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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-K

(Mark One)
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

or

o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________________ to __________________________
Commission file number: 000-32037

GENESIS GROUP HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

Delaware
65-0908171
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

2500 N. Military Trail, Suite 275, Boca Raton, FL
33431
(Address of principal executive offices)
(Zip Code)

Registrant's telephone number, including area code:
(561) 988-1988

Securities registered under Section 12(b) of the Act:
 
Title of each class
Name of each exchange on which registered
None
Not applicable
 
Securities registered under Section 12(g) of the Act:

Common Stock, par value $0.0001 per share
(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.   o Yes x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
o Yes x No

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.
oYes x No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 (or for such shorter period that the registrant was required to submit and post such files).  
x Yes o No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 
 

 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company:

Large accelerated filer
o
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
o Yes x No

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of the last business day of the registrant's most recently completed fiscal quarter.  Approximately $1,2
00,000 on April 5, 2011.

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date.   167,945,163 shares of common stock are issued and outstanding as of March 31, 2012.

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933.  The listed documents should be clearly described for identification purposes (e.g., annual report to security holders for fiscal year ended December 24, 1980).  None.

 
 

 
 
GENESIS GROUP HOLDINGS, INC.
FORM 10-K
TABLE OF CONTENTS

    Page No.
  Part I  
Item 1.
4
Item 1A.
8
Item 1B.
16
Item 2.
16
Item 3.
16
Item 4.
Mine Safety Disclosures.
16
Part II
Item 5.
16
Item 6.
17
Item 7.
17
Item 7A.
20
Item 8.
21
Item 9.
44
Item 9A
44
Item 9B.
45
Part III
Item 10.
45
Item 11.
47
Item 12.
49
Item 13.
50
Item 14.
51
Part IV
Item 15.
52
 
 
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This report contains forward-looking statements. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.  Forward-looking statements are typically identified by use of terms such as “may”, “could”, “should”, “expect”, “plan”, “project”, “intend”, “anticipate”, “believe”, “estimate”, “predict”, “potential”, “pursue”, “target” or “continue”, the negative of such terms or other comparable terminology, although some forward-looking statements may be expressed differently.  The forward-looking statements contained in this report are largely based on our expectations, which reflect estimates and assumptions made by our management.  These estimates and assumptions reflect our best judgment based on currently known market conditions and other factors.  Although we believe such estimates and assumptions to be reasonable, they are inherently uncertain and involve a number of risks and uncertainties that are beyond our control.  In addition, management’s assumptions about future events may prove to be inaccurate.  Management cautions all readers that the forward-looking statements contained in this report are not guarantees of future performance, and we cannot assure any reader that such statements will be realized or the forward-looking events and circumstances will occur.  Actual results may differ materially from those anticipated or implied in the forward-looking statements due to a number of factors, including:
 
 
delays or difficulties related to the commencement or completion of contracts, including additional costs, reductions in revenues or the payment of completion penalties or liquidated damages;
 
actions of suppliers, subcontractors, customers, competitors, banks, surety providers and others which are beyond our control including suppliers' and subcontractor's failure to perform;
 
the effects of estimates inherent in our percentage-of-completion accounting policies including onsite conditions that differ materially from those assumed in our original bid, contract modifications, mechanical problems with our machinery or equipment and effects of other risks discussed in this document;
 
cost escalations associated with our fixed-unit price contracts, including changes in availability, proximity and cost of materials such as steel, concrete, aggregate, oil, fuel and other construction materials and cost escalations associated with subcontractors and labor;
 
our dependence on a few significant customers;
 
adverse weather conditions - although we prepare our budgets and bid contracts based on historical rain and snowfall patterns, the incident of rain, snow, hurricanes, etc., may differ significantly from these expectations;
 
the presence of competitors with greater financial resources than we have and the impact of competitive services and pricing;
 
changes in general economic conditions and resulting reductions or delays, or uncertainties regarding governmental funding for infrastructure services;
 
adverse economic conditions in our markets;
 
our ability to successfully identify, complete and integrate acquisitions;
 
citations and fines issued by any government authority;
 
risks associated with the terms of the Note and Warrant Purchase Agreement with UTA Capital LLC, and
 
the other factors discussed in more detail in Item 1A. —Risk Factors

You should consider the areas of risk described in connection with any forward-looking statements that may be made herein.  You should also consider carefully the statements under “Risk Factors” and other sections of this report, which address additional factors that could cause our actual results to differ from those set forth in the forward-looking statements.  Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report in its entirety, including the risks described in Item 1A. - Risk Factors.  Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events.  These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.

OTHER PERTINENT INFORMATION

Unless specifically set forth to the contrary, when used in this report the terms “Genesis", "we"", "our", the "Company" and similar terms refer to Genesis Group Holdings, Inc., a Delaware corporation, and wholly owned subsidiary Digital Comm Inc., a Florida corporation (“Digital Comm”).  In addition, when used herein and unless specifically set forth to the contrary, “2010” refers to the year ended December 31, 2010 and “2011” refers to the year ending December 31, 2011.

The information which appears on our web site at www.genesisgroupholdingsinc.com is not part of this report.
 
 
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PART I
 
ITEM 1
DESCRIPTION OF BUSINESS.

Overview

We are a national provider of specialty and end-to-end outsourced network and infrastructure services to the wireless and wireline telecommunications industry.  These services include engineering, construction, maintenance and installation services to telecommunications providers, underground facility locating services to telecommunications providers, original equipment manufacturers (“OEMs”), and governmental entities. Our core services include the design, engineering, construction, deployment, integration and maintenance of complex and converging wireless and wireline networks. These services are critical to our customers’ ability to deliver voice, video and data services to their end users.

