Geospatial Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

September 30, 2015

Note 4 – Notes Payable (continued)

Long-term notes payable consisted of the following:

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

Geospatial Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

JuneSeptember 30, 2015

Note 5 – Income Taxes

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

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

Geospatial Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

JuneSeptember 30, 2015

Note 5 – Income Taxes (continued)

Significant components of the Company’s deferred tax assets and liabilities are summarized below. A valuation allowance has been established as realization of such assets has not met the more-likely-than-not threshold requirement under FASB ASC 740.

At JuneSeptember 30, 2015, the Company had federal and state net operating loss carryforwards of approximately $37,493,000.$37,809,000. The federal and state net operating loss carryforwards will expire beginning in 2021 and 2026, respectively. The amount of the state net operating loss carryforward that can be utilized each year to offset taxable income is limited by state law.

Geospatial Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

JuneSeptember 30, 2015

Note 6 – Net Loss Per Share of Common Stock

Basic net loss per share are computed by dividing earnings available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per share reflects per share amounts that would have resulted if dilutive potential common stock had been converted to common stock. Dilutive potential common shares are calculated in accordance with the treasury stock method, which assumes that proceeds from the exercise of all warrants and options are used to repurchase common stock at market value. The number of shares remaining after the proceeds are exhausted represents the potentially dilutive effect of the securities.

The following reconciles amounts reported in the financial statements:

Geospatial Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

JuneSeptember 30, 2015

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

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

Geospatial Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

JuneSeptember 30, 2015

Note 7 – Stock-Based Payments

During the sixnine months ended JuneSeptember 30, 2015, the Company granted stock appreciation rights on 362,5001,362,500 shares of the Company’s common stock to an eligible consultantemployees and consultants pursuant to the 2013 Equity Incentive Plan.

During the sixnine months ended JuneSeptember 30, 2015, the Company granted warrants to purchase 3,661,7503,962,641 shares of the Company’s common stock to lenders in connection with loans to the Company, and warrants to purchase 1,300,000 shares of the Company’s common stock to consultants.

Note 8 – Gains on Extinguishment of Debt

Due to significant cash flow problems, the Company has negotiated concessions on the amounts of certain liabilities and extensions of payment terms. The Company accounts for such concessions in accordance with Financial Accounting Standards Board Accounting Standards Codification 470-60, Troubled Debt Restructurings by Debtors, and recognizes gains to the extent that the carrying value of the liability exceeds the fair value of the restructured payment plan. Such gains are included as “Gains on extinguishment of debt” in “Other income and expenses” on the Company’s Consolidated Statement of Operations. In addition, the Company has accounts payable that have aged or are expected to age beyond the statute of limitations. The Company is amortizing those liabilities over the remaining term of the statute of limitations. Gains on extinguishment of debt amounted to $73,181 and $164,306$74,528 during the three months ended JuneSeptember 30, 2015 and 2014, respectively, and $146,363$219,544 and $235,474$310,002 during the sixnine months ended JuneSeptember 30, 2015 and 2014, respectively.

Note 9 – Registration Payment Arrangements

The Company is contractually obligated to issue shares of its common stock to certain investors for failure to register shares of its common stock under the Securities Act of 1933, as amended (the “Securities Act”). The Company has recorded a liability for the estimated number of shares to be issued at the fair value of the stock to be issued. The Company measures fair value by the price of its common stock at its most recent sale. The Company reviews its estimate of the number of shares to be issued and the fair value of the stock to be issued quarterly. The liability is included on the Consolidated Balance Sheet under the heading “accrued registration payment arrangement,” and amounted to $1,334,629 at JuneSeptember 30, 2015, and $2,525,075 at December 31, 2014. Gains or losses resulting from changes in the carrying amount of the liability are included in the Consolidated Statement of Operations in other income and expense under the heading “registration payment arrangements” which amounted to gains of $468,996 and $1,190,446 during the three and sixnine months respectively, ended JuneSeptember 30, 2015. There were no such gains or losses during the three and six months ended JuneSeptember 30, 2014.

