UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.DC 20549

FORM 10-Q

FOR THE QUARTERLY PERIOD ENDED: JUNE 30, 2015

JUNE 30, 2016 OR

COMMISSION FILE NUMBER: 333-04066

GEOSPATIAL CORPORATION

(Exact name of registrant as specified in its charter)

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 ☒   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):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): YES ☐ NO ☒

The number of $.001 par value common shares outstanding at August 7, 2015: 137,806,264.10, 2016: 174,555,605.

FORWARD-LOOKING STATEMENT NOTICE

When used

The statements set forth in this report the words “may,” “will,” “expect,” “anticipate,” “continue,” “estimate,” “project,” “intend,” and similar expressions, which are not historical constitute “Forward Looking“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, and Rule 3b-6 promulgated thereunder, including statements regarding theour expectations, beliefs, intentions or strategies for the future. We intend that suchWhen used in this report, the terms “anticipate,” “believe,” “estimate,” “expect” and “intend” and words or phrases of similar import, as they relate to our business or our subsidiaries or our management, are intended to identify Forward-Looking Statements. These Forward-Looking Statements regardingare only predictions and reflect our views as of the date they are made with respect to future events conditions, and financial trendsperformance. Forward-Looking Statements are subject to many risks and uncertainties that may affectcould cause our actual results to differ materially from any future results expressed or implied by the Company’s future plans of operations, business strategy, operating results, and financial positionForward-Looking Statements.

Because our common stock is considered to be subject toa “penny stock”, the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Persons reviewing this report are cautioned that any1995 do not apply to such Forward-Looking Statements areStatements.

Our business involves various risks, including, but not guaranteeslimited to, our ability to implement our business strategies as planned in a timely manner or at all; our lack of future performanceoperating history; our ability to protect our proprietary technologies; our ability to obtain financing sufficient to meet our capital needs; our inability to use historical financial data to evaluate our financial performance; and are subjectthe other risk factors identified in our filings with the Securities and Exchange Commission. 

Because the risk factors referred to risks and uncertainties and thatabove could cause actual results mayor outcomes to differ materially from those included within the Forward-Looking Statements as a resultexpressed or implied in any forward-looking statements made by us or on our behalf, readers 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 cautionedthis report should not to place undue reliance on these Forward-Looking Statements that speakany forward-looking statement. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligations to update any Forward-Looking Statement to reflect events or circumstances after the date on which the statement was made.is made or to reflect the occurrence of future events or developments. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any Forward-Looking Statements.

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

GEOSPATIAL CORPORATION

INDEX

Geospatial Corporation and Subsidiaries

Consolidated Balance Sheets

Notes to Unaudited Consolidated Financial Statements

June 30, 20152016 

Note 1 – Basis of Presentation

The Unaudited Consolidated Financial Statements included herein have been prepared by Geospatial Corporation (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 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 Consolidated Financial Statements as of and for the three and six months ended June 30, 20152016 should be read in conjunction with the Company’s Financial Statements as of and for the year ended December 31, 2014.2015. In the opinion of the Company’s management, all adjustments considered necessary for a fair statement of the accompanying Unaudited 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 six months ended June 30, 20152016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015,2016, or any other interim periods, or any future year or period.

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 subsidiary,subsidiaries, Geospatial Mapping Systems, Inc. and Utility Services and Consulting Corporation, which ceased operations in 2011. All intercompany accounts and transactions have been eliminated.

Note 2 – Accrued Expenses

Accrued expenses consisted of the following:

Geospatial Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

June 30, 20152016 

Note 3 – Related-Party Transactions

The Company leases its headquarters building from Mark A. Smith, the Company’s Chairman and Chief Executive Officer. The building has approximately 3,200 square feet of office space, and is used by the Company’s corporate, technical, and operations staff. Mr. Smith has agreed to suspend collection of rent effective April 1, 2016. The lease is cancellable by either party upon 30 days’ notice. The Company incurred $19,500 ofno lease expense during the three months ended June 30, 20152016, and 2014, and $39,000$19,500 of lease expense during the six months ended June 30, 20152016. The Company incurred lease expense of $19,500 and 2014. The lease is cancellable by either party upon$39,000 during the three and six months, respectively, ended June 30, days’ notice.2015.

