Attached files
file | filename |
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EX-32.1 - FTE Networks, Inc. | v210879_ex32-1.htm |
EX-31.1 - FTE Networks, Inc. | v210879_ex31-1.htm |
EX-31.2 - FTE Networks, Inc. | v210879_ex31-2.htm |
EX-32.2 - FTE Networks, Inc. | v210879_ex32-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
þ
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended December 31, 2010.
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from _______________ to __________________
Commission
File No. 000-31355
BEACON ENTERPRISE SOLUTIONS
GROUP, INC.
(Name of
registrant in its charter)
Nevada
|
81-0438093
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification
No.)
|
9300
Shelbyville Road, Suite 1000, Louisville, KY 40222
(Address
of principal executive offices)
502-657-3500
(Issuer’s
telephone number)
Indicate
by check mark whether the registrant (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 þ No o
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes o No þ
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 during the
preceding 12 months (or for such shorter period that the registrant was
required to submit and post such files).
Yes o
No þ
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 o
|
Accelerated
filer o
|
Non-accelerated
filer
o
(Do
not check if a smaller reporting company)
|
Smaller
reporting
company
þ
|
As of
February11, 2011, Beacon Enterprise Solutions Group, Inc. had a total of
37,376,396 shares of common stock issued and outstanding.
Beacon
Enterprise Solutions Group, Inc.
FORM 10-Q
For
the fiscal three months ended December 31, 2010
INDEX
PART
I: FINANCIAL INFORMATION
|
||
Item
1. Financial Statements
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3
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
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15
|
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Item
4. Controls and Procedures
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19
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|
PART
II: OTHER INFORMATION
|
||
Item
1. Legal Proceedings
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21
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Item
4. Removed and Reserved
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21
|
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Item
5. Other information
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21
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|
Item
6. Exhibits
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21
|
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Signatures
|
22
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EX-31.1
|
23
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EX-31.2
|
24
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EX-32.1
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25
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EX-32.2
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26
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Page
2
Condensed
Consolidated Balance Sheets
(all
amounts in 000's except share and per share data)
December
31,
|
September
30,
|
|||||||
2010
|
2010
|
|||||||
(unaudited)
|
||||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$ | 108 | $ | 246 | ||||
Accounts
receivable, net
|
4,241 | 4,535 | ||||||
Inventory,
net
|
526 | 557 | ||||||
Prepaid
expenses and other current assets
|
608 | 357 | ||||||
Current
assets of discontinued operations
|
- | 133 | ||||||
Total
current assets
|
5,483 | 5,828 | ||||||
Property
and equipment, net
|
385 | 420 | ||||||
Goodwill
|
2,792 | 2,792 | ||||||
Other
intangible assets, net
|
2,947 | 3,011 | ||||||
Other
assets
|
27 | 20 | ||||||
Total
assets
|
$ | 11,634 | $ | 12,071 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIENCY)
|
||||||||
Current
liabilities:
|
||||||||
Bridge
note - related party
|
$ | 100 | $ | 100 | ||||
Current
portion of long-term debt
|
261 | 379 | ||||||
Senior
Secured Notes Payable, net of deferred debt discount of
$78
|
1,473 | - | ||||||
Accounts
payable
|
2,368 | 2,971 | ||||||
Accrued
expenses and other current liabilities
|
1,952 | 880 | ||||||
Current
liabilities of discontinued operations
|
- | 8,558 | ||||||
Total
current liabilities
|
6,154 | 12,888 | ||||||
Non-current
Line of Credit - related party
|
- | 630 | ||||||
Long-term
debt, less current portion
|
136 | 403 | ||||||
Deferred
tax liability
|
167 | 153 | ||||||
Total
liabilities
|
6,457 | 14,074 | ||||||
Stockholders'
equity (deficiency)
|
||||||||
Preferred
Stock: $0.01 par value, 5,000,000 shares
|
||||||||
authorized,
1,041 shares outstanding in the
|
||||||||
following
classes:
|
||||||||
Series
A convertible preferred stock, $1,000 stated value,
|
||||||||
4,500
shares authorized, 30 shares issued and outstanding
|
||||||||
at
December 31, 2010 and September 30, 2010, respectively,
|
||||||||
(liquidation
preference $94)
|
30 | 30 | ||||||
Series
A-1 convertible preferred stock, $1,000 stated value,
|
||||||||
1,000
shares authorized, 311 shares issued and outstanding
|
||||||||
at
December 31, 2010 and September 30, 2010,
respectively
|
||||||||
(liquidation
preference $442)
|
311 | 311 | ||||||
Series
B convertible preferred stock, $1,000 stated value,
|
||||||||
4,000
shares authorized, 700 shares issued and outstanding
|
||||||||
at
December 31, 2010 and September 30, 2010, respectively,
|
||||||||
(liquidation
preference $981)
|
700 | 700 | ||||||
Common
stock, $0.001 par value 70,000,000 shares authorized
|
||||||||
37,376,396
shares issued and outstanding
|
||||||||
at
December 31, 2010 and September 30, 2010, respectively.
|
37 | 37 | ||||||
Additional
paid in capital
|
37,491 | 37,137 | ||||||
Accumulated
deficit
|
(33,473 | ) | (39,711 | ) | ||||
Accumulated
other comprehensive income (loss)
|
81 | (507 | ) | |||||
Total
stockholders' equity (deficiency)
|
5,177 | (2,003 | ) | |||||
Total
liabilities and stockholders' equity
|
$ | 11,634 | $ | 12,071 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
Page
3
Condensed
Consolidated Statements of Operations
(Unaudited)
(all
amounts in 000's except share and per share data)
For
the Three
|
For
the Three
|
|||||||
Months
Ended
|
Months
Ended
|
|||||||
December
31,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Net
sales
|
$ | 3,974 | $ | 2,873 | ||||
Cost
of materials sold
|
276 | 483 | ||||||
Cost
of services
|
2,523 | 1,276 | ||||||
Gross
profit
|
1,175 | 1,114 | ||||||
Operating
expenses
|
||||||||
Salaries
and benefits
|
1,675 | 1,041 | ||||||
Selling,
general and administrative
|
888 | 1,017 | ||||||
Total
operating expense
|
2,563 | 2,058 | ||||||
Loss
from operations
|
(1,388 | ) | (944 | ) | ||||
Other
expenses
|
||||||||
Other
expenses
|
(285 | ) | (185 | ) | ||||
Change
in fair value of warrants
|
- | (24 | ) | |||||
Total
other expenses
|
(285 | ) | (209 | ) | ||||
Net
loss before income taxes
|
(1,673 | ) | (1,153 | ) | ||||
Income
tax benefit (expense)
|
38 | (39 | ) | |||||
Loss
from continuing operations
|
(1,635 | ) | (1,192 | ) | ||||
Net
income of discontinued operations (including gain on
|
||||||||
deconsolidation
of $7,892 in the three months ended
|
||||||||
December
31, 2010)
|
7,892 | 161 | ||||||
Net
income (loss)
|
6,257 | (1,031 | ) | |||||
Series
A, A-1 and B Preferred Stock:
|
||||||||
Contractual
dividends
|
(19 | ) | (48 | ) | ||||