Overview

You should read the following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) together with our financial statements and notes thereto as of and for the year ended December 31, 2014, and for the three months ended March 31, 2015, filed with our Registration Statement on Form S-1 on June 12, 2015, and our financial statements and notes thereto as of and foror during the three and sixnine months ended JuneSeptember 30, 2015, which appear elsewhere in this Quarterly Report on Form 10-Q.2014.

We provide cloud-based geospatial solutions to accurately locate and digitally map underground pipelines and other infrastructure in three dimensions. Our professional staff offers the expertise,

ITEM2: MANAGEMENT’SDISCUSSION&ANALYSISOFFINANCIALCONDITIONANDRESULTSOFOPERATIONS

Overview

YoushouldreadthefollowingManagement’sDiscussionandAnalysisofFinancialConditionandResultsofOperations(“MD&A”)togetherwithour financialstatementsandnotestheretoasofandfortheyearendedDecember31,2014,andforthethreemonthsendedMarch31,2015,filedwithourRegistration StatementonFormS-1onJune12,2015,andourfinancialstatementsandnotestheretoasofandforthethreeandnine monthsendedSeptember 30,2015,whichappear elsewhereinthisQuarterlyReportonForm10-Q.

Weprovidecloud-basedgeospatialsolutionstoaccuratelylocateanddigitallymapundergroundpipelinesandotherinfrastructureinthreedimensions. Ourprofessionalstaffofferstheexpertise,ability, and technologies required to design and execute solutions that are delivered in a cloud-based GIS (geographic information system) andtechnologiesrequiredtodesignandexecutesolutionsthataredeliveredinacloud-basedGIS(geographic informationsystem)platform.

We believe that the market for aggregating and maintaining positional data for underground assets is maturing, and that business and governmental entities are beginning to understand the value of such data. We believe that this developing market presents us with an opportunity to deliver long-term value to ourentitiesarebeginningtounderstandthevalueofsuchdata.Webelievethatthisdevelopingmarketpresentsuswithanopportunitytodeliverlong-termvaluetoour shareholders. In order to realize that value, our primary challenge is to raise working capital sufficient to operate our business, and investment capital to hire employees, acquire assets, and expand our business. Management is currently focused on raising capital, and planning to position our business to capitalize on theacquireassets,andexpandourbusiness.Managementiscurrentlyfocusedonraisingcapital,andplanningtopositionourbusinesstocapitalizeonthe maturing market for positional data once such capital is in place, including identifying new technologies for aggregating positional data, developing our GeoUnderground software, and planning the strategies and processes for our upcoming marketing campaigns. We use financial and non-financial performance indicators to assess our business, including liquidity measures, indicatorstoassessourbusiness,includingliquiditymeasures,revenues, gross margins, operating revenue, and backlog.grossmargins,operatingrevenue,andbacklog.

LiquidityandCapitalResources

Liquidity and Capital ResourcesAtSeptember 30,2015,wehadcurrentassetsof$486,643,andcurrentliabilitiesof$5,889,358.

AtJune 30,2015,wehadcurrentassetsof$351,057,andcurrentliabilitiesof$5,182,986.OurCompanyhasincurrednetlossessinceinception.Ouroperationsandcapitalrequirementshavebeenfundedbysalesofourcommonandpreferred stockandadvancesfromourchiefexecutiveofficer.AtSeptember 30,2015,currentliabilitiesexceededcurrentassetsby$5,402,715,andtotalliabilitiesexceededtotal assetsby$5,245,896.Thosefactorsraisedoubtsaboutourabilitytocontinueasagoingconcern.