We have established relationships with many leading telephone companies, cable television multiple system operators, OEMs and others, including AT&T Inc., Comcast Corporation, Verizon Communications Inc., Hotwire Communications, Alpha Technologies Inc. and Miami Dade Public Schools.    We are currently performing work with these entities and expect to continue to provide these services for the foreseeable future.

Our operations experience has given us a deep and comprehensive understanding of the markets we serve, as well as the ability to effectively manage people, projects and equipment. It allows us to proactively identify challenges, avoid pitfalls, and overcome obstacles, and to accurately set and meet expectations for our clients’ schedule and budget. We operate through our wholly owned subsidiaries. Digital Comm Inc.; Tropical Communications, Inc. a licensed low voltage and underground contractor; and Rives Monteiro Engineering LLC, a cable-engineering firm performing services in the Southeastern United States and internationally

Industry

There are several industry trends driving the demand for our services:

Growing Wireless Market Driven by Increasing Demand for Wireless Data Services

The U.S. wireless telecommunications market exceeded $228 billion in revenue in 2010 and is expected to grow at a compound annual growth rate, or CAGR, of 5.7% through 2014, reaching a total market size of $286 billion, according to the TIA’s 2011 ICT Market Review and Forecast (c) 2011 by the Telecommunications Industry Association, Arlington, Va., USA, or the TIA Report. According to the TIA Report, cellular phone usage passed 94% of the U.S. population and is expected to reach 99.9% by 2014. Data usage over wireless networks is rapidly increasing as more consumers surf the Internet, check email and watch video on mobile devices. Providers are reporting that data traffic, including Internet access, video messaging and other services, has begun to outpace voice traffic.

According to the Cisco Visual Networking Index Global Mobile Data Forecast, 2010-2015, or Cisco VNI,  globally, mobile data traffic is expected to grow at a CAGR of 92% between 2010 and 2015, as smartphones, tablets, laptops, 3G and 4G modems and other telecommunications devices are becoming increasingly utilized by consumers.  An October 2010 study conducted by the FCC estimates that mobile data demand will exceed available wireless capacity in the near-term; growing to between 25 and 50 times 2010 levels of demand by 2014.

Need for Ongoing Capacity Management and Network Modernization to Address Growing Complexities The rapid evolution of services, technology and usage in wireless networks is driving service providers to undertake a number of initiatives to increase coverage, capacity and performance of their existing networks, including service providers adding and upgrading cell sites nationwide. The FCC estimates that this wireless data growth will result in the addition of nearly 100,000 cell sites between 2009 and 2014 and wireless data growth per cell site of 25 times during such period. As the use and number of wireless cell sites continue to grow rapidly, the need for constructing robust backhaul capabilities will also grow.
 
 
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Additionally, service providers are also performing ongoing grooming of their networks, which includes end-to-end network upgrades, growth, balancing, optimization, downscale and decommissioning and capacity alignment. Finally, major regional and rural telecommunication companies are upgrading their networks from copper line to fiber optic line in order to provide additional backhaul capacity to support the additional data usage at cell sites. These initiatives by our customers require them to add, modify or upgrade their physical infrastructure and provide us with opportunities for additional services to address their requirements. We believe the wireless industry will continue to face the need for design, engineering, installation, integration, optimization, construction, commissioning, and testing services for the foreseeable future.

Evolution to 4G Wireless Standard Driving Infrastructure Build-outs

To meet the increased demand for wireless data services, several telecommunications providers, including AT&T, Verizon Wireless, Sprint, T-Mobile, Clearwire, and LightSquared, among others, have recently begun to upgrade, or have announced plans to upgrade, their wireless networks to support the 4G wireless standard. We believe the build-out of wireless networks by these carriers could take approximately three to five years or longer, and we expect this evolution to the 4G standard to provide us with opportunities to participate in the build-outs of 4G wireless networks for several U.S.-based carriers, and to provide ongoing maintenance services to these customers.

Increasing Trend for Carriers to Outsource Non-Core Services

Service providers are under increasing competitive pressure to deliver a high level of performance and additional next generation services to their customers. At the same time, as average revenue per user decreases in the industry, service providers must reduce their costs in order to improve profitability. As a result, many have adopted an outsourcing model of non-core services, which allows them to focus on core competencies. This outsourced model provides better flexibility, efficiency and cost than self-performing the required services to design, build and maintain their complex network offerings. According to the TIA Report, the wireless telecommunications and network infrastructure outsourcing market has grown annually at a 9.5% growth rate since 2004 and is expected to continue to grow at a 5.9% rate through 2014, becoming a $21.6 billion market.

OEMs Increasingly Providing Managed Services Offerings

OEMs are increasingly bundling their equipment and software with ongoing services to provide complete managed services to their service provider customers and to create deeper customer relationships. However, similar to their customers, OEMs are also under increasing pressure to reduce costs and grow profitability. As a result, many OEMs look to outsource non-core services such as network design and engineering services, to professional services firms and concentrate their internal resources on other core areas. This trend creates significant opportunities for outsourced design and engineering services. We believe this trend creates significant opportunities for companies such as ours to be an outsourcing vendor to OEMs. Need for Outsourcing in Network-Based Industries such as Electric, Utility and Cable and Satellite We believe the trends described above in the telecommunications vertical are also relevant to several other verticals, such as power and utility and cable and satellite. Electric utilities are increasingly adding intelligence to their grids by building Internet Protocol, or IP,-based networks, also referred to as “smart” grids. These IP-based networks will require similar network design, engineering and network integration work as is required in telecommunications networks. In the renewable energy segment, many companies will need to perform site acquisitions, structural work, supply chain management, construction management, tower erections, electronics integrations and overall professional project management, similar to what telecommunications companies have been required to perform in building cell towers. We believe that many of these companies will outsource the professional services required for these functions as opposed to expand their internal organized workforce to support them. Additionally, the cable and satellite industry has historically leveraged the lower cost labor of outsourced partners to perform the majority of their customer premise work, which we believe will continue to grow.
 