Deemed
dividends related to beneficial conversion feature
|
- | (25 | ) | |||||
Net
income (loss) available to common stockholders
|
$ | 6,238 | $ | (1,104 | ) | |||
Net
income (loss) per share to common stockholders - basic and
diluted
|
||||||||
Net
loss per share from continuing operations
|
$ | (0.04 | ) | $ | (0.05 | ) | ||
Net
income per share from discontinued operations
|
0.21 | 0.01 | ||||||
$ | 0.17 | $ | (0.04 | ) | ||||
Weighted
average shares outstanding
|
||||||||
basic
and diluted
|
37,376,396 | 26,156,058 | ||||||
Other
comprehensive loss, net of tax
|
||||||||
Net
income (loss)
|
$ | 6,238 | $ | (1,104 | ) | |||
Foreign
currency translations adjustment
|
(102 | ) | (15 | ) | ||||
Comprehensive
income (loss)
|
$ | 6,136 | $ | (1,119 | ) |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
Page
4
Beacon
Enterprise Solutions Group, Inc. and Subsidiaries
Condensed
Consolidated Statement of Stockholders' Equity (Deficiency)
(Unaudited)
(all
amounts in 000's except share data)
Series
A Convertible
|
Series
A-1 Convertible
|
Series
B Convertible
|
Accumulated
|
|||||||||||||||||||||||||||||||||||||||||||||
Preferred
Stock
|
Preferred
Stock
|
Preferred
Stock
|
Common
Stock
|
Additional
|
Other
|
|||||||||||||||||||||||||||||||||||||||||||
$1,000
Stated
|
$1,000
Stated
|
$1,000
Stated
|
$0.001
Par
|
Paid-In
|
Accumulated
|
Comprehensive
|
||||||||||||||||||||||||||||||||||||||||||
Shares
|
Value
|
Shares
|
Value
|
Shares
|
Value
|
Shares
|
Value
|
Capital
|
Deficit
|
Income
|
Total
|
|||||||||||||||||||||||||||||||||||||
Balance
at September 30, 2010
|
30 | $ | 30 | 311 | $ | 311 | 700 | $ | 700 | 37,376,396 | $ | 37 | $ | 37,137 | $ | (39,711 | ) | $ | (507 | ) | (2,003 | ) | ||||||||||||||||||||||||||
Vested
portion of share based payments to employees for
services
|
179 | 179 | ||||||||||||||||||||||||||||||||||||||||||||||
Warrants
issued under consulting agreements
|
46 | 46 | ||||||||||||||||||||||||||||||||||||||||||||||
Amortization
of market value of common stock vested for investor relations
agreement
|
6 | 6 | ||||||||||||||||||||||||||||||||||||||||||||||
Amortization
of non-employee stock options issued for performance of
services
|
15 | 15 | ||||||||||||||||||||||||||||||||||||||||||||||
Warrants
issued for credit facility
|
30 | 30 | ||||||||||||||||||||||||||||||||||||||||||||||
Discount
on senior secured notes payable
|
78 | 78 | ||||||||||||||||||||||||||||||||||||||||||||||
Series
A-1 Preferred Stock contractual
dividends
|
(8 | ) | (8 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Series
A-1 Preferred Stock contractual dividends paid in in
kind
|
(11 | ) | (11 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Net
income
|
6,257 | 6,257 | ||||||||||||||||||||||||||||||||||||||||||||||
Net
change in accumulated other comprehensive income
|
588 | 588 | ||||||||||||||||||||||||||||||||||||||||||||||
Balance
at December 31, 2010
|
30 | $ | 30 | 311 | $ | 311 | 700 | $ | 700 | 37,376,396 | $ | 37 | $ | 37,491 | $ | (33,473 | ) | $ | 81 | $ | 5,177 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
Page
5
Beacon
Enterprise Solutions Group, Inc. and Subsidiaries
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
(all
amounts in 000's)
For
the Three
|
For
the Three
|
|||||||
Months
Ended
|
Months
Ended
|
|||||||
December
31,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
income (loss)
|
$ | 6,257 | $ | (1,031 | ) | |||
Net
(income) loss from discontinued operations (including gain on
deconsolidation of $7,892 for the three months ended December 31,
2010)
|
(7,892 | ) | $ | (161 | ) | |||
Net
loss from continuing operations
|
(1,635 | ) | (1,192 | ) | ||||
Adjustments
to reconcile net income (loss) to net cash used in continuing operating
activities:
|
||||||||
Change
in reserve for obsolete inventory
|
15 | 12 | ||||||
Change
in reserve for doubtful accounts
|
37 | 37 | ||||||
Depreciation
and amortization
|
132 | 163 | ||||||
Non-cash
interest
|
26 | 88 | ||||||
Share
based payments
|
276 | 319 | ||||||
Change
in fair value of warrants with anti-dilution rights
|
- | 24 | ||||||
Amortization
of deferred finance fees
|
14 | - | ||||||
Change
in deferred tax liability
|
15 | - | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
193 | 589 | ||||||
Inventory
|
16 | 85 | ||||||
Prepaid
expenses and other assets
|
(100 | ) | (58 | ) | ||||
Accounts
payable
|
(575 | ) | (730 | ) | ||||
Accrued
expenses
|
1,030 | (1,138 | ) | |||||
CASH
USED IN CONTINUING OPERATING ACTIVITIES
|
(556 | ) | (1,801 | ) | ||||
CASH
PROVIDED BY DISCONTINUED OPERATIONS
|
- | 1,244 | ||||||
NET
CASH USED IN OPERATING ACTIVITIES
|
(556 | ) | (557 | ) | ||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Capital
expenditures
|
(35 | ) | (168 | ) | ||||
Capital
expenditures of discontinued operations
|
- | (186 | ) | |||||
NET
CASH USED IN INVESTING ACTIVITIES
|
(35 | ) | (354 | ) | ||||
CASH
FLOWS FROM CONTINUING FINANCING ACTIVITIES
|
||||||||
Proceeds
from sale of common stock, net of offering costs
|
- | 2,425 | ||||||
Proceeds
from issuance of senior secured notes payable, net of offering
costs
|
1,377 | - | ||||||
Proceeds
from non-current line of credit - related party
|
310 | - | ||||||
Payments
on non-current line of credit - related party
|
(940 | ) | - | |||||
Payments
on short term debt
|
- | (550 | ) | |||||
Repayment
of convertible notes
|
- | (224 | ) | |||||
Payments
of notes payable
|
(385 | ) | (169 | ) | ||||
NET
CASH PROVIDED BY CONTINUING FINANCING ACTIVITIES
|
362 | 1,482 | ||||||
Effect
of exchange rate changes on cash and cash equivalents
|
91 | 5 | ||||||
NET
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
(138 | ) | 576 | |||||
CASH
AND CASH EQUIVALENTS - BEGINNING OF PERIOD
|
246 | 227 | ||||||
CASH
AND CASH EQUIVALENTS - END OF PERIOD
|
$ | 108 | $ | 803 | ||||
Supplemental
disclosures
|
||||||||
Cash
paid for:
|
||||||||
Interest
|
$ | 31 | $ | 24 | ||||
Income
taxes
|
$ | - | $ | - |
Page
6
BEACON
ENTERPRISE SOLUTIONS GROUP, INC.
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts
in thousands, except share and per share data)
NOTE 1 —
|
ORGANIZATION
AND DESCRIPTION OF BUSINESS
|
Organization
The
condensed consolidated financial statements presented are those of Beacon
Enterprise Solutions Group, Inc., which was originally formed in the State of
Indiana on June 6, 2007 and combined with Suncrest Global Energy Corp., a
Nevada corporation, on December 20, 2007. In these footnotes to the
condensed consolidated financial statements, the terms “Company,” “Beacon,”
“we,” “us” or “our” mean Beacon Enterprise Solutions Group, Inc. and all
subsidiaries included in our condensed consolidated financial
statements.
Beacon
provides global, international and regional telecommunications and technology
systems infrastructure services, encompassing a comprehensive suite of
consulting, design, installation, and infrastructure management offerings.
Beacon’s portfolio of infrastructure services spans all professional and
construction requirements for design, build and management of
telecommunications, network and technology systems infrastructure. Professional
services offered include consulting, engineering, program management, project
management, construction services and infrastructure management services. Beacon
offers these services under either a comprehensive contract option or unbundled
to some global and regional clients.