Our Companyhasincurrednetlossessinceinception.Ouroperationsandcapitalrequirementshavebeenfundedbysalesofourcommonandpreferredstock andadvancesfromourchiefexecutiveofficer.At June 30,2015,currentliabilitiesexceededcurrentassetsby$4,831,929,andtotalliabilitiesexceededtotalassetsby $4,675,041.Thosefactorsraisedoubtsaboutourabilitytocontinueasagoingconcern.In 2012, we raised approximately $632,000 in cash through private sales of our Series B Convertible Preferred Stock (“Series B Stock”), and converted approximately $215,000 in liabilities to Series B Stock. In 2013, we raised approximately $3,246,000 through private sales of our Series B Stock and common stock, and converted approximately $4,926,000 of liabilities to Series B Stock and common stock. During 2014, we raised approximately $2,430,000 through private sales of our common stock, and approximately $272,000 through the exercise of outstanding warrants to purchase Series B Stock and common stock. In addition,wehavenegotiatedsettlementsorlong-termextensionsonapproximately$1,776,000ofliabilitiesfrom2012through2014.Weenteredintoanagreement with Reduct NV, licensor of our former exclusive technology, on May 10, 2013 that eliminates all prior liabilities to Reduct in consideration for the issuance of 9,000,000 shares of our common stock, warrants to purchase 3,500,000 shares of our common stock, and purchases of $300,000 of equipment from Reduct. The agreement allows us to purchase their products on a non-exclusive basis without the minimum purchase requirements to maintain the exclusive license. On February 26, 2015, an outstanding Senior Secured Redeemable Note with a balance due of approximately $1.6 million was converted into shares of our common stock.

In 2012,weraisedapproximately$632,000incashthroughprivatesalesofourSeriesBConvertiblePreferredStock(“SeriesBStock”),andconvertedapproximately$215,000 inliabilitiestoSeriesBStock.In2013,weraisedapproximately$3,246,000throughprivatesalesofourSeriesBStockandcommonstock,andconvertedapproximately$4,926,000 ofliabilitiestoSeriesBStockandcommonstock.During2014,weraisedapproximately$2,430,000throughprivatesalesofourcommonstock,andapproximately$272,000throughtheexerciseofoutstandingwarrantstopurchaseSeriesBStockandcommonstock.Inaddition,wehavenegotiatedsettlementsorlong-termextensionsonapproximately$1,776,000ofliabilitiesfrom2012through2014.WeenteredintoanagreementwithReductNV,licensorofourformerexclusivetechnology,onMay10,2013thateliminatesallpriorliabilitiestoReductinconsiderationfortheissuanceof9,000,000sharesofourcommonstock,warrantstopurchase3,500,000sharesofourcommonstock,andpurchasesof$300,000ofequipmentfromReduct.Theagreementallowsustopurchasetheirproductsonanon-exclusivebasiswithouttheminimumpurchaserequirementstomaintaintheexclusivelicense.OnFebruary26,2015,anoutstandingSeniorSecuredRedeemableNotewithabalancedueofapproximately$1.6millionwasconvertedintosharesofourcommonstock.

OnJanuary 16,2015,weissuedaSeniorSecuredPromissoryNotetoHorbergEnterprisesLLC(the“HorbergNote”)in theprincipalamountof$500,000.TheHorbergNotewasdueonApril8,2015,andaccruednointerestthroughtheduedate.TheHorbergNotewassecuredbyliensonallofourassets.WealsoissuedHorbergEnterprisesLLCwarrantstopurchase1,500,000sharesofourcommonstockinconsiderationforitspurchasingtheHorbergNote.ProceedsfromtheissuanceoftheHorbergNotewereusedforworkingcapitalpurposes.WerepaidtheHorbergNoteonApril3,2014.intheprincipalamountof$500,000. TheHorbergNotewasdueonApril8,2015,andaccruednointerestthroughtheduedate.TheHorbergNotewassecuredbyliensonallofourassets.Wealso issuedHorbergEnterprises LLCwarrantstopurchase1,500,000sharesofourcommonstockinconsiderationforitspurchasingtheHorbergNote.Proceedsfrom theissuanceoftheHorbergNotewereusedforworkingcapitalpurposes.WerepaidtheHorbergNoteonApril3,2015.