 
5

 
 
Our Services

We help carriers and OEMs design, engineer, construct, deploy, integrate, maintain and, finally, decommission critical elements across the telecommunications network infrastructure. Our "one-stop" capabilities include project development, procurement, design, engineering, construction management, and on- going maintenance and operations services for telecommunications networks.  The projects include the construction of fiber networks that provide advanced digital voice, data and video communications and wireless infrastructure deployment.
 
Wireless Communication Services.  Our wireless division provides enhancements to existing wireless telephone and data networks, designed to improve productivity for specified applications.  In 2011 a significant portion of the Company’s revenue was derived from the Wireless division.  That division is capable of providing a full-range of solutions to OEM’s and wireless carriers throughout the United States. The scope of work the Company completes within its Wireless division includes, but is not limited to: wireless equipment installation, commissioning, implementation and integration for TDMA, CDMA, GSM, GSM/UMTS, CDMA/EVDO 4G LTE, and WIMAX.  The Company has been assisting in the Verizon Wireless 4G LTE Network Deployments, by providing installation and commissioning technicians and integration engineers to assist with Verizon’s 4G LTE network deployment throughout the United States

Engineering.  We provide outside plant engineers to telecommunication providers, together with services that include project development, procurement, design, engineering, construction management, and on-going maintenance.

Structured Cabling / DAS Systems

The inside plant services, also known as premise wiring; that we provide include design, engineering, installation and integration of telecommunications networks for voice, video and data inside customers’ facilities. Additionally, we provide maintenance and installation of electric utility grids and water and sewer utilities. We provide outside plant telecommunications services primarily under hourly and per unit basis contracts to local telephone companies. We also provide these services to US Corporations, long distance telephone companies, electric utility companies, local municipalities and cable television multiple system operators.

Training.  Taking advantage of Federal funding made available at local levels for job creation and back-to -work training, we recently created a School of Telecommunications. The training division is offering training programs to individuals looking for a career in telecommunications. Our first such training center was established in Ft Myers, Florida in partnership with the Southwest Florida Workforce Development Board

Our Position in the Marketplace.

While we are a small company, we are poised for rapid growth within the marketplace.    We intend to maintain a decentralized operating structure.  We believe that this structure and numerous points of contact within customer organizations position us favorably to win new opportunities with existing customers.  We will pursue work that is not only profitable and within the areas of our expertise, but work that will not unnecessarily strain our cash flow requirements.

Growth Through Selective Acquisitions

We intend to pursue growth and market share through selective acquisitions.  In particular, we will pursue those acquisitions that we believe will provide us with incremental revenue and diversification while complementing our existing operations.  We intend to target companies for acquisition that are profitable, with proven operating histories and sound management. We completed two acquisitions in 2011 and we expect to complete at least two more in 2012. The Company may be required to raise additional capital in order to complete these acquisitions.

Master Contracts and Other Service Agreements

A portion of our services are performed under master service agreements and other arrangements with customers that extend for periods of one or more years.  We are approved vendors for many telecommunication companies and utilities, including AT&T, Verizon and Ericsson.  Master Service agreements generally contain customer specified service requirements, such as discrete pricing for individual tasks. We also work with local government agencies.  Whether in the public or private sectors, a customer’s decision to engage us with respect to a specific construction or maintenance project is often made by local customer management.  Historically, most of our agreements have been awarded through a competitive bidding process; however, we may be able to extend some of these agreements on a negotiated basis.

 
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Competition

The specialty contracting services industry in which we operate is highly fragmented and it is characterized by a large number of participants, including several large companies as well as a significant number of small, privately held, local competitors.  A significant portion of our revenue is currently derived from master service agreements and price is often an important factor in awarding such agreements. Accordingly, we may be underbid by our competitors if they elect to price their services aggressively to procure such business. Our competitors may also develop the expertise, experience and resources to provide services that are equal or superior in both price and quality to our services, and we may not be able to maintain or enhance our competitive position. The principal competitive factors for our services include geographic presence, breadth of service offerings, worker and general public safety, price, quality of service, and industry reputation. We believe that we compete favorably with our competitors on the basis of these factors.

Materials and Subcontractors

For a majority of the contract services we perform, our customers provide all necessary materials and we provide the personnel, tools, and equipment necessary to perform installation and maintenance services. The customer determines the specifications of the materials and we are only responsible for the performance of the required services. Materials supplied by our customers, for whom the customer retains the financial and performance risk, are not included in our revenue or costs of sales. Under contracts where we are required to supply part or all of the materials, we are not dependent upon any one source for the materials that we customarily use to complete the job. We do not manufacture any significant amounts of material for resale. We are not presently experiencing, nor do we anticipate experiencing, any difficulties in procuring an adequate supply of materials.

We use independent contractors to perform portions of the services that we provide; however, we are not dependent on any single independent contractor. These independent contractors typically are small locally owned companies. Independent contractors provide their own employees, vehicles, tools, and insurance coverage. We use independent contractors to help manage our work flow and reduce the amount that we may otherwise be required to spend on fixed assets.

Seasonality

Some of our revenues are affected by seasonality as a portion of the work we perform is outdoors. Consequently, our outside operations are impacted by extended periods of inclement weather. Generally, inclement weather is more likely to occur during the winter season which falls during our second and third fiscal quarters.  Holidays and access customer premises will have additional impact on our revenues.