Basis of
Presentation
The
accompanying unaudited condensed consolidated financial statements for the three
months ended December 31, 2010 have been prepared in accordance with the
accounting principles generally accepted in the United States of America
(“GAAP”) for interim financial information and pursuant to the instructions to
Form 10-Q and Article 8 of Regulation S-X of the Securities and
Exchange Commission (“SEC”) and on the same basis as the annual audited
consolidated financial statements. The unaudited Condensed Consolidated Balance
Sheet as of December 31, 2010, Condensed Consolidated Statements of Operations
and Cash Flows for the three months ended December 31, 2010, and the Condensed
Consolidated Statement of Stockholders’ Equity for three months ended December
31, 2010 are unaudited, but include all adjustments, consisting only of normal
recurring adjustments, which Beacon considers necessary for a fair presentation
of the financial position, operating results and cash flows for the period
presented. The results for the three months ended December 31, 2010 are not
necessarily indicative of results to be expected for the year ending
September 30, 2011 or for any future interim period. The accompanying
condensed consolidated financial statements should be read in conjunction with
Beacon’s consolidated financial statements and notes thereto included in
Beacon’s Annual Report on Form 10-K, which was filed with the SEC on
December 16, 2010.
NOTE 2 —
|
LIQUIDITY
AND FINANCIAL CONDITION
|
We
generated net income of $6,257, which includes a gain on the deconsolidation of
discontinued operations of $7,892 (see Note 4), non-cash expenses for share
based compensation of $276, non-cash depreciation and amortization expense of
$132, and other non-cash charges of $107. Cash used for continuing
operations amounted to $556 for the three months ended December 31, 2010.
Our accumulated deficit amounted to $33,473, while we had cash of $108 and a
working capital deficit of $671.
On August
17, 2010 we entered into a long term line of credit facility with one of our
directors for $4,000, the facility has an annual interest rate of 7.73% on any
outstanding balance and a facility fee of the greater of $40 or 1% of the unused
balance. Additionally, 15,000 warrants, with a five year term at $1.00 per
share, per month will be paid for each month the facility is outstanding.
As of December 31, 2010, we have issued 75,000 warrants. Using the Black
Scholes pricing model, we have determined the warrants have a fair value of $30
which has been recorded as other expense for the three months ended December 31,
2010. As of December 31, 2010, we do not have an outstanding balance under
this facility. See Note 6.
On
November 23, 2010, we initiated a private placement (the “Placement”) of up to
$3,000 of 12 month Senior Secured Notes (“Notes”) with warrants to purchase 150
shares of Beacon’s common stock at $0.40 per share for every $1 in principal
invested. The Notes bear interest at 9% APR. The Placement will be
made on a "best efforts" basis with a Minimum of $600 and a Maximum of
$3,000. Net proceeds have been used to repay and replace an existing
Senior Secured Bank Note totaling approximately $300 and will also be used for
additional working capital. The Placement will expire on the sooner of (a)
March 15, 2011 if the Minimum has not been met or (b) the date that the Maximum
has been raised,see Note 6. As of December 31, 2010 we have received net
proceeds of $1,377 (gross proceeds of $1,551, less offering costs of
$174).
Page
7
Based on
the recent progress we made in the execution of our business plan, we believe
that our currently available cash, availability of aforementioned credit line
and cash received from the issuance of notes payable, and funds we expect to
generate from operations will enable us to operate our business and repay our
debt obligations as they become due through January 1, 2012. However, we may
require additional capital in order to execute our business plan. If we are
unable to raise additional capital, or encounter unforeseen circumstances that
place constraints on our capital resources, we will be required to take various
measures to conserve liquidity, which could include, but not necessarily be
limited to, curtailing our business development activities, suspending the
pursuit of our business plan, and controlling overhead expenses. We cannot
provide any assurance that we will raise additional capital. We have not secured
any commitments for new financing at this time, nor can we provide any assurance
that new financing will be available to us on acceptable terms, if at
all.
NOTE 3 —
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
Principles of
Consolidation
The
condensed consolidated financial statements include the accounts of Beacon
Enterprise Solutions Group, Inc., a Nevada corporation and its wholly-owned
subsidiaries including BESG Ireland Ltd. and Beacon Solutions S.R.O., which
began operations November 1, 2009 and January 1, 2010, respectively.
Additionally Datacenter Contractors AG (formerly Beacon Solutions AG)
acquired on July 29, 2009 and discontinued as of June 30, 2010, has been
deconsolidated as of December 31, 2010 due to cessation of controlling financial
interest in the subsidiary (see Note 4). All significant intercompany
accounts and transactions have been eliminated in consolidation.
Reclassifications
Certain
amounts in the prior period financial statement have been reclassified to
conform to the current period presentation.
Use of
Estimates
The preparation of the condensed
consolidated financial statements in conformity with GAAP requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of net sales and expenses
during the reporting period. Actual results could differ from those estimates.
These estimates and assumptions include valuing equity securities and derivative
financial instruments issued as purchase consideration in business combinations
and/or in financing transactions and in share based payment arrangements,
accounts receivable reserves, inventory reserves, deferred taxes and related
valuation allowances, allocating the purchase price to the fair values of assets
acquired and liabilities assumed in business combinations (including separately
identifiable intangible assets and goodwill) and estimating the fair values of
long lived assets to assess whether impairment charges may be necessary. Certain
of our estimates, including accounts receivable and inventory reserves and the
carrying amounts of intangible assets could be affected by external conditions
including those unique to our industry and general economic conditions. It is
reasonably possible that these external factors could have an effect on our
estimates that could cause actual results to differ from our estimates. We
re-evaluate all of our accounting estimates at least quarterly based on these
conditions and record adjustments, when necessary.
Accounts
receivable
Accounts
receivable of $5,128 and $5,401 as of December 31, 2010 and September 30, 2010,
respectively include customer billings on invoices issued by us after the
service is rendered or the sale earned. Credit is extended based on an
evaluation of our customer’s financial condition and advance payment for
services is generally required for many of our services.
We
establish an allowance for doubtful account based on our best estimate of the
amount of potential credit losses based on specific customer information and
historical experience. Changes in economic conditions might result in changes to
the estimated allowance. Account balances deemed to be uncollectible are
charged to the allowance for doubtful accounts after all means of collection
have been exhausted and the potential for recovery is considered remote. We
currently believe the majority of our receivables are collectible due to the
nature of the industry. The allowance for doubtful accounts amounted to $887 and
$866 as of December 31, 2010 and September 30, 2010,
respectively.
Page
8
Inventory
Inventory
consisted of parts and system components of $691 and $707 as of December 31,
2010 and September 30, 2010, respectively is stated at the lower of cost
(first-in, first-out method) or market. In the case of slow moving items, we
calculate a reserve for obsolescence to reflect a reduced marketability for the
items. The actual percentage reserved will depend on the total quantity on hand,
its sales history, and expected near term sales prospects. The reserve for
obsolescence amounted to $165 and $150 as of December 31, 2010 and
September 30, 2010, respectively.
Net Loss Per
Share
Basic net
loss per share is computed by dividing net income or loss per share available to
common stockholders by the weighted average shares of common stock outstanding
for the periods presented. Diluted net income per share reflects the
potential dilution that could occur if securities or other instruments to issue
common stock were exercised or converted into common
stock. Potentially dilutive securities, consisting of options and
warrants, are excluded from the calculation of diluted per share data when they
have an anti-dilutive effect or their per share exercise price is greater than
the average market price of common stock during the periods
presented. The computation of net income (loss) available to common
stockholders per share for the three months ended December 31, 2010 and 2009,
respectively, excludes potentially dilutive securities because their inclusion
would be anti-dilutive.