On April2,2015,OnApril2,2015,weissuedaSecuredPromissoryNotetoDavidM.Truitt(the“TruittNote”)intheprincipalamountof$1,000,000.TheTruittNoteisdueonOctober2,2015,1,000,000.TheTruittNoteis dueonOctober2,2015,andbearsinterestat10%perannum.TheTruittNoteissecuredbyliensonallofourassets,andisconvertibleintosharesofourcommonstockattheoptionoftheholder.Wealsoissuedandisconvertibleintosharesofourcommon stock at the option of the holder. We also issued Mr.Truittwarrantstopurchase2,000,000sharesofourcommonstockinconsiderationforhispurchasingtheTruittNote.ProceedsfromtheissuanceoftheTruittNotewereusedtorepaytheHorbergNoteandforworkingcapitalpurposes. Truitt warrants to purchase 2,000,000 shares of our common stock in consideration for his purchasing the TruittNote.ProceedsfromtheissuanceoftheTruittNotewereusedtorepaytheHorbergNoteandforworkingcapitalpurposes.

On September17,2014,weenteredintoanAssetPurchaseAgreementtoacquiresubstantiallyalltheassetsofSelectAnalyticsLLC,acompanythatoperatestheShaleNavigatorwebsite,andisengagedinthebusinessofaggregating,managing,andsellinginfrastructuredata.PursuanttotheAssetPurchaseAgreement,wewillberequiredtopay$160,000incashandissue550,000sharesoftheCompany’scommonstocktothesellerduring2015.During 2015, we raised approximately $421,000 in cash through private sales of our common stock. Also during 2015, we issued Unsecured Convertible Promissory Notes (the “Unsecured Notes”) with principal amounts totaling approximately $299,000, which bear interest at 10% per annum. The Unsecured Notes are convertible into shares of our common stock at the option of the holder. We issued warrants to purchase 408,891 shares of our common stock in connection with the Unsecured Notes. Proceeds from the Unsecured Notes were used for working capital purposes.

Management iscontinuingeffortstosecurefundingsufficientfortheCompany’soperatingandcapitalrequirementsthroughprivatesalesofcommonstock,andtonegotiatesettlementsorextensionsofexistingliabilities.Theproceedsofsuchsalesofstock,ifany,willbeusedtofundgeneralworkingcapitalneeds.OnSeptember17,2014,weenteredintoanAssetPurchaseAgreementtoacquiresubstantiallyalltheassetsofSelectAnalyticsLLC,acompanythat operatestheShaleNavigatorwebsite,andisengagedinthebusinessofaggregating,managing,andsellinginfrastructuredata.PursuanttotheAssetPurchase Agreement,wewillberequiredtopay$160,000incashandissue550,000sharesoftheCompany’scommonstocktothesellerduring2015.

Beginning in2012,wechangedthefocusofourcompanytopositionustogeneraterevenuefromdataacquisitionanddatamanagement.Weexpandedourserviceofferingstoprovidedataacquisitionservicesutilizingtwelvedifferenttechnologies.Wedevelopednew,cloud-basedmappingsoftwaretobemarketedunderourexistingnameGeoUndergoundthatreplacesourpreviousversionofGeoUnderground.WecurrentlyutilizeGeoUnderground todeliverdatatocustomers.WeintendtoofferGeoUndergroundasasubscription-basedstand-aloneproduct beginninginthefirstquarterof 2015.In2014,weenteredintoanagreementtoacquirethe ShaleNavigatorwebsite,whichweintendtoincorporateintoGeoUnderground.WeexpecttohavetheShaleNavigatorwebsiteincorporatedintoGeoUnderground, andtorealizerevenuefromShaleNavigatorsubscriptionsandsalesofdatabeginningin2015.Webelievethatourchangestoouroperatingfocus willenableustobegintogeneratesignificantrevenuefromoperations.ManagementiscontinuingeffortstosecurefundingsufficientfortheCompany’soperatingandcapitalrequirementsthroughprivatesalesofcommon stock,andtonegotiatesettlementsorextensionsofexistingliabilities.Theproceedsofsuchsalesofstock,ifany,willbeusedtofundgeneralworkingcapital needs.

Beginningin2012,wechangedthefocusofourcompanytopositionustogeneraterevenuefromdataacquisitionanddatamanagement.Weexpanded ourserviceofferingstoprovidedataacquisitionservicesutilizingtwelvedifferenttechnologies.Wedevelopednew,cloud-basedmappingsoftwaretobemarketed under our existing name GeoUndergound that replaces our previous version of GeoUnderground. We believe that our actions and planned actions will enable uscurrently utilize GeoUnderground to finance our operations beyonddeliver data to customers. We intend to offer GeoUnderground as a subscription-based stand-alone product beginning in the next twelve months.first quarter of 2016. Webelievethatourchangesto ouroperatingfocuswillenableustobegintogeneratesignificantrevenuefromoperations.