On November 9, 2012, the Company and Mr. Smith entered into a Lease Agreement, pursuant to which the Company leases a field vehicle from Mr. Smith. The lease is for 60 months, and is for substantially the same terms for which Mr. Smith leases the vehicle from the manufacturer. Interest on the lease amounted to $41 and $65, and $137respectively, for the three months and six months, respectively, ended June 30, 2016 and 2015, respectively, and $89$88 and $185$137, respectively, for the three and six months respectively, ended June 30, 2014.2016 and 2015, respectively. The lease is recorded as a capital lease. At June 30, 2015,2016, gross assets recorded under the lease and associated accumulated depreciation were $16,870 and $8,857,$12,231, respectively. Future minimum payments under the capital lease are as follows as of June 30, 2015:2016:

On May 18, 2016, the Company and Mr. Smith entered into a Conversion Agreement (the “Smith Conversion Agreement”), pursuant to which Mr. Smith converted accrued salaries totaling $766,833 to 19,170,831 shares of the Company’s common stock and warrants to purchase 23,004,998 shares of the Company’s common stock at an exercise price of $0.04 per share. Mr. Smith also converted pursuant to the Smith Conversion Agreement, $156,782 of unreimbursed business expenses and unpaid rent on the Company’s offices to 783,912 shares of the Company’s Series C Convertible Preferred Stock.

On May 18, 2016, the Company and Troy G. Taggart, the Company’s President, entered into a Conversion Agreement, pursuant to which Mr. Taggart converted accrued salaries totaling $215,490 to 5,387,241 shares of the Company’s common stock and warrants to purchase 6,464,689 shares of the Company’s common stock at an exercise price of $0.04 per share.

Geospatial Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

June 30, 20152016 

Note 3 – Related-Party Transactions (continued)

On May 18, 2016, the Company and Thomas R. Oxenreiter, the Company’s Chief Financial Officer, entered into a Conversion Agreement (the “Oxenreiter Conversion Agreement”), pursuant to which Mr. Oxenreiter converted accrued salaries totaling $226,458 to 5,661,460 shares of the Company’s common stock and warrants to purchase 6,793,753 shares of the Company’s common stock at an exercise price of $0.04 per share. Mr. Oxenreiter also converted, pursuant to the Oxenreiter Conversion Agreement, $5,000 of unreimbursed business expenses to 25,000 shares of the Company’s Series C Convertible Preferred Stock.

Note 4 – Notes Payable

Current notes payable consisted of the following:

Long-term notes payable consisted of the following:

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

Geospatial Corporation and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

June 30, 20152016 

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

June 30, 20152016 

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 June 30, 2015,2016, the Company had federal and state net operating loss carryforwards of approximately $37,493,000.$38,020,000. 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

June 30, 20152016 

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

Basic net lossincome (loss) per share of common stock 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 lossincome (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

June 30, 20152016 

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

June 30, 20152016 

Note 7 – Stock-Based Payments

During the six months ended June 30, 2015, the Company granted2016, stock appreciation rights on 362,5003,896,000 shares of the Company’s common stock issued to an eligible consultantemployees and consultants pursuant to the Company’s 2013 Equity Incentive Plan.Plan were forfeited.

During the six months ended June 30, 2015,2016, the Company granted warrants to purchase 3,661,75029,226,000 shares of the Company’s common stock to consultants and to lenders in connection with loans to the Company, and warrants to purchase 1,300,00036,263,440 to the Company’s officers in connection with the conversion of debt owed to the officers to equity.

On May 10, 2016, the Company entered into a Conversion Agreement with an investor whereby the investor converted (i) an Unsecured Convertible Note Payable (the “Note Payable”) due from the Company in the amount of $54,278, and (ii) warrants to purchase 3,075,000 shares of the Company’s common stock in exchange for warrants to consultants.purchase 10,000,000 shares of the Company’s common stock at $0.01 per share for a term of five years (the “Warrant”). The Company recorded the Warrant on the Consolidated Balance Sheet as “Additional paid-in capital, warrant” at the carrying value of the Note Payable.