Shares of
common stock issuable upon conversion or exercise of potentially dilutive
securities at December 31, 2010 are as follows:
Total
|
||||||||||||
Stock
|
Common
|
Common
|
||||||||||
Options
and
|
Stock
|
Stock
|
||||||||||
Warrants
|
Equivalents
|
Equivalents
|
||||||||||
Series
A Convertible Preferred Stock with Warrants
|
20,131 | 40,263 | 60,394 | |||||||||
Series
A-1 Convertible Preferred Stock with Warrants
|
207,260 | 414,518 | 621,778 | |||||||||
Series
B Convertible Preferred Stock with Warrants
|
350,000 | 875,000 | 1,225,000 | |||||||||
Common
Stock Offering Warrants
|
2,807,322 | - | 2,807,322 | |||||||||
Placement
Agent Warrants
|
2,847,497 | - | 2,847,497 | |||||||||
Affiliate
Warrants
|
55,583 | - | 55,583 | |||||||||
Bridge
Financing
|
285,500 | 166,667 | 452,167 | |||||||||
Convertible
Notes Payable Warrants
|
50,000 | - | 50,000 | |||||||||
Senior
Secured Notes Payable Warrants
|
232,664 | - | 232,664 | |||||||||
Compensatory
Warrants
|
300,000 | - | 300,000 | |||||||||
Equity
Financing Arrangements Warrants
|
791,662 | - | 791,662 | |||||||||
Consulting
Warrants
|
2,500,000 | 2,500,000 | ||||||||||
Employee
Stock Options
|
4,193,648 | - | 4,193,648 | |||||||||
Non-Employee
Stock Options
|
250,000 | - | 250,000 | |||||||||
14,891,267 | 1,496,448 | 16,387,715 |
Recently
Adopted Accounting Pronouncements
In
January 2010, the Financial Accounting Standards Board ("FASB") issued ASU
No. 2010-02, “Accounting and
Reporting for Decreases in Ownership of a Subsidiary- a Scope Clarification
to address implementation issues related to the changes in ownership
provisions in the Consolidation-Overall Subtopic (Subtopic 810-10) of the FASB Accounting Standards
Codification. Subtopic 810-10 establishes the accounting and reporting
guidance for noncontrolling interests and changes in ownership interests of a
subsidiary. An entity is required to deconsolidate a subsidiary when the entity
ceases to have a controlling financial interest in the subsidiary. Upon
deconsolidation of a subsidiary, an entity recognizes a gain or loss on the
transaction and measures any retained investment in the subsidiary at fair
value. The gain or loss includes any gain or loss associated with the difference
between the fair value of the retained investment in the subsidiary and its
carrying amount at the date the subsidiary is deconsolidated. In contrast, an
entity is required to account for a decrease in its ownership interest of a
subsidiary that does not result in a change of control of the subsidiary as an
equity transaction. See Note 4 for the impact on the condensed consolidated
financial statements as of December 31, 2010.
Other
accounting standards that have been issued or proposed by the FASB and SEC
and/or other standards-setting bodies that do not require adoption until a
future date are not expected to have a material impact on the condensed
consolidated financial statements upon adoption.
Page
9
NOTE 4 —
|
DISCONTINUED
OPERATIONS
|
As
previously disclosed in the Company’s Current Report on Form 10-Q filed on
August 16, 2010, due to a contractual dispute with its one significant customer
and the inability to reach a settlement, Datacenter Contractors AG’s (“DC”,
formerly known as “Beacon Solutions AG”) Board has elected to discontinue DC’s
operations. As a result, the net sales and expenses associated with DC
have been reclassified as discontinued operations for the three months ended
December 31, 2009 in the condensed consolidated financial
statements.
On
December 14, 2010, Beacon announced that, as a result of DC’s inability to reach
a settlement of unpaid invoices by its largest debtor, the DC Board has filed
the relevant statutory notices with the local judge in Switzerland in accordance
with its fiduciary obligations under Swiss law. As a result of this action,
Beacon ceases to have a controlling financial interest in DC and therefore, in
accordance with ASC 810-10-65, must deconsolidate the subsidiary from the
condensed consolidated financial statements for the three months ended December
31, 2010. The resultant deconsolidation generated a net income of $7,892
which is mainly composed of the elimination of the net liabilities of the
discontinued DC operations from Beacon’s operations.
We
accounted for the filing under the guidance of ASU No. 2010-02, “Accounting and Reporting for
Decreases in Ownership of a Subsidiary- a Scope
Clarification” which requires an entity to deconsolidate a subsidiary
when the entity ceases to have a controlling financial interest in the
subsidiary.
NOTE 5 —
|
ACCRUED
EXPENSES
|
Accrued
expenses consist of the following:
As
of
|
As
of
|
|||||||
December
31,
|
September
30,
|
|||||||
2010
|
2010
|
|||||||
Compensation
related
|
$ | 742 | $ | 483 | ||||
Customer
deposits
|
498 | 29 | ||||||
Dividends
|
172 | 153 | ||||||
Interest
|
60 | 50 | ||||||
Other
|
480 | 165 | ||||||
$ | 1,952 | $ | 880 |
NOTE 6 —
|
NOTES PAYABLE
AND LINE OF CREDIT – RELATED PARTY
|
Notes
Payable
On
November 23, 2010, we initiated a private placement (the “Placement”) of up to
$3,000 of 12 month Senior Secured Notes (“Notes”) with warrants to purchase 150
shares of Beacon’s common stock at $0.40 per share for every $1 in principal
invested. The Notes bear interest at 9% APR. The Placement will be
made on a "best efforts" basis with a Minimum of $600 and a Maximum of
$3,000. Net proceeds have been used to repay and replace an existing
Senior Secured Bank Note totaling approximately $300 and will also be used for
additional working capital. The Placement will expire on the sooner of (a)
March 15, 2011 if the Minimum has not been met or (b) the date that the Maximum
has been raised. The Notes have not been and will not be registered under
the 1933 Act and may not be offered or sold in the United States absent
registration or an applicable exemption from registration requirements.
The notes are secured by all business assets of the Company, as defined.
As of December 31, 2010 we have issued $1,551 of notes, 232,664 warrants and
have recorded interest expense of $18. We incurred financing fee of $174
which has been recognized as deferred finance fees and are be amortized ratably
over the life of the debt.
Using the
Black-Scholes model we have determined the fair value of the issued warrants to
be $78 and allocated the debt proceeds in accordance with the relative fair
value method. The notes payable have been recorded on the Condensed
Consolidated Balance Sheet as of December 31, 2010 at $1,473 which is net of the
discount representing the allocation of the $78 relative fair value to the
warrants. We will record interest in the condensed consolidated statements of
operations as the discounted note is accreted to face value over the life of the
debt.
Page
10
Long Term Line of
Credit –
Related Party
On August
17, 2010 we entered into a long term line of credit facility with one of our
directors for $4,000, the facility has an annual interest rate of 7.73% on any
outstanding balance and a facility fee of the greater of $40 or 1% of the unused
balance. Additionally, 15,000 warrants, with a five year term at $1.00 per
share, per month will be paid for each month the facility is outstanding. As of
December 31, 2010, we have issued 75,000 warrants. Using the Black Scholes
method, we have determined the warrants have a fair value of $30 which has been
recorded as other expense for the three months ended December 31, 2010. As of
December 31, 2010, we do not have an outstanding balance under this
facility.
NOTE 7 —
|
RELATED
PARTY TRANSACTIONS
|
The Company has obtained
insurance through an agency owned by one of its founding
stockholders/directors. Insurance expense of $31and $45 was paid to the
agency for each of the three months ended December 31, 2010 and 2009,
respectively.