We do not believe that inflation and changing prices will have a material impact on our net sales and revenues, or on income from continuing operations.Webelievethatouractionsandplannedactionswillenableustofinanceouroperationsbeyondthenexttwelvemonths.

Results of OperationsWedonotbelievethatinflationandchangingpriceswillhaveamaterialimpactonournetsalesandrevenues,oronincomefromcontinuingoperations.

ResultsofOperations

WehadWe had no sales of $20,800 during each of the three and six months ended JuneSeptember 30, 2015. Cost of sales were $41,9752015, and $79,569 for the three and sixsalesof$20,800duringthenine monthsendedSeptember 30,2015.Costofsaleswere$33,545and$113,114forthethreeandnine months,respectively, ended June 30, 2015. Forthethree and sixmonthsended June 30,2014,sales were $83,030 and $195,751, endedSeptember 30,2015.Forthethreeandnine monthsendedSeptember 30,2014,saleswere$58,400and$254,151,respectively,andcostofsaleswere$46,202and$95,817,respectively.Oursaleshavefluctuatedthroughout2015and2014asourabilitytomarketandperformjobswashamperedbyourfinancialcondition.Weexpectsalesandcostofsalestocontinuetofluctuateasourbusinesscontinuestomature.andcostofsales were$49,809and$145,626,respectively.Oursaleshavefluctuatedthroughout2015and2014asourabilitytomarketandperformjobswashamperedbyour financialcondition.Weexpectsalesandcostofsalestocontinuetofluctuateasourbusinesscontinuestomature.

Selling,general, and administrative (“andadministrative(“SG&A”) expenses were $656,697 and $1,323,339 for the three and sixexpenseswere$698,559and$2,021,897forthethreeandnine monthsendedSeptember 30,2015,respectively, comparedto$724,098and$1,967,784forthethreeandnine months, ended June 30, 2015, respectively, compared to $640,146 and $1,243,687 for the three and six months, respectively, ended June 30, 2014.endedSeptember 30,2014. The increasedecrease in SG&A costs for the three and six months ended JuneSeptember 30, 2015 compared to the three and six months ended JuneSeptember 30, 2014 werewas due to increaseddecreases in development costs associated with our software, and decreases in professional fees, which was partially offset by an increase in payroll costs related to our expanded technical staff in 2015.

Other incomeandexpenseforthethree and sixmonthsendedTheincreaseinSG&Acostsforthenine months endedSeptember 30,2015comparedtothenine monthsendedSeptember 30,2014 June 30was,2015wasanetincomeof$504,405 and $1,214,895, respectively,whichincludedinterestexpenseof$37,772 and $121,914, respectively,gains onextinguishmentofdebtof$73,181 and $146,363, respectively, andgainsrelatedtoregistrationpaymentarrangementsof$468,996 and $1,190,446, respectively.Otherincomeandexpenseforthethree and sixmonthsended June 30,2014wasanetincomeof$125,176 and $156,566, respectively,whichincludedinterestexpenseof$39,130 and $78,908, respectively,andgainsonextinguishmentofdebtof$164,306 and $235,474, respectively.Theincreaseininterestexpensein2015wasdue tointerestonnewloansin2015,andinterestonhigherbalancesforexistingloans.Thegainsonextinguishmentofdebtresultedfromsettlementagreementsonpriorliabilities.duetoincreasedpayrollcostsrelatedtoourexpandedtechnicalstaffin2015.