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 (“ASC”) 470-60, Troubled Debt Restructurings by Debtors, and ASC 405-20,Extinguishment of Liabilities, 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$58,603 and $164,306$73,181 during the three months ended June 30, 20152016 and 2014,2015, respectively, and $146,363$492,583 and $235,474$1,190,446 during the six months ended June 30, 2016 and 2015, respectively.

Geospatial Corporation and 2014, respectively.Subsidiaries

Notes to Unaudited Consolidated Financial Statements

June 30, 2016 

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$54,732 at June 30, 2015,2016, and $2,525,075$547,315 at December 31, 2014.2015. 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 six months, respectively, ended June 30, 2015.. There were no such gains or losses during the three months ended June 30, 2016, a gain of $468,996 during the three months ended June 30, 2015, and gains of $492,583 and $1,190,446 during the six months ended June 30, 2014.2016 and 2015, respectively.

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 StatementAnnual Report on Form S-110-K on June 12, 2015,April 14, 2016, and our financial statements and notes thereto as of and for the three and six months ended June 30, 2015,2016, which appear elsewhere in this Quarterly Report on Form 10-Q.

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, ability, and technologies required to design and execute solutions that are delivered in a cloud-based GIS (geographic information system) 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 our 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 the 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, revenues, gross margins, operating revenue, and backlog.

Liquidity and Capital Resources

AtJune 30,,2015,wehadcurrentassetsof$351,057,andcurrentliabilitiesof$5,182,986. 2016, we had current assets of $386,996, and current liabilities of $2,776,887.

Our Companyhasincurrednetlossessinceinception.Ouroperationsandcapitalrequirementshavebeenfundedbysalesofourcommonandpreferredstock andadvancesfromourchiefexecutiveofficer.AtCompany has incurred net losses since inception. Our operations and capital requirements have been funded by sales of our common and preferred stock and advances from our chief executive officer. At June 30,,2015,currentliabilitiesexceededcurrentassetsby$4,831,929,andtotalliabilitiesexceededtotalassetsby $4,675,041.Thosefactorsraisedoubtsaboutourabilitytocontinueasagoingconcern. 2016, current liabilities exceeded current assets by $2,389,891, and total liabilities exceeded total assets by $2,294,006. Those factors raise doubts about our ability to continue as a going concern.

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.

On January16,2015,weissuedaSeniorSecuredPromissoryNotetoHorbergEnterprisesLLC(the“HorbergNote”)in theprincipalamountof$500,000.TheHorbergNotewasdueonApril8,2015,andaccruednointerestthroughtheduedate.TheHorbergNotewassecuredbyliensonallofourassets.WealsoissuedHorbergEnterprisesLLCwarrantstopurchase1,500,000sharesofourcommonstockinconsiderationforitspurchasingtheHorbergNote.ProceedsfromtheissuanceoftheHorbergNotewereusedforworkingcapitalpurposes.WerepaidtheHorbergNoteonApril3,2014.2014, we raised approximately $2.4 million 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. We also issued common stock for services valued at $82,500, and settled $500,000 of liabilities for shares of our common stock. In 2015, we raised approximately $476,000 through private sales of our common stock, and converted our outstanding Senior Secured Redeemable Note with a balance due of approximately $1.6 million to shares of our common stock.

On April2,2015,weissuedaSecuredPromissoryNotetoDavidM.Truitt(the“TruittNote”January 16, 2015, we issued a Senior Secured Promissory Note to Horberg Enterprises LLC (the “Horberg Note”)intheprincipalamountof$1,000,000.TheTruittNoteisdueonOctober2,2015,andbearsinterestat10%perannum.TheTruittNoteissecuredbyliensonallofourassets,andisconvertibleintosharesofourcommonstockattheoptionoftheholder.Wealsoissued Mr.Truittwarrantstopurchase2,000,000sharesofourcommonstockinconsiderationforhispurchasingtheTruittNote.ProceedsfromtheissuanceoftheTruittNotewereusedtorepaytheHorbergNoteandforworkingcapitalpurposes. in the principal amount of $500,000. The Horberg Note was due on April 8, 2015, and accrued no interest through the due date. The Horberg Note was secured by liens on all of our assets. We also issued Horberg Enterprises LLC warrants to purchase 1,500,000 shares of our common stock in consideration for its purchasing the Horberg Note. Proceeds from the issuance of the Horberg Note were used for working capital purposes. We repaid the Horberg Note on April 3, 2015. 