Environmental Matters

A portion of our work is performed underground. As a result, we are potentially subject to material liabilities related to encountering underground objects which may cause the release of hazardous materials or substances. Additionally, the environmental laws and regulations which relate to our business include those regarding the removal and remediation of hazardous substances and waste. These laws and regulations can impose significant fines and criminal sanctions for violations. Costs associated with the discharge of hazardous materials or substances may include clean-up costs and related damages or liabilities. These costs could be significant and could adversely affect our results of operations and cash flows.

Government Regulations

We have no specific governmental regulations that we need to comply with, fines and risks are associated with the transport of equipment over highways to job sites. We also have certain local permitting requirements at those sites.

 
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Employees

As of December 31, 2011 we had 59 full time employees and one part-time employee.

Our History

We were incorporated under the name i-realtyauction.com, Inc. in the State of Delaware on November 22, 1999 as a subsidiary of i-Incubator.com, Inc. (OTCBB:INQU).  We were initially incorporated to develop and operate an online auction web site that was dedicated to bringing together buyers and sellers of real estate.  In January 2001, i-Incubator spun off our shares to its shareholders of record.  On August 16, 2001, we changed our name to Genesis Realty Group, Inc. and began to focus our attention on the acquisition, development and management of real property.  In August 2008 we changed our name to Genesis Group Holdings, Inc.
 
On January 14, 2010 the Company acquired all the outstanding shares of Digital Comm in exchange for 50,000,000 shares of our common stock. Digital was originally formed on September 13, 2006 and on January 14, 2010 was merged into Genesis as a wholly owned subsidiary. Digital is a provider of specialty contracting services, primarily in the installation of fiber optic telephone cable. These services are provided throughout the United States and include engineering, construction, maintenance and installation services to telecommunications providers, underground facility locating services to various utilities including telecommunications providers, and other construction and maintenance services to electric and gas utilities and others.

On August 22, 2011 the Company acquired 100% interest in Tropical Communications, Inc. (“Tropical”), a Florida corporation, based in Miami, Florida. Tropical is a State licensed Low Voltage and Underground contractor and provides services to construct, install, optimize and maintain structured cabling for commercial and governmental entities in the South Florida area. The purchase price for Tropical was $90,000 paid with 1,000,000 shares of common stock in the Company valued at $.09  per share and an earn-out provision for additional shares of stock in the Company based on a formula tied to future earnings of Tropical.
 
On December 29, 2011 the Company acquired a 49% stake in Rives Monteiro Engineering LLC. (“RME”), an engineering firm and certified woman owned business based in Tuscaloosa, Al.  The Company also acquired 100% of Rives Monteiro Leasing LLC an equipment provider for the cable-engineering services. The Company has an option to purchase the remaining 51% of RME.  The entire combined transaction was paid with 7.5 million shares of Common Stock in the Company, $100,000 in cash and an additional $0.2 million to be paid pursuant to a six month promissory note.
 
ITEM 1A.
RISK FACTORS.
 
Before you invest in our securities, you should be aware that there are various risks. You should consider carefully these risk factors, together with all of the other information included in this annual report before you decide to purchase our securities. If any of the following risks and uncertainties develop into actual events, our business, financial condition or results of operations could be materially adversely affected.

Risks Relating to Our Business.

OUR PRIMARY ASSETS SERVE AS COLLATERAL UNDER THE NOTE AND WARRANT PURCHASE AGREEMENT WITH UTA CAPITAL. IF WE WERE TO DEFAULT ON THIS AGREEMENT, THE LENDER COULD FORECLOSE ON OUR ASSETS.

 On August 6, 2010, UTA Capital LLC provided a working capital loan to Genesis Group Holdings, Inc., the parent company of Digital, with Digital also as an additional borrower. The loan is evidenced by a Note and Warrant Purchase Agreement between Digital and Genesis and UTA Capital, LLC dated August 6, 2010. The Agreement calls for two senior bridge notes in the amount of $1 million each, for an aggregate principal amount of $2 million.  The notes are each one year amortized term notes bearing interest at 10% per annum. Additionally, the parent company issued to UTA Capital, LLC warrants to purchase 20,952,381 shares of common stock in Genesis exercisable at $0.15 per share which provide for a cashless exercise. The Company received an initial draw from the first $1 million note $960,000 net of fees which was recorded as an investment contribution by Genesis in Digital.

 
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Additionally, the parent company issued to UTA Capital, LLC warrants purchasing 20,952,381 shares of common stock in Genesis exercisable at $0.15 per share which provide for a cashless exercise.

In or about February 14, 2011, Digital Comm entered into a Loan Extension and Modification Agreement with UTA Capital, extending the maturity date to September 30, 2011.  The revolving note continues to be collateralized by a blanket security interest in Digital Comm’s assets and the agreement contains certain covenants we must comply with.  If we should default under the terms of this agreement, the lender could seek to foreclose on our primary assets.  If the lender was successful, we would be unable to conduct our business as it is presently conducted and our ability to generate revenues and fund our ongoing operations would be materially adversely affected.

On June 25, 2011, the Company and lender UTA Capital LLC, entered into Second Loan Extension and Modification Agreements (“Modification Agreement”) in connection with their existing note payable with a balance of $775,000 at December 31, 2010. The Modification Agreement provided for:

a)           An extension of the original maturity date of the note from August 6, 2011 to July 30, 2012,
b)           A continuation in interest rate of 10% for the remainder of the loan.

The 2nd Modification Agreement also provided for certain repayments of the loan in the event the Company secures additional equity and/or financing.  In exchange for consenting to the 2nd Modification Agreement the lender was issued 292,439 shares of the Company’s common stock; and a continuing provision of additional shares to be issued to the lender to maintain ownership of 1% of the company’s total outstanding shares until the loan is repaid. The additional shares of common stock were unissued as of December 31, 2011 and will be recorded and valued at the fair market price on their date of issue as deferred loan cost and will be charged to loan cost expense over the remaining period of the loan. . Subsequent thereto, the Company issued to the UTA Capital, LLC, as additional consideration for failure to timely satisfy a certain First Extension post-amendment covenant, an additional 500,000 shares of the Company’s common stock.