Gains orexpenserelatedtoregistrationpaymentarrangementsresultfromaseriesofStockSubscriptionAgreementsweenteredintoin2009and2010(the“StockSubscriptionAgreements”).We arerequiredtoregisterthesharesofcommonstocksoldpursuanttotheStockSubscriptionAgreementsundertheSecurities Act.OurfailuretoregisterthesharesofcommonstockundertheSecuritiesActresultedinourobligationtoissueadditionalshares(“PenaltyShares”) toinvestorswhopurchasedsharespursuanttotheStockSubscriptionAgreements.We recorded aliabilityonourbooksforthevalueoftheestimatednumberofsharestobeissued.WeincurlossesonourregistrationpaymentarrangementswhentheestimatednumberofPenaltySharestobeissuedincreases,orwhenthevalueofourcommonstockincreases.WerecordgainsonourregistrationpaymentarrangementswhentheestimatednumberofPenaltySharestobeissueddecreases,orwhenthevalueofourcommonstockdecreases.

Otherincomeandexpenseforthethreeandnine monthsendedSeptember 30,2015wasanetincomeof$31,387and$1,246,281,respectively,whichincluded interest expense of $41,794 and $163,709, respectively, gains on extinguishment of debt of $73,181 and $219,544, respectively, and gains related to registration paymentarrangementsof$0and$1,190,446,respectively.Otherincomeandexpenseforthethreeandnine monthsendedSeptember 30,2014wasanetincomeof $34,182and$190,748,respectively,whichincludedinterestexpenseof$40,346and$119,254,respectively,andgainsonextinguishmentofdebtof$74,528and $310,002,respectively.Theincreaseininterestexpensein2015wasduetointerestonnewloansin2015,andinterestonhigherbalancesforexistingloans.The gainsonextinguishmentofdebtresultedfromsettlementagreementsonpriorliabilities.

During thethreeGains or expense related to registration payment arrangements result from a series of Stock Subscription Agreements we entered into in 2009 and sixmonthsended June 30,2015,wehadgainsrelatedtoregistrationpaymentarrangementsduetodecreasesinthevalueofourcommonstock and2010 (the “Stock Subscription Agreements”). We are required to register the shares of common stock sold pursuant to the Stock Subscription Agreements under the SecuritiesAct.OurfailuretoregisterthesharesofcommonstockundertheSecuritiesActresultedinourobligationtoissueadditionalshares(“PenaltyShares”)to investors who purchased shares pursuant to the Stock Subscription Agreements. We recorded a liability on our books for the value of the estimated number of shares to be issued. We incur losses on our registration payment arrangements when the estimated number of Penalty Shares to be issued.Wehad nogainsorexpenserelatedtoregistrationpaymentarrangements duringthethree and sixmonthsended June 30,2014.Weexpectthatincomeorexpenserelatedtoregistrationpaymentarrangements willfluctuateasthepriceofourcommonstockandtheestimateofthenumberofPenaltySharestobeissuedfluctuate.issued increases, or when the value of our common stock increases. We record gains on our registration payment arrangements when the estimated number of Penalty Shares to be issued decreases,orwhenthevalueofourcommonstockdecreases.

We hadnobenefitfromincometaxesduringthethree and sixmonthsended JuneDuring the nine months ended September 30,,2015or2014,asourdeferredtaxbenefitwascompletelyoffsetbyavaluationallowanceduetotheuncertaintyofrealizationofthebenefit. 2015, we had gains related to registration payment arrangements due to decreases in the value of our commonstockandtheestimatednumberofPenaltySharestobeissued.Wehadnogainsorexpenserelatedtoregistrationpaymentarrangementsduringthenine monthsendedSeptember 30,2014.Weexpectthatincomeorexpenserelatedtoregistrationpaymentarrangementswillfluctuateasthepriceofourcommon stockandtheestimateofthenumberofPenaltySharestobeissuedfluctuate.

Off-Balance Sheet ArrangementsWehadnobenefitfromincometaxesduringthethreeandnine monthsendedSeptember 30,2015or2014,asourdeferredtaxbenefitwascompletelyoffsetbya valuationallowanceduetotheuncertaintyofrealizationofthebenefit.

The Company had no off-balance sheet arrangements as of June 30, 2015.Off-BalanceSheetArrangements

TheCompanyhadnooff-balancesheetarrangementsasofSeptember 30,2015.

ApplicationofCriticalAccountingPolicies

Application