NOTE 8 —
|
COMMITMENTS
AND CONTINGENCIES
|
Litigation
On
September 7, 2010, Beacon was named a party in a lawsuit filed in Jefferson
Circuit Court in the State of Kentucky, seeking $270 plus other costs,
attorney’s fees and damages, regarding the Company's alleged conduct during the
course of the purchase of the assets and assumption of certain liabilities of
Strategic Communications, LLC. Although the outcome of this matter cannot
be predicted at this time, Beacon believes this lawsuit is without merit.
As of December 31, 2010, no provision has been made in the condensed
consolidated financial statements related to this action, as the Company
believes that the ultimate disposition of this matter will not have a material
adverse effect on the Company’s financial position or results of
operations.
Operating
Leases
The
Company has entered into operating leases for office facilities in Louisville,
KY, Columbus, OH Cincinnati, OH, and Prague, Czech Republic. Rent expense for
the three months ended December 31, 2010 and 2009, respectively amounted to $50
and $48. A summary of the minimum lease payments due on these operating leases,
exclusive of the Company’s share of operating expenses and other costs, is as
follows:
2011
|
$ | 195 | ||
2012
|
116 | |||
2013
|
116 | |||
2014
|
89 | |||
2015
|
80 | |||
Thereafter
|
47 | |||
$ | 643 |
Engagement of Investor
Relations Firms
On
December 17, 2009, we engaged an investor relations firm for a twenty four
month period, the commitment date being November 1, 2009, providing for
compensation payable in 50,000 shares of fully vested non-forfeitable common
stock with an aggregate fair value of $45. For three months ended December
31, 2010, we recorded approximately $6 of investor relations expense related to
this agreement.
Engagement for Advisory
Services
On
January 1, 2009, we entered into a three year advisory agreement with a
stockholder, whereby the party will provide corporate finance and business
strategy advisory services pertaining to Beacon’s business affairs in the areas
of business combinations, financing, etc. This agreement was subsequently
extended to a total of 5 years in April 2010. We recorded $9 of
professional fees expense under this agreement for the three months ended
December 31, 2010.
Page
11
Consulting
Agreement
On
December 1, 2009, we entered into two 36 month consulting agreements,
which were subsequently extended to 60 months in April 2010, issuing an
aggregate of 2,500,000 consulting warrants. The warrants, issued on
December 1, 2009 were fully vested upon issuance and have a fair value of
$915, determined using the Black Scholes model. We are recognizing investor
relations expense ratably over a 60 month term. For the three months ended
December 31, 2010, we recorded approximately $46 of investor relation expense
related to these agreements.
NOTE 9 —
|
STOCKHOLDERS’
EQUITY
|
Preferred
Stock
Each
share of Series A, Series A-1 and Series B preferred stock has
voting rights equal to the equivalent number of common shares into which it is
convertible. The holders of the Series A and Series A-1 are entitled
to receive contractual cumulative dividends in preference to any dividend on the
common stock at the rate of 10% per annum on the initial investment amount
commencing on the date of issue. The holders of the Series B are entitled
to receive contractual cumulative dividends in preference to any dividend on the
common stock (but subject to the rights of the Series A and
Series A-1) at the rate of 6% per annum on the initial investment amount
commencing on the date of issue. Such dividends are payable on January 1,
April 1, July 1 and October 1 of each year. Dividends accrued but unpaid as
of December 31, 2010, are $45 for Series A, $43 for Series A-1 and $84
for Series B, respectively.
The
Company applies the classification and measurement principles enumerated in ASC
815 with respect to accounting for its issuances of the Series A, A-1, and
B preferred stock. The Company is required, under Nevada law, to obtain the
approval of its Board of Directors in order to effectuate a merger,
consolidation or similar event resulting in a more than 50% change in control or
a sale of all or substantially all of its assets.
We
evaluate convertible preferred stock at each reporting date for appropriate
balance sheet classification.
Preferred Stock
Dividends
We
follow the guidelines of ASC 505 Equity - Dividends and Stock Splits when
accounting for pay-in-kind (“PIK”) dividends that are settled in convertible
securities with beneficial conversion features. Therefore, we recorded $0 and
$25 of deemed dividends for the three months ended December 31, 2010 and 2009,
respectively, related to the conversion feature based on the difference between
the effective conversion price of the conversion option and the fair value of
the common stock on the PIK election dates.
Issuance
of non-employee compensatory options
During
the fiscal year ended September 30, 2010, in consideration for services, we
granted options to purchase 250,000 shares of Common Stock vesting ratably over
a 36 month period. We calculated the fair value of the options using the
Black-Scholes option pricing model resulting in a fair value determination of
$188, to be recognized over a 36 month period. For the three months ended
December 31, 2010 we recognized share based compensation of $15 related to these
options.
Stock
Options and Other Equity Compensation Plans
During
the three months ended December 31, 2010, our Board of Directors authorized the
Company to grant two tranches of employee stock options to purchase 140,000 and
585,115 shares of common stock, respectively. The options have ten year
terms and vest over 5 and 3 year periods, respectively. We calculated the
fair value of the options using the Black-Scholes option pricing model with the
following assumptions:
For
the Three
|
||||
Months
Ended
|
||||
December
31,
|
||||
2010
|
||||
Stock
Price
|
$ | 0.63 | ||
Expected
Life
|
5.5 - 7.5 | |||
Volatility
|
178 | % | ||
Risk-free
interest rate
|
1.17 | % | ||
Dividend
Yield
|
0 | % | ||
Fair
value of options
|
$0.60 - $0.62 |
Page
12
We
recognized non-cash share-based employee compensation expenses as
follows:
For
the Three
|
For
the Three
|
|||||||
Months
Ended
|
Months
Ended
|
|||||||
December
31,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
Non-Cash
Share-Based Compensation Expense
|
||||||||
Restricted
Stock
|
$ | - | $ | 45 | ||||
Stock
Options
|
179 | 200 | ||||||
Total
Stock Compensation Expense
|
$ | 179 | $ | 245 |
A summary
of the status of our stock option plan and the changes during the three months
ended December 31, 2010, is presented in the table below:
Weighted
|
||||||||||||||||
Average
|
||||||||||||||||
Weighted
|
Remaining
|
Aggregate
|
||||||||||||||
Number
|
Average
|
Contractual
|
Intrinsic
|
|||||||||||||
Of Options
|
Exercise Price
|
Life
|
Value
|
|||||||||||||
Options
Outstanding at October 1, 2010
|
3,718,533 | $ | 1.47 | |||||||||||||
Granted
|
725,115 | $ | 0.93 | |||||||||||||
Forfeited
|
- | $ | - | |||||||||||||
Options
Outstanding at December 31, 2010
|
4,443,648 | $ | 2.40 | 8.97 | $ | - | ||||||||||
Options
Exercisable, December 31, 2010
|
1,301,799 | $ | 1.18 | 8.50 | $ | - |
As of
December 31, 2010, there was $1,841 in unamortized share-based compensation
cost. This cost is expected to be recognized over the remaining weighted average
vesting period of approximately 2 years.
|
NOTE 10 —
|
Segment
Reporting
|
In
accordance with ASC 280 “Segment Reporting,” our operating segments are those
components of our business for which separate and discrete financial information
is available and is used by our chief operating decision makers, or
decision-making group, in making decisions on how we allocate resources and
assess performance.
In
accordance with ASC 280, the Company reports two operating segments, North
America and Europe. The Company’s chief decision-makers review financial
information presented on a consolidated basis, accompanied by disaggregated
information about net sales and operating profit each year by operating segment.
This information is used for purposes of allocating resources and evaluating
financial performance.
The
accounting policies of the segments are the same as those described in the
“Summary of Significant Accounting Policies.” Segment data includes segment net
sales, segment operating profitability, and total assets by segment. Shared
corporate operating expenses are reported in the United States (“U.S.”)
segment.