On December 30, 2011, Digital Comm entered into a Third Loan Extension and Modification extending the Maturity Date to January 31, 2013 and to modify other terms and conditions of the first Amended and Restated Note issued with the First Extension, and the Purchaser, upon and subject to all covenants, terms and conditions provided herein and in the Third Amended and Restated Note. In connection with the Modification, the Company repaid $25,000 of the principal balance of the Loan, in connection with certain new cumulative additional equity or unsecured subordinated debt investment totaling $0.5 million and agreed to pay an additional  $25,000 of the principal balance of the Loan upon receipt by of cumulative equity or unsecured subordinated debt investment totaling $0.75 and an additional  $25,000 of the principal balance of the Loan upon receipt by Digital Comm or the Company of cumulative equity or unsecured subordinated debt investment of $1.0 million such that $75,000 of the principal balance of the Loan will be amortized upon receipt of $1.0 million of gross proceeds in equity or unsecured subordinated debt investment.

On July 5, 2011the Company entered into a definitive master funding agreement (“Master Agreement”) with Tekmark® Global Solutions, LLC (“Tekmark”) and Munro Capital Inc. (“Munro Capital”). Pursuant to the parties’ Master Agreement, the Company is receiving financing in the original principal amount of up to $2,000,000 from Tekmark and a line of credit in the original principal amount of up to $1,000,000 from Munro Capital. In connection with the financing arranged we issued MMD Genesis LLC Preferred Series B stock in the Company. The Preferred Series B will convert in the aggregate, at the option of the holders, to 20% of the issued and outstanding Common stock of the Company.  Tekmark funding is secured by the Company’s accounts receivable. Funding by Tekmark has been in the form of payroll funding support for specific and approved customers of Digital. As of December 31, 2011 the balances owed Tekmark and Munro Capital was $497,000 and $328,000, respectively.
 
IF WE ARE UNABLE TO ACCURATELY ESTIMATE THE OVERALL RISKS OR COSTS WHEN WE BID ON A CONTRACT THAT IS ULTIMATELY AWARDED TO US, WE MAY ACHIEVE A LOWER THAN ANTICIPATED PROFIT OR INCUR A LOSS ON THE CONTRACT.
 
 
9

 
 
Substantially all of our revenues are typically derived from fixed unit price contracts. Fixed unit price contracts require us to perform the contract for a fixed unit price irrespective of our actual costs. As a result, we realize a profit on these contracts only if we successfully estimate our costs and then successfully control actual costs and avoid cost overruns. If our cost estimates for a contract are inaccurate, or if we do not execute the contract within our cost estimates, then cost overruns may cause us to incur losses or cause the contract not to be as profitable as we expected. This, in turn, could negatively affect our cash flow, earnings and financial position.

The costs incurred and gross profit realized on such contracts can vary, sometimes substantially, from the original projections due to a variety of factors, including, but not limited to:

 
onsite conditions that differ from those assumed in the original bid;
 
delays caused by weather conditions or project owners notice to proceed;
 
contract modifications creating unanticipated costs not covered by change orders;
 
changes in availability, proximity and costs of construction materials, as well as fuel and lubricants for our equipment;
 
availability and skill level of workers in the geographic location of a project;
 
our suppliers’ or subcontractors’ failure to perform due to various reasons including bankruptcy;
 
fraud or theft committed by our employees;
 
mechanical problems with our machinery or equipment;
 
citations or fines issued by any governmental authority;
 
difficulties in obtaining required governmental permits or approvals or performance bonds;
 
changes in applicable laws and regulations; and
 
claims or demands from third parties alleging damages arising from our work or from the project of which our work is part.

ECONOMIC DOWNTURNS OR REDUCTIONS IN GOVERNMENT FUNDING OF INFRASTRUCTURE PROJECTS COULD REDUCE OUR REVENUES AND PROFITS AND HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS.

Our business is highly dependent on the amount and timing of infrastructure work funded by various governmental entities, and which, in turn, depends on the overall condition of the economy, the need for new or replacement infrastructure, the priorities placed on various projects funded by governmental entities and federal, state or local government spending levels.

THE CANCELLATION OF SIGNIFICANT CONTRACTS OR OUR DISQUALIFICATION FROM BIDDING FOR NEW CONTRACTS COULD REDUCE OUR REVENUES AND PROFITS AND HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS.

Contracts that we enter into can usually be canceled at any time by the customer with payment only for the work already completed. In addition, we could be prohibited from bidding on certain governmental contracts if we fail to maintain qualifications required by those entities. A cancellation of an unfinished contract or our debarment from the bidding process could cause our equipment and work crews to be idled for a significant period of time until other comparable work became available, which could have a material adverse effect on our business and results of operations.

We operate in several states, including Ohio, Florida, Texas, Louisiana, and North Carolina any adverse change to the economy or business environment in any State that we perform work could significantly and adversely affect our operations, which would lead to lower revenues and reduced profitability.
 
OUR ACQUISITION STRATEGY INVOLVES A NUMBER OF RISKS.

In addition to organic growth of our business, we intend to continue pursuing growth through the acquisition of companies or assets that may enable us to expand our project skill-sets and capabilities, enlarge our geographic markets, add experienced management and increase critical mass to enable us to bid on larger contracts. However, we may be unable to implement this growth strategy if we cannot reach agreements for potential acquisitions on acceptable terms or for other reasons. Moreover, our acquisition strategy involves certain risks, including:
 
 
10

 
 
 
difficulties in the integration of operations and systems;
 
difficulties applying our expertise in one market into another market;
 
the key personnel and customers of the acquired company may terminate their relationships with the acquired company;
 
we may experience additional financial and accounting challenges and complexities in areas such as tax planning and financial reporting;
 
we may assume or be held liable for risks and liabilities (including for environmental-related costs and liabilities) as a result of our acquisitions, some of which we may not discover during our due diligence;
 
our ongoing business may be disrupted or receive insufficient management attention; and
 
we may not be able to realize cost savings or other financial benefits we anticipated.
 