On September17,2014,weenteredintoanAssetPurchaseAgreementtoacquiresubstantiallyalltheassetsofSelectAnalyticsLLC,acompanythatoperatestheShaleNavigatorwebsite,andisengagedinthebusinessofaggregating,managing,andsellinginfrastructuredata.PursuanttotheAssetPurchaseAgreement,wewillberequiredtopay$160,000incashandissue550,000sharesoftheCompany’scommonstocktothesellerduring2015.April 2, 2015, we issued a Secured Promissory Note to David M. Truitt (as amended, the “Truitt Note”) in the principal amount of $1,000,000. The Truitt Note bears interest at 10% per annum. The Truitt Note is secured by liens on all of our assets, and is convertible into shares of our common stock at a discount to market value at the option of the holder. We also issued Mr. Truitt warrants to purchase 2,000,000 shares of our common stock in consideration for his purchasing the Truitt Note. Proceeds from the issuance of the Truitt Note were used to repay the Horberg Note and for working capital purposes. The initial due date of the Truitt Note was October 2, 2015. 

Management iscontinuingeffortstosecurefundingsufficientfortheCompany’soperatingandcapitalrequirementsthroughprivatesalesofcommonstock,andtonegotiatesettlementsorextensionsofexistingliabilities.Theproceedsofsuchsalesofstock,ifany,willbeusedtofundgeneralworkingcapitalneeds.On January 27, 2016, we entered into an Agreement and Amendment with Mr. Truitt pursuant to which Mr. Truitt loaned us an additional $250,000 and extended the due date of the Truitt Note to July 31, 2016. We issued Mr. Truitt warrants to purchase 25.0 million shares of our common stock in connection with the Agreement and Amendment. 

On March 16, 2016 we designated 10.0 million shares of preferred stock as Series C Convertible Preferred Stock (“Series C Stock”). Series C Stock is convertible to common stock at a conversion ratio of 20 shares of common stock for each share of Series C Stock, subject to adjustment for stock dividends, splits, and similar events. Series C Stock has a liquidation preference equal to its original issue price, and has voting rights equal to five times the number of shares of common stock into which the Series C Stock is convertible. On March 16, 2016, we sold 1,250,000 shares of Series C Stock to Mr. Truitt for consideration of $250,000. 

During the second quarter of 2016, we sold 1,500,000 shares of Series C Stock to Mr. Truitt for $300,000. Also during the second quarter of 2016, we converted notes payable totaling approximately $197,000 to shares of Series C Stock, and we converted a note payable of approximately $54,000 to warrants to purchase common stock. We also converted approximately $1.3 million of our officers’ accrued salaries to shares of common stock, and approximately $162,000 of other liabilities to our officers to shares of Series C Stock.

On August 12, 2016, we entered into an Agreement and Amendment with Mr. Truitt pursuant to which Mr. Truitt extended the due date of the Truitt Note to January 31, 2017. We issued Mr. Truitt warrants to purchase 12.0 million shares of our common stock in connection with the Agreement and Amendment.

Management is continuing efforts to secure funding sufficient for the Company’s operating and capital requirements through private sales of Series C Stock and common stock, and to negotiate settlements or extensions of existing liabilities. The proceeds of such sales of stock, if any, will be used to fund general working capital needs.