The
Company is organized primarily on the basis of operating units which are
segregated by geography in the U.S. and Europe. For the three months ended
December 31, 2010 our segment results, net of Discontinued Operations (see Note
4 for more details) are as follows:
Page
13
United States
|
Europe
|
Total
|
||||||||||
Net
sales
|
$ | 2,710 | $ | 1,264 | $ | 3,974 | ||||||
Loss
from operations
|
(684 | ) | (704 | ) | (1,388 | ) | ||||||
Other
expense
|
(184 | ) | (101 | ) | (285 | ) | ||||||
Depreciation
and amortization
|
(122 | ) | (10 | ) | (132 | ) | ||||||
Net
loss from continuing operations
|
(883 | ) | (752 | ) | (1,635 | ) | ||||||
Net
loss from discontinued operations
|
- | 7,892 | 7,892 | |||||||||
Assets
|
9,391 | 2,243 | 11,634 | |||||||||
Capital
expenditures
|
35 | - | 35 | |||||||||
Goodwill
|
2,792 | - | 2,792 | |||||||||
Intangible
Assets
|
2,947 | - | 2,947 |
In our
European operations 96% of the net sales were generated by one customer for the
three months ended December 31, 2010.
NOTE 11 —
|
SUBSEQUENT
EVENTS
|
As of
February 11, 2011 we have received additional net proceeds of $825 (gross
proceeds of $927 less offering costs of $102 and issued 139,110 warrants related
to the Senior Secured Notes.
Management
has evaluated all subsequent events or transactions occurring through the date
the financial statements were issued.
Page
14
Beacon
Enterprise Solutions Group, Inc. and subsidiaries (collectively the “Company”) is a provider of
global, international and regional telecommunications and technology systems
infrastructure services, encompassing a comprehensive suite of consulting,
design, installation, and infrastructure management offerings. Beacon’s
portfolio of infrastructure services spans all professional and construction
requirements for design, build and management of telecommunications, network and
technology systems infrastructure. Professional services offered include
consulting, engineering, program management, project management, construction
services and infrastructure management services. Beacon offers these services
under a comprehensive contract vehicle or unbundled to some global and regional
clients. Beacon also offers special services in support of qualified projects in
the smart buildings/campuses/cities and data center verticals. Finally, Beacon
provides managed information technology and telecommunications services in
selected local markets. In this report, the terms “Company,” “Beacon,” “we,”
“us” or “our” mean Beacon Enterprise Solutions Group, Inc. and all subsidiaries
included in our consolidated financial statements.
Cautionary
Statements — Forward Outlook and Risks
Certain
statements contained in this quarterly report on Form 10-Q, including, without
limitation, statements containing the words “believes,” “anticipates,”
“intends,” “expects,” “assumes,” “trends” and similar expressions, constitute
“forward-looking statements” within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are based upon the
Company’s current plans, expectations and projections about future events.
However, such statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. These
factors include, among others, the following:
|
·
|
general
economic and business conditions, such as the current global recession,
that may affect demand for our services and products and the ability of
our customers to pay for such services and
products;
|
|
·
|
effects
of competition in the markets in which the Company
operates;
|
|
·
|
liability
and other claims asserted against the
Company;
|
|
·
|
ability
to attract and retain qualified
personnel;
|
|
·
|
availability
and terms of capital;
|
|
·
|
loss
of significant contracts or reduction in revenue associated with major
customers;
|
|
·
|
ability
of customers to pay for services;
|
|
·
|
business
disruption due to natural disasters or terrorist
acts;
|
|
·
|
changes
in, or failure to comply with, existing governmental regulations;
and
|
|
·
|
changes in estimates and
judgments associated with critical accounting policies and
estimates.
|
For a
detailed discussion of these and other factors that could cause the Company’s
actual results to differ materially from the results contemplated by the
forward-looking statements, please refer to Item 1A “Risk Factors” in the
Company’s Current Report on Form 10-K filed on December 16, 2010. The
reader is encouraged to review the risk factors set forth therein. The reader
should not place undue reliance on forward-looking statements, which speak only
as of the date of this report. Except as required by law, the Company assumes no
responsibility for updating forward-looking statements to reflect unforeseen or
other events after the date of this report.
Page
15
Overview
Beacon
was formed for the purpose of acquiring and consolidating regional telecom
businesses and service platforms into an integrated, national provider of high
quality voice, data and VOIP communications to small and medium-sized business
enterprises (the “SME Market”). The Company was originally formed to acquire
companies that would allow it to serve the SME Market on an integrated, turn-key
basis from system design, procurement and installation through all aspects of
providing network service and designing and hosting network applications. In
response to identification of a significant under-served market, our business
strategy has shifted to become a leading provider of global, international and
regional telecommunications and technology systems infrastructure services,
encompassing a comprehensive suite of consulting, design, installation, and
infrastructure management offerings, while continuing to provide managed
information technology and telecommunications services in selected local
markets.
Organic Growth
Strategy
With
respect to our plans to increase net sales organically, we have identified, and
are currently pursuing, several significant strategies including:
|
·
|
Strengthening
existing customer relationships to ensure we are their partner for all
design, implementation and management of ITS infrastructure
solutions.
|
|
·
|
Add
additional major account sales resources to facilitate the introduction of
Fortune 1000, Global 2000 and qualifying multi-national firms. We refer to
these current and future clients as Fortune
10000.
|
|
·
|
Continued
expansion of the a la carte services offered to existing major national,
multi-national and global clients who have not already signed an
infrastructure managed services
agreement.
|
Results of
Operations
For
the three months ended December 31, 2010 and 2009
In order
to best discuss and compare operations for the three month periods ended
December 31, 2010 and 2009 our North American and European operations will be
presented and discussed separately.
North
American Operations
For
the three months ended December 31,
|
||||||||||||||||||||
2010
|
2009
|
|||||||||||||||||||
North
America
|
North
America
|
change
|
||||||||||||||||||
Net
Sales
|
$ | 2,710 | 100 | % | $ | 2,261 | 100 | % | $ | 449 | ||||||||||
Cost
of materials sold
|
276 | 10 | % | 483 | 21 | % | (207 | ) | ||||||||||||
Cost
of services
|
1,479 | 55 | % | 941 | 42 | % | 538 | |||||||||||||
Gross
profit
|
955 | 35 | % | 837 | 37 | % | 118 | |||||||||||||
Operating
expense
|
||||||||||||||||||||
Salaries
and benefits
|
1,560 | 58 | % | 1,041 | 46 | % | 519 | |||||||||||||
Selling,
general and administrative
|
806 | 30 | % | 950 | 42 | % | (144 | ) | ||||||||||||
Intercompany
services
|
(727 | ) | -27 | % | (55 | ) | -2 | % | (672 | ) | ||||||||||
Loss
from operations
|
(684 | ) |
NM
|
(1,099 | ) |
NM
|
415 | |||||||||||||
Other
expense
|
(184 | ) | (209 | ) | 25 | |||||||||||||||
Net
loss before income taxes
|
(868 | ) | (1,308 | ) | 440 | |||||||||||||||
Income
tax expense
|
(15 | ) | - | (15 | ) | |||||||||||||||
Net
loss from continuing operations
|
(883 | ) | (1,308 | ) | 425 | |||||||||||||||
Net
loss from discontinued operations
|
- | - | - | |||||||||||||||||
Net
loss
|
$ | (883 | ) | $ | (1,308 | ) | $ | 425 |
Net sales
from our North American operations the three months ended December 31, 2010 and
2009 was $2,710 and $2,261, or a 20% increase resulting from a focused market
development and customer penetration leading to additional work from existing
customers while creating new customer opportunities.