Future acquisitions may require us to obtain additional equity or debt financing, as well as additional surety bonding capacity, which may not be available on terms acceptable to us or at all. Moreover, to the extent that any acquisition results in additional goodwill, it will reduce our tangible net worth, which might have an adverse effect on our credit and bonding capacity.

OUR INDUSTRY IS HIGHLY COMPETITIVE, WITH A VARIETY OF LARGER COMPANIES WITH GREATER RESOURCES COMPETING WITH US, AND OUR FAILURE TO COMPETE EFFECTIVELY COULD REDUCE THE NUMBER OF NEW CONTRACTS AWARDED TO US OR ADVERSELY AFFECT OUR MARGINS ON CONTRACTS AWARDED.

Essentially all of the contracts on which we bid are awarded through a competitive bid process, with awards generally being made to the lowest bidder, but sometimes recognizing other factors, such as shorter contract schedules or prior experience with the customer. Within our markets, we compete with many national, regional and local construction firms. Some of these competitors have achieved greater market penetration than we have in the markets in which we compete, and some have greater financial and other resources than we do. In addition, there are a number of national companies in our industry that are larger than we are and that, if they so desire, could establish a presence in our markets and compete with us for contracts.  As a result, we may need to accept lower contract margins in order to compete against competitors that have the ability to accept awards at lower prices or have a pre-existing relationship with a customer. If we are unable to compete successfully in our markets, our relative market share and profits could be reduced.
 
OUR DEPENDENCE ON SUBCONTRACTORS AND SUPPLIERS OF MATERIALS COULD INCREASE OUR COSTS AND IMPAIR OUR ABILITY TO COMPLETE CONTRACTS ON A TIMELY BASIS OR AT ALL, WHICH WOULD ADVERSELY AFFECT OUR PROFITS AND CASH FLOW.

We rely on third-party subcontractors to perform some of the work on many of our contracts. We generally do not bid on contracts unless we have the necessary subcontractors committed for the anticipated scope of the contract and at prices that we have included in our bid. Therefore, to the extent that we cannot engage subcontractors, our ability to bid for contracts may be impaired. In addition, if a subcontractor is unable to deliver its services according to the negotiated terms for any reason, including the deterioration of its financial condition, we may suffer delays and be required to purchase the services from another source at a higher price. This may reduce the profit to be realized, or result in a loss, on a contract.
 
We also rely on third-party suppliers to provide most of the materials for our contracts. We normally do not bid on contracts unless we have commitments from suppliers for the materials required to complete the contract and at prices that we have included in our bid. Thus, to the extent that we cannot obtain commitments from our suppliers for materials, our ability to bid for contracts may be impaired. In addition, if a supplier is unable to deliver materials according to the negotiated terms of a supply agreement for any reason, including the deterioration of its financial condition, we may suffer delays and be required to purchase the materials from another source at a higher price. This may reduce the profit to be realized, or result in a loss, on a contract.

IF WE ARE UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL AND SKILLED LABOR, OR IF WE ENCOUNTER LABOR DIFFICULTIES, OUR ABILITY TO BID FOR AND SUCCESSFULLY COMPLETE CONTRACTS MAY BE NEGATIVELY IMPACTED.
 
 
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Our ability to attract and retain reliable, qualified personnel is a significant factor that enables us to successfully bid for and profitably complete our work. This includes members of our management, project managers, estimators, supervisors, foremen, equipment operators and laborers. The loss of the services of any of our management could have a material adverse effect on us. Our future success will also depend on our ability to hire and retain, or to attract when needed, highly-skilled personnel. Competition for these employees is intense, and we could experience difficulty hiring and retaining the personnel necessary to support our business. If we do not succeed in retaining our current employees and attracting, developing and retaining new highly-skilled employees, our reputation may be harmed and our future earnings may be negatively impacted.
 
OUR CONTRACTS MAY REQUIRE US TO PERFORM EXTRA OR CHANGE ORDER WORK, WHICH CAN RESULT IN DISPUTES AND ADVERSELY AFFECT OUR WORKING CAPITAL, PROFITS AND CASH FLOWS.
 
Our contracts generally require us to perform extra or change order work as directed by the customer even if the customer has not agreed in advance on the scope or price of the extra work to be performed. This process may result in disputes over whether the work performed is beyond the scope of the work included in the original project plans and specifications or, if the customer agrees that the work performed qualifies as extra work, the price that the customer is willing to pay for the extra work. These disputes may not be settled to our satisfaction. Even when the customer agrees to pay for the extra work, we may be required to fund the cost of such work for a lengthy period of time until the change order is approved by the customer and we are paid by the customer.
 
To the extent that actual recoveries with respect to change orders or amounts subject to contract disputes or claims are less than the estimates used in our financial statements, the amount of any shortfall will reduce our future revenues and profits, and this could have a material adverse effect on our reported working capital and results of operations. In addition, any delay caused by the extra work may adversely impact the timely scheduling of other project work and our ability to meet specified contract milestone dates.
 
OUR FAILURE TO MEET SCHEDULE OR PERFORMANCE REQUIREMENTS OF OUR CONTRACTS COULD ADVERSELY AFFECT US.
 
