest income, interest expense, and non-business income and expenses.  Other income and expense for the three months ended JuneSeptember 30, 2010 was a net expense of $21,406,$23,582, which included interest income of $8,841,$9,138, interest expense of $31,683,$32,784, and other income of

$1,436. $64.  Other income and expense for the sixnine months ended JuneSeptember 30, 2010 was a net expense of $63,828,$87,410, which included interest income of $16,791,$25,929, interest expense of $82,055,$114,839, and other income of $1,436.$1,500.  Other income and expense for the three months ended JuneSeptember 30, 2009 was a net expense of $46,705,$54,786, which included interest income of $7,587,$7,430, and interest expense of $54,342, and other income of $50.$62,216.  Other income and expenseexp ense for the sixnine months ended JuneSeptember 30, 2009 was a net expense of $84,420,$139,206, which included interest income of $15,035,$22,465, interest expense of $100,788,$163,004, and other income of $1,333.  The decrease in interest expense in 2010 is due to a reduction in interest on notes payable to stockholders, due to the conversion of notes payable to stockholders to common stock, partially offset by additional interest expense in 2010 related to capital leases.

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 JuneSeptember 30, 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 license rights to the patent pending DuctRunner Smart Probe™ technology. We licensed the technology under the Exclusive License and Distribution Agreement dated 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™ technology throughout the continents of North America, SouthSou th America, and Australia. We recorded an intangible asset of $1,367,000 upon use of the license under the Original Reduct License Agreement. In addition to the license fees, we are required to make minimum purchases of Smart Probes™. If we are unable to satisfy minimum purchase requirements required pursuant to the Amended Reduct License Agreement, Reduct may terminate the license agreement, and our investment in the license rights would be impaired.

On August 14, 2010, the Company and Reduct entered into a Letter Agreement to extend the date of payment for the advance purchase of equipment of $2,500,000 due pursuant to the Amended Reduct License Agreement from June 30, 2010 to September 15, 2010.

On September 15, 2010, the Company and Reduct entered into a Letter Agreement to extend the dates of payments for the advance purchases of equipment of $2,500,000 and $1,750,000 due pursuant to the Amended Reduct License Agreement from September 15, 2010 and September 30, 2010, respectively, to October 30, 2010.
The Company failed to satisfy its obligation under the Amended Reduct License Agreement to make a payment to Reduct for the purchase of equipment in the amount of $4,250,000 by October 30, 2010.  No event of default has been declared under the Amended Reduct License Agreement.  The Company and Reduct are currently negotiating an agreement to extend the due date of such payment.
Under the Original Reduct License Agreement, the license rights had an indefinite useful life. Accordingly, the license rights were 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 test for impairment, we determine the fair value of the license rights 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 JuneSeptember 30, 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 JuneSeptember 30, 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.

ITEMITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Foreign Currency Risk—Our functional currency is the United States dollar. We 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.

Under the Amended Reduct License Agreement, our future transactions with Reduct are denominated in United States dollars. At JuneSeptember 30, 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.

ITEMITEM 4.
CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

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

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

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the three months ended JuneSeptember 30, 20092010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



PART II - OTHER INFORMATION

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

On June 29,October 15, 2010, Geospatial Holdings, Inc. (the “Company”) completed private placements of  $1,100,000 aggregate principal amount of a 10% Senior Convertible Redeemable Note (the “Note”) with two unrelated accredited investors (the “Holders”), pursuant to Subscription Agreements, dated October 15, 2010.  Under the terms of the Subscription Agreement and the Note, the Company enteredmay issue up to an additional $1.4 million aggregate principal amount of the Note.  Interest on the Note accrues at a rate of 10% per annum by increasing the Note balance quarterly.  The Note matures fifteen months after October 15, 2010.  With the consent of the Holders of a majority of the Note, the term of the Note may be extended for up to three six-month periods.   ;The Holders may, at any time until the Note is fully paid, convert any outstanding principal and accrued interest on the Note into an agreement with an investor in connection with the sale of 50,000 shares of ourthe Company’s common stock, at $1.00par value $.001 per share for an aggregate offering(the “Common Stock”), at a price of $50,000. The sale and issuance took place$0.50 per share.  Pursuant to the terms of the Subscription Agreements, the Company granted the investors certain registration rights with respect to the Common Stock issuable upon conversion of the Note.  Upon the occurrence of certain events, the price at which the Note may be converted into shares of the Company’s Common Stock may be adjusted.  In addition, the Company may prepay in acash all or any portion of the outstanding principal amount of the Note, without penalty, on the 30th day following written notice to the Holder of the Note.
The private placement transactionwas conducted pursuant to thean exemption from the registration requirements of the Securities Act of 1933, as amended, provided by(the “Securities Act”) pursuant to Section 4(2) of the Securities Act and Regulation D. D promulgated under the Securities Act.
The purchaser is an accredited investor,forgoing description of the Subscription Agreement and the Company conducted the private placement without any general solicitation or advertisementNote does not purport to be complete and with a restriction on resale.

ITEM 5.OTHER INFORMATION

Entry into a Material Definitive Agreement

On August 14, 2010, Geospatial Holdings, Inc. and Reduct NV entered into a Letter Agreement to extend the date of payment for the advance purchase of equipment of $2,500,000, due pursuantis qualified in its entirety by reference to the Amendedfull text of the Subscription Agreement and Restated Exclusive LicenseNote.  The Form of Subscription Agreement and Distribution Agreement dated DecemberForm of Note were included as Exhibits 10.1 and 10.2 to the Current Report on Form 8-K filed by the Company on October 15, 2009, from June 30, 2010, to September 15, 2010.

and are incorporated herein by reference.
ITEMITEM 6.
EXHIBITS

Exhibit

 

Description

10.44
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: August 16,November 15, 2010

 By: 

/S/    MARK A. SMITH        

 Name: Mark A. Smith
 Title: 

Chief Executive Officer

(as Principal Executive Officer)

 By: 

/S/    THOMAS R. OXENREITER        

 Name: Thomas R. Oxenreiter
 Title: 

Chief Financial Officer

(as Principal Financial Officer)

22