Cost of
goods sold for the three months ended December 31, 2010 and 2009 amounted to
$1,755 and $1,424, and consisted of $276 and $483 of material costs, $454 and
$570 of direct labor, $112 and $142 of direct project related costs, and $913
and $229 of subcontractor fees incurred in providing services. The shift
in cost of goods sold from materials to services reflects our maturation into a
professional services firm whereby Beacon is using more subcontractors for
installation services, and they bear the material costs.
Salaries
and benefits of approximately $1,560 and $1,041 for the three months ended
December 31, 2010 and 2009 consisted of salaries and wages of approximately $881
and $600, commissions and bonuses of $299 and $47, benefits and payroll taxes of
$187 and $149. Non-cash share-based compensation of $193 and $245 related
primarily to granted stock options is included in salaries and wages. While
headcount is relatively consistent, the increase in salaries is attributable to
a workforce shift to higher salaried professional administrative and management
workforce.
Page
16
Selling,
general and administrative expense for the three months ended December 31, 2010
and 2009 of approximately $806 and $950 include approximately $260 and $377 of
accounting, investor relations and professional fees, $37 of bad debt expense
for both period, $67 and $77 of office related expense, $62 and $87 of
telecommunications and data related expenses, $61 and $37 of travel related
expenses, $69 and $51 of expenses related to business insurance, depreciation
and amortization of $122 and $163, and $128 and $121 of other administrative
services. The reduction in these costs reflects a concerted effort to
streamline operations and control costs while increasing the efficiency and
scalability of Beacon’s office infrastructure. These costs were offset by
intercompany services of $727 and $55 charged to the European business for
administrative functions provided and are eliminated upon consolidation.
European
Operations
For
the three months ended December 31,
|
||||||||||||||||||||
2010
|
2009
|
|||||||||||||||||||
Europe
|
Europe
|
Change
|
||||||||||||||||||
Net
Sales
|
$ | 1,264 | 100 | % | $ | 612 | 100 | % | $ | 652 | ||||||||||
Cost
of materials sold
|
- | 0 | % | - | 0 | % | - | |||||||||||||
Cost
of services
|
1,044 | 83 | % | 335 | 55 | % | 709 | |||||||||||||
Gross
profit
|
220 | 17 | % | 277 | 45 | % | (57 | ) | ||||||||||||
Operating
expense
|
0 | % | ||||||||||||||||||
Salaries
and benefits
|
115 | 9 | % | - | 115 | |||||||||||||||
Selling,
general and administrative
|
82 | 6 | % | 67 | 11 | % | 15 | |||||||||||||
Intecompany
services
|
727 | 58 | % | 55 | 9 | % | 672 | |||||||||||||
Loss
from operations
|
(704 | ) |
NM
|
155 | 25 | % | (859 | ) | ||||||||||||
Other
expense
|
(101 | ) | - |
NM
|
(101 | ) | ||||||||||||||
Net
loss before taxes
|
(805 | ) | 155 | (960 | ) | |||||||||||||||
Income
tax benefit (expense)
|
53 | (39 | ) | 92 | ||||||||||||||||
Net
(loss) income from continuing operations
|
(752 | ) | 116 | (868 | ) | |||||||||||||||
Net
income from discontinued operations including gain on deconsolidation of
$7,892 in the three months ended December 31, 2010
|
7,892 | 161 | ||||||||||||||||||
Net
income
|
$ | 7,140 | $ | 277 | $ | (868 | ) |
Net sales
from European operations the three months ended December 31, 2010 and 2009 was
$1,264 and $612 and show the growth in this segment as we solidify our foothold
in Europe and further expand operations abroad. Now that we have a full
fiscal year of activity in Europe with a proven services solution, we have been
able to leverage the experience to increase business from our largest
customer.
Cost of
services for the three months ended December 31, 2010 and 2009 amounted to
approximately $1,044 and $335 and consisted primarily of subcontractor
costs. The significant increase in subcontractor costs during the quarter
was primarily
due to work being completed in European countries with higher cost
structures. In addition,the nature/type of service delivered changed
to a more subcontractor intensive model.
Gross
profit as
a percentage of sales decreased significantly during the three
months ended December 31, 2010 compared to 2009 due to the majority of work
being completed in European countries with higher cost structures. In
addition, the nature/type of service delivered changed to a more subcontractor
intensive model.
Salaries
and benefits of approximately $115 for the three months ended December 31, 2010
and 2009 consisted of salaries and related benefits. For the comparative
three months ended December 31, 2009 we had not yet hired employees in the
European segment.
Selling,
general and administrative expense for the three months ended December 31, 2010
and 2009 was approximately $82 and $67. Additionally, intercompany
services of $727 and $55 were charged to the European business for
administrative functions provided by the North American corporate office and
were eliminated upon consolidation.
Liquidity and Capital
Resources
We
generated net income of $6,257, which includes a gain on the deconsolidation of
discontinued operations of $7,892 (see Note 4), non-cash expenses for share
based compensation of $276, non-cash depreciation and amortization expense of
$132, and other non-cash charges of $107. Cash used for continuing
operations amounted to $556 for the three months ended December 31, 2010.
Our accumulated deficit amounted to $33,473, while we had cash of $108 and a
working capital deficit of $671.
Page
17
On August
17, 2010 we entered into a long term line of credit facility with one of our
directors for $4,000, the facility has an annual interest rate of 7.73% on any
outstanding balance and a facility fee of the greater of $40 or 1% of the unused
balance. Additionally, 15,000 warrants, with a five year term at $1.00 per
share, per month will be paid for each month the facility is outstanding.
As of December 31, 2010, we have issued 75,000 warrants. Using the Black
Scholes pricing model, we have determined the warrants have a fair value of $30
which has been recorded as other expense for the three months ended December 31,
2010. As of December 31, 2010, we do not have an outstanding balance under
this facility.
On
November 23, 2010, we initiated a private placement (the “Placement”) of up to
$3,000 of 12 month Senior Secured Notes (“Notes”) with warrants to purchase 150
shares of Beacon’s common stock at $0.40 per share for every $1 in principal
invested. The Notes bear interest at 9% APR. The Placement will be
made on a "best efforts" basis with a Minimum of $600 and a Maximum of
$3,000. Net proceeds have been used to repay and replace an existing
Senior Secured Bank Note totaling approximately $300 and will also be used for
additional working capital. The Placement will expire on the sooner of (a)
March 15, 2011 if the Minimum has not been met or (b) the date that the Maximum
has been raised. As of December 31, 2010 we have received net proceeds of
$1,377 (gross proceeds of $1,551, less offering costs of $174).
Based on
the recent progress we made in the execution of our business plan, we believe
that our currently available cash, availability of aforementioned credit line
and cash received from the issuance of notes payable, and funds we expect to
generate from operations will enable us to operate our business and repay our
debt obligations as they become due through January 1, 2012. However, we may
require additional capital in order to execute our business plan. If we are
unable to raise additional capital, or encounter unforeseen circumstances that
place constraints on our capital resources, we will be required to take various
measures to conserve liquidity, which could include, but not necessarily be
limited to, curtailing our business development activities, suspending the
pursuit of our business plan, and controlling overhead expenses. We cannot
provide any assurance that we will raise additional capital. We have not secured
any commitments for new financing at this time, nor can we provide any assurance
that new financing will be available to us on acceptable terms, if at
all.
Off-Balance
Sheet Arrangements
We have
four operating lease commitments for real estate used for office space and
production facilities.