In most cases, our contracts require completion by a scheduled acceptance date. Failure to meet any such schedule could result in additional costs, penalties or liquidated damages being assessed against us, and these could exceed projected profit margins on the contract. Performance problems on existing and future contracts could cause actual results of operations to differ materially from those anticipated by us and could cause us to suffer damage to our reputation within the industry and among our customers.
 
UNANTICIPATED ADVERSE WEATHER CONDITIONS MAY CAUSE DELAYS, WHICH COULD SLOW COMPLETION OF OUR CONTRACTS AND NEGATIVELY AFFECT OUR REVENUES AND CASH FLOW.
 
Because much of our work is performed outdoors, work on our contracts is subject to unpredictable weather conditions, which could become more frequent or severe if general climatic changes occur..  While revenues can be recovered following a period of bad weather, it is generally impossible to recover the inefficiencies, and significant periods of bad weather typically reduce profitability of affected contracts both in the current period and during the future life of affected contracts. Such reductions in contract profitability negatively affect our results of operations in current and future periods until the affected contracts are completed.
 
TIMING OF THE AWARD AND PERFORMANCE OF NEW CONTRACTS COULD HAVE AN ADVERSE EFFECT ON OUR OPERATING RESULTS AND CASH FLOW.
 
It is generally very difficult to predict whether and when new contracts will be offered for tender, as these contracts frequently involve a lengthy and complex design and bidding process, which is affected by a number of factors, such as market conditions, financing arrangements and governmental approvals. Because of these factors, our results of operations and cash flows may fluctuate from quarter to quarter and year to year, and the fluctuation may be substantial. In addition, the timing of the revenues, earnings and cash flows from our contracts can be delayed by a number of factors, including adverse weather conditions such as prolonged or intense periods of rain, snow, storms or flooding, delays in receiving material and equipment from suppliers and changes in the scope of work to be performed. Such delays, if they occur, could have adverse effects on our operating results for current and future periods until the affected contracts are completed.
 
 
12

 
 
OUR DEPENDENCE ON A LIMITED NUMBER OF CUSTOMERS COULD ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS.
 
Due to the size and nature of our construction contracts, one or a few customers have in the past and may in the future represent a substantial portion of our consolidated revenues and gross profits in any one year or over a period of several consecutive years. One customer may comprise a significant percentage of revenues at a certain point in time. The loss of business from any one of such customers could have a material adverse effect on our business or results of operations. Because we do not maintain any reserves for payment defaults, a default or delay in payment on a significant scale could materially adversely affect our business, results of operations and financial condition.
 
WE MAY INCUR HIGHER COSTS TO LEASE, ACQUIRE AND MAINTAIN EQUIPMENT NECESSARY FOR OUR OPERATIONS, AND THE MARKET VALUE OF OUR OWNED EQUIPMENT MAY DECLINE.
 
We own most of the construction equipment used on our projects. However, to the extent that we are unable to buy construction equipment necessary for our needs, either due to a lack of available funding or equipment shortages in the marketplace, we may be forced to rent equipment on a short-term basis, which could increase the costs of performing our contracts.
 
The equipment that we own or lease requires continuous maintenance, for which we maintain our own repair facilities. If we are unable to continue to maintain the equipment in our fleet, we may be forced to obtain third-party repair services, which could increase our costs. In addition, the market value of our equipment may unexpectedly decline at a faster rate than anticipated.
 
AN INABILITY TO OBTAIN PERFORMANCE BONDING COULD LIMIT THE AGGREGATE DOLLAR AMOUNT OF CONTRACTS THAT WE ARE ABLE TO PURSUE.

 As is customary in the construction business, we are required to provide surety bonds to secure our performance under certain construction contracts. Our ability to obtain surety bonds primarily depends upon our capitalization, working capital, past performance, management expertise and reputation and certain external factors, including the overall capacity of the surety market. Surety companies consider such factors in relationship to the amount of our backlog and their underwriting standards, which may change from time to time. Events that affect the insurance and bonding markets generally may result in bonding becoming more difficult to obtain in the future, or being available only at a significantly greater cost. Our inability to obtain adequate bonding, and, as a result, to bid on new contracts, could have a material adverse effect on our future revenues and business prospects.
 
OUR OPERATIONS ARE SUBJECT TO HAZARDS THAT MAY CAUSE PERSONAL INJURY OR PROPERTY DAMAGE, THEREBY SUBJECTING US TO LIABILITIES AND POSSIBLE LOSSES, WHICH MAY NOT BE COVERED BY INSURANCE.
 
Our workers are subject to the usual hazards associated with providing construction and related services on construction sites. Operating hazards can cause personal injury and loss of life, damage to or destruction of property, plant and equipment and environmental damage. We maintain insurance coverage in amounts and against the risks that we believe are consistent with industry practice, but this insurance may not be adequate to cover all losses or liabilities that we may incur in our operations.
 
Insurance liabilities are difficult to assess and quantify due to unknown factors, including the severity of an injury, the determination of our liability in proportion to other parties, the number of incidents not reported and the effectiveness of our safety program. If we were to experience insurance claims or costs above our estimates, we might also be required to use working capital to satisfy these claims rather than to maintain or expand our operations. To the extent that we experience a material increase in the frequency or severity of accidents or workers’ compensation claims, or unfavorable developments on existing claims, our operating results and financial condition could be materially and adversely affected.
 
