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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
 
3
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
15
     
Item 4. Controls and Procedures
 
19
     
PART II: OTHER INFORMATION
   
     
Item 1. Legal Proceedings
 
21
     
Item 4. Removed and Reserved
 
21
     
Item 5. Other information
 
21
     
Item 6. Exhibits
 
21
     
Signatures
 
22
     
EX-31.1
 
23
     
EX-31.2
 
 24
     
EX-32.1
 
  25
     
EX-32.2
  
 26

 
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 cus