Contractual
Obligations
The following is a summary of our
contractual obligations as of December 31, 2010:
Contractual
Obligations
|
Total
|
2011
|
2012
|
2013
|
2014
|
2015
|
Thereafter
|
|||||||||||||||||||||
Long-term
debt obligations
|
$ | 2,048 | $ | 1,912 | $ | 136 | $ | - | $ | - | $ | - | $ | - | ||||||||||||||
Interest
obligations (1)
|
167 | 162 | 5 | - | - | - | ||||||||||||||||||||||
Operating
lease obligations (2)
|
643 | 195 | 116 | 116 | 89 | 80 | 47 | |||||||||||||||||||||
$ | 2,858 | $ | 2,269 | $ | 257 | $ | 116 | $ | 89 | $ | 80 | $ | 47 |
(1)
|
Interest
obligations assume Prime Rate of 3.25% at December 31, 2010. Interest rate
obligations are presented through the maturity dates of each component of
long-term debt.
|
(2)
|
Operating
lease obligations represent payment obligations under non-cancelable lease
agreements classified as operating leases and disclosed pursuant to ASC
840 “Accounting for Leases,” as may be modified or supplemented. These
amounts are not recorded as liabilities as of the current balance sheet
date.
|
Dividends
on Series A and A-1 Preferred Stock are payable quarterly at an annual rate
of 10% and Series B Preferred Stock are payable quarterly at an annual rate
of 6% in cash or the issuance of additional shares of Series A, A-1 and B
Preferred Stock, at our option. If we were to fund dividends accruing during the
year ending September 30, 2011 in cash, the total obligation would be $172
based on the number of shares of Series A, A-1 and B Preferred Stock
outstanding as of December 31, 2010.
We
currently anticipate the cash requirements for capital expenditures, operating
lease commitments and working capital will likely be funded with our existing
fund sources and cash provided from operating activities. In the aggregate,
total capital expenditures are not expected to be significant for the year ended
September 30, 2011 and could be curtailed should we experience a shortfall
in expected financing.
Page
18
Customer
Concentration
For the
three months ended December 31, 2010 our largest customer accounted for
approximately 61% of total sales. Although we expect to have a high degree of
customer concentration, our customer engagements are typically covered by
multi-year contracts or master service agreements under which we have been
operating for a number of years. In addition, current economic conditions could
harm the liquidity of and/or financial position of our customers or suppliers,
which could in turn cause such parties to fail to meet their contractual or
other obligations to us.
Employees
Beacon
currently employs approximately 110 people in the Columbus, OH, Louisville, KY,
Raritan, NJ, Cincinnati, OH and Prague, Czech Republic.
Facilities
Beacon’s
executive offices are located at 9300 Shelbyville Road, Suite 1000,
Louisville, KY 40222 in 2,142 square feet of office space leased on a month
to month basis. Additionally, we have offices in Louisville, KY consisting of
8,150 square feet of office space leased through February 28, 2011,
Cincinnati, OH consisting of 5,341 square feet of office space leased
through May 31, 2016, Columbus, OH consisting of 7,018 square feet leased
through December 31, 2014, and Prague, Czech Republic consisting of
approximately 2,100 square feet leased through June 30, 2011. We believe
our facilities are adequate for the continuing operations of our existing
business.
Certain Relationships and
Related Party Transactions
The
Company has obtained insurance through an agency owned by one of its founding
stockholders/directors. Insurance expense of $31 and $45 was paid to the
agency for each of the three months ended December 31, 2010 and 2009,
respectively.
Filing
Status
Beacon
Enterprise Solutions Group, Inc., a Nevada corporation has in the past filed
reports with the SEC and will continue to do so as Beacon. You can read and copy
any materials we file with the SEC at its Public Reference Room at 450 Fifth
Street, NW, Washington, DC 20549. You can obtain additional information about
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
In addition, the SEC maintains an Internet site (www.sec.gov) that contains
reports, proxy and information statements, and other information regarding
issuers that file electronically with the Commission, including us.
ITEM
4. CONTROLS AND PROCEDURES
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our filings under the Exchange Act is
recorded, processed, summarized and reported within the periods specified in the
rules and forms of the SEC. This information is accumulated and communicated to
our executive officers to allow timely decisions regarding required disclosure.
As of December 31, 2010, our Chief Executive Officer, who acts in the capacity
of principal executive officer and our Chief Financial Officer who acts in the
capacity of principal financial officer, have evaluated the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
report. Based upon that evaluation, our Chief Executive Officer and the Chief
Financial Officer have concluded that our disclosure controls and procedures
were not effective as of December 31, 2010, based on their evaluation of these
controls and procedures required by paragraph (b) of Exchange Act
Rules 13a-15 or 15d-15.
DISCLOSURE
CONTROLS AND INTERNAL CONTROLS
Disclosure
controls are designed with the objective of ensuring that such information is
accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. Internal controls are procedures which are
designed with the objective of providing reasonable assurance that our
transactions are properly authorized, recorded and reported and our assets are
safeguarded against unauthorized or improper use, to permit the preparation of
our financial statements in conformity with generally accepted accounting
principles, including all applicable SEC regulations.
Page
19
As of
September 30, 2010, management of our Company had reported at previous dates of
assessment that we identified various deficiencies in our accounting processes
and procedures that constitute material weaknesses in internal control over
financial reporting and disclosure controls. During the year ended
September 30, 2010, we took certain steps in an effort to correct these material
weaknesses, including hiring a Chief Financial Officer and Corporate Controller,
both whom have significant experience with publicly held companies. The
addition of the Corporate Controller has allowed us to implement more complete
segregation of duties while also dedicating a resource solely to financial and
SEC reporting.
Although
we believe that these steps have enabled us to improve our internal controls,
additional time is still required to fully document our systems, implement
control procedures and test their operating effectiveness before we can
definitively conclude that we have remediated our deficiencies.
We
believe that our internal control risks are sufficiently mitigated by the fact
that our Chief Executive Officer and Chief Financial Officer review and approve
substantially all of our major transactions and we have, when needed, hired
outside experts to assist us with implementing complex accounting principles.
Additionally, we believe the addition of the aforementioned Chief Financial
Officer and Corporate Controller will enable us to continue implementing the
proper controls and making the necessary changes until these material weaknesses
are remediated.
Changes in Internal Control
Over Financial Reporting
There
were no changes in our internal control over financial reporting during our last
fiscal quarter that materially affected or are reasonably likely to materially
affect our internal control over financial reporting.
Page
20
ITEM 1.
LEGAL PROCEEDINGS
We are
subject to various legal proceedings in the normal course of business, none of
which is required to be disclosed under this Item 1.
ITEM 4.
Removed and Reserved.
ITEM 5.
Other Information
ITEM 6.
EXHIBITS
31.1
|
Certification
of Principal Executive Officer, pursuant to Rules 13a-14(a) of the
Sarbanes-Oxley Act of 2002.
|
31.2
|
Certification
of Principal Financial Officer, pursuant to Rules 13a-14(a) of the
Sarbanes-Oxley Act of 2002.
|
32.1
|
Certification
of Principal Executive Officer, pursuant to 18 U.S.C Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
|
32.2
|
Certification
of Principal Financial Officer, pursuant to 18 U.S.C Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.*
|
*
|
This
certification shall not be deemed “filed” for purposes of Section 18
of the Securities Exchange Act of 1934, or otherwise subject to the
liability of that section, nor shall it be deemed to be incorporated by
reference into any filing under the Securities Act of 1933 or the
Securities Exchange Act of 1934
|
Page
21
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 thereunto
duly authorized.
Date:
February 14, 2011
|
Beacon
Enterprise Solutions Group, Inc.
|
|
By:
|
/s/
Bruce Widener
|
|
Bruce
Widener
|
||
Chief
Executive Officer and Chairman of the
|
||
Board
of Directors
|
||
and
|
||
Date:
February 14, 2011
|
By:
|
/s/
Michael Grendi
|
Michael
Grendi
|
||
Principal
Financial Officer
|
Page
22