Beginning in2012,wechangedthefocusofourcompanytopositionustogeneraterevenuefromdataacquisitionanddatamanagement.Weexpandedourserviceofferingstoprovidedataacquisitionservicesutilizingtwelvedifferenttechnologies.Wedevelopednew,cloud-basedmappingsoftwaretobemarketedunderourexistingnameGeoUndergoundthatreplacesourpreviousversionofGeoUnderground.WecurrentlyutilizeGeoUnderground todeliverdatatocustomers.WeintendtoofferGeoUndergroundasasubscription-basedstand-aloneproduct beginninginthefirstquarterof 2015.In2014,weenteredintoanagreementtoacquirethe ShaleNavigatorwebsite,whichweintendtoincorporateintoGeoUnderground.WeexpecttohavetheShaleNavigatorwebsiteincorporatedintoGeoUnderground, andtorealizerevenuefromShaleNavigatorsubscriptionsandsalesofdatabeginningin2015.Webelievethatourchangestoouroperatingfocus willenableustobegintogeneratesignificantrevenuefromoperations.in 2012, we changed the focus of our company to position us to generate revenue from data acquisition and data management. We expanded our service offerings to provide data acquisition services utilizing twelve different technologies. We developed new, cloud-based mapping software to be marketed under our existing name GeoUndergound that replaced our previous version of GeoUnderground. We currently utilize GeoUnderground to deliver data to customers. We intend to offer GeoUnderground as a subscription-based stand-alone product beginning in 2016. We believe that our changes to our operating focus will enable us to begin to generate significant revenue from operations.

We believe that our actions and planned actions will enable us to finance our operations beyond the next twelve months.

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.

Results of Operations

We had sales of $258,800 and $440,000 during the three and six months, respectively, ended June 30, 2016. Cost of sales were $72,603 and $130,536 for the three and six months, respectively, ended June 30, 2016. Sales were $20,800 during each of the three and six months ended June 30, 2015. Cost of sales were $41,975 and $79,569 during the three and six months, respectively, ended June 30, 2015. Our sales have fluctuated throughout 2016 and 2015 as our ability to market and perform jobs was hampered by our financial condition. We expect sales and cost of sales to continue to fluctuate as our business continues to mature.

Selling, general, and administrative (“SG&A”) expenses were $396,901 and $776,724 for the three and six months, respectively, ended June 30, 2016. SG&A expenses were $656,697 and $1,323,339 for the three and six months, respectively, ended June 30, 2015. Forthethree and sixmonthsended June 30,2014,sales were $83,030 and $195,751, respectively,andcostofsaleswere$46,202and$95,817,respectively.Oursaleshavefluctuatedthroughout2015and2014asourabilitytomarketandperformjobswashamperedbyourfinancialcondition.Weexpectsalesandcostofsalestocontinuetofluctuateasourbusinesscontinuestomature.

Selling, general, and administrative (“SG&A”) expenses were $656,697 and $1,323,339 for the three and six 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. The increasedecreases in SG&A costs for the three and six months ended June 30, 20152016 compared to the three and six months ended June 30, 20142015 were due to increaseddecreases in payroll costscost and professional fees due to reductions in staffing necessitated by our financial position.

Other income and expense for the three and six months ended June 30, 2016 was a net expense of $10,950 and a net income of $493,332, respectively, which included interest expense of $63,553 and $132,772, respectively, gains on extinguishment of debt of $58,603 and $133,521, respectively, and gains related to our expanded technical staff in 2015.

registration payment arrangements of $0 and $492,583, respectively. Other incomeandexpenseforthethreeincome and sixmonthsendedexpense for the three and six months ended June 30,,2015wasanetincomeof$504,405 2015 was a net income of $504,405 and a net income of $1,214,895, respectively,whichincludedinterestexpenseof$37,772 which included interest expense of $37,772 and $121,914, respectively,gains onextinguishmentofdebtof$73,181on extinguishment of debt of $73,181 and $146,363, respectively, andgainsrelatedtoregistrationpaymentarrangementsof$468,996and gains related to registration payment arrangements of $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.respectively. 

Gains orexpenserelatedtoregistrationpaymentarrangementsresultfromaseriesofStockSubscriptionAgreementsweenteredintoin2009and2010(the“StockSubscriptionAgreements”).We arerequiredtoregisterthesharesofcommonstocksoldpursuanttotheStockSubscriptionAgreementsundertheSecurities Act.OurfailuretoregisterthesharesofcommonstockundertheSecuritiesActresultedinourobligationtoissueadditionalshares(“PenaltyShares”) toinvestorswhopurchasedsharespursuanttotheStockSubscriptionAgreements.We recorded aliabilityonourbooksforthevalueoftheestimatednumberofsharestobeissued.WeincurlossesonourregistrationpaymentarrangementswhentheestimatednumberofPenaltySharestobeissuedincreases,orwhenthevalueofourcommonstockincreases.WerecordgainsonourregistrationpaymentarrangementswhentheestimatednumberofPenaltySharestobeissueddecreases,orwhenthevalueofourcommonstockdecreases.The increase in interest expense in 2016 was due to interest on the Truitt Note in 2016. 

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 were required to register the shares of common stock sold pursuant to the Stock Subscription Agreements under the Securities Act. Our failure to register the shares of common stock under the Securities Act timely resulted in our obligation to issue additional shares (“Penalty Shares”) 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, or when the value of our common stock decreases.

We hadnobenefitfromincometaxesduringthethreeDuring the three months ended June 30, 2016, we had no gains or losses related to registration payment arrangements. During the six months ended June 30, 2016, we had gains of $492,583 related to registration payment arrangements due to a decrease in the value of our common stock. During the three and sixmonthsended months ended June 30,,2015or2014,asourdeferredtaxbenefitwascompletelyoffsetbyavaluationallowanceduetotheuncertaintyofrealizationofthebenefit. 2015, we had gains related to registration payment arrangements of $468,996 and $1,190,446, respectively, due to decreases in the value of our common stock and the estimated number of penalty shares to be issued. We expect that income or expense related to registration payment arrangements will fluctuate as the price of our common stock and the estimate of the number of Penalty Shares to be issued fluctuate.

We had no benefit from income taxes during the three and six months ended June 30, 2016 and 2015, 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 June 30, 2015.2016. 

Application of Critical Accounting Policies

We prepareour financialstatements inconformity withaccounting principlesgenerally acceptedintheUnited StatesofAmerica, whichrequiresusto makeestimatesandassumptions thataffectthereported amountsofassetsand liabilitiesanddisclosuresof contingentassetsandliabilities atthedate ofthe financialstatements,andthereportedamounts ofrevenuesandexpenses duringthereporting period.Actualresultscould differfromthoseestimates. Estimatesandassumptionswhich, inouropinion,are significanttotheunderlying amountsincludedinthe financialstatementsandfor whichit wouldbereasonably possiblethatfutureeventsorinformationcouldchange thoseestimatesinclude:

Registration Payment Arrangements.Weare contractuallyobligatedtoissuesharesofourcommon stocktocertaininvestors forfailuretoregister theirsharesofour commonstockunderthe Securities Act. Act. Wehave recordedaliability fortheestimatednumber ofsharestobe issuedatthefair valueofthestock tobeissued.We reviewona on a quarterlybasis ourestimateofthenumberofsharestobeissued andthefairvalue ofthestocktobeissued.

Realization of Deferred Income Tax Assets.We provideanetdeferred taxassetorliability equaltotheexpectedfuturetax future tax benefitorexpenseoftemporary reportingdifferencesbetweenfinancial reportingandtaxaccounting methodsandanyavailable operatinglossortax creditcarryovers.At June 30,,2015,wehada 2016, we had a deferred taxassetresultingprincipally fromournetoperating lossdeductioncarryforwardavailable fortaxpurposesin futureyears.Thisdeferred taxassetiscompletely offsetbyavaluationallowancedue totheuncertaintyof realization.Weevaluatethenecessityofthe of the valuation allowancequarterly.

Estimated Costs to Complete Fixed-Price Contracts.Werecordrevenues forfixed-price contractsunderthepercentage-of-completionmethod of accounting,wherebyrevenuesare recognizedratablyasthose as those contractsarecompleted.Thisrateisbasedprimarilyon theproportionofcontract costsincurredtodate tototalcontractcosts projectedtobe to be incurredfortheentireproject,or theproportionofmeasurableoutputcompleted todatetototal outputanticipatedforthe entireproject.Wereviewourestimatesofcoststo of costs to completeeach contractquarterly,andmake adjustmentsifnecessary.AtJune 30,,2015, 2016, we donotbelievethat materialchangestocontractcostestimatesatcompletionforany ofouropencontracts arereasonablylikelyto likely to occur.