 
13

 
 
ENVIRONMENTAL AND OTHER REGULATORY MATTERS COULD ADVERSELY AFFECT OUR ABILITY TO CONDUCT OUR BUSINESS AND COULD REQUIRE EXPENDITURES THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
 
Our operations are subject to laws and regulations relating to workplace safety and worker health, which, among other things, regulate employee exposure to hazardous substances. Immigration laws require us to take certain steps intended to confirm the legal status of our immigrant labor force, but we may nonetheless unknowingly employ illegal immigrants. Violations of such laws and regulations could subject us to substantial fines and penalties, cleanup costs, third-party property damage or personal injury claims. In addition, these laws and regulations have become, and enforcement practices and compliance standards are becoming, increasingly stringent. Moreover, we cannot predict the nature, scope or effect of legislation or regulatory requirements that could be imposed, or how existing or future laws or regulations will be administered or interpreted, with respect to products or activities to which they have not been previously applied. Compliance with more stringent laws or regulations, as well as more vigorous enforcement policies of the regulatory agencies, could require us to make substantial expenditures for, among other things, pollution control systems and other equipment that we do not currently possess, or the acquisition or modification of permits applicable to our activities.
 
Risks Related to Our Financial Results and Financing Plans
 
ACTUAL RESULTS COULD DIFFER FROM THE ESTIMATES AND ASSUMPTIONS THAT WE USE TO PREPARE OUR FINANCIAL STATEMENTS.
 
To prepare financial statements in conformity with generally accepted accounting principles (“GAAP”), management is required to make estimates and assumptions, as of the date of the financial statements, which affect the reported values of assets and liabilities, revenues and expenses, and disclosures of contingent assets and liabilities. Areas requiring significant estimates by our management include: contract costs and profits and application of percentage-of-completion accounting and revenue recognition of contract change order claims; provisions for uncollectible receivables and customer claims and recoveries of costs from subcontractors, suppliers and others; valuation of assets acquired and liabilities assumed in connection with business combinations; and accruals for estimated liabilities, including litigation and insurance reserves. Our actual results could differ from, and could require adjustments to, those estimates.
 
In particular we recognize contract revenue using the percentage-of-completion method. Under this method, estimated contract revenue is recognized by applying the percentage of completion of the contract for the period to the total estimated revenue for the contract. Estimated contract losses are recognized in full when determined. Contract revenue and total cost estimates are reviewed and revised on a continuous basis as the work progresses and as change orders are initiated or approved, and adjustments based upon the percentage of completion are reflected in contract revenue in the accounting period when these estimates are revised. To the extent that these adjustments result in an increase, a reduction or an elimination of previously reported contract profit, we recognize a credit or a charge against current earnings, which could be material.
 
WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE FOR WORKING CAPITAL, CAPITAL EXPENDITURES AND/OR ACQUISITIONS, AND WE MAY NOT BE ABLE TO DO SO ON FAVORABLE TERMS OR AT ALL, WHICH WOULD IMPAIR OUR ABILITY TO OPERATE OUR BUSINESS OR ACHIEVE OUR GROWTH OBJECTIVES.
 
Our ability to obtain additional financing in the future will depend in part upon prevailing credit and equity market conditions, as well as conditions in our business and our operating results; such factors may adversely affect our efforts to arrange additional financing on terms satisfactory to us. We have pledged substantially all of our other assets as collateral in connection with our credit. As a result, we may have difficulty in obtaining additional financing in the future if such financing requires us to pledge assets as collateral. In addition, under our credit facility, we must obtain the consent of our lenders to incur any amount of additional debt from other sources (subject to certain exceptions). If future financing is obtained by the issuance of additional shares of common stock, our stockholders may suffer dilution. If adequate funds are not available, or are not available on acceptable terms, we may not be able to make future investments, take advantage of acquisitions or other opportunities, or respond to competitive challenges.

 
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Risks Related to our Common Stock
 
THE TERMS OF THE UTA CAPITAL WARRANTS WILL RESULT IN CONTINUED DILUTION TO OUR COMMON STOCKHOLDERS.

Under the terms of the five warrants we issued UTA Capital as part of the Note and Warrant Purchase Agreement, we agreed that if we should issue any shares of common stock, other than certain excepted issuances, without consideration or for a consideration per share less than the exercise price of $0.15 per share, then the exercise price is reduced in accordance with the formula set forth in the warrant and the number of shares underlying the warrant are concurrently increased so that the aggregate equity percentage represented by the warrant remains at 16%.  In addition, so long as a note is outstanding and during the term of the warrants we agreed that we will not issue any shares of our common stock or securities convertible into or exercisable for shares of our common stock, or grant any option or warrant to acquire shares of our common stock, to any individual who prior to such issuance or grant is the beneficial owner of 5% or more of our common stock without UTA Capital’s prior consent.  If we do not obtain such consent, we are required to issue UTA Capital an additional number of warrants so as to maintain their ownership interest (on an as converted basis) of 16% of our common stock on a fully diluted basis giving effect to such additional issuance or grant.  These provisions could result in significant dilution to our existing stockholders without our receipt of any additional consideration and could inhibit our ability to raise additional capital as needed.

THE UTA CAPITAL WARRANTS CONTAIN A CASHLESS EXERCISE PROVISION WHICH MEANS WE MAY NOT RECEIVE ANY CASH PROCEEDS UPON THEIR EXERCISE.

In August 2010 under the terms of the Note and Warrant Purchase Agreement with UTA Capital we issued common stock purchase warrants to purchase an aggregate of 20,952,381 shares of our common stock with an exercise price of $0.15 per share.  These five-year warrants are exercisable on a cashless basis which means that the holder, rather than paying the exercise price in cash, may surrender a number of warrants equal to the exercise price of the warrants being exercised. The utilization of this cashless exercise feature will deprive us of additional capital which might otherwise be obtained if the warrants did not contain a cashless feature.

WE ISSUED PREFERRED STOCK  TO CERTAIN INVESTORS IN ORDER TO RAISE WORKING CAPITAL
 
On December 23, 2011 the Board of Directors designated 1,500 shares of the authorized preferred stock as Series C Preferred Stock. The Certificate of Incorporation was amended and a Certificate of Designation, Preferences Rights and Other Rights of Series C Preferred Stock of Genesis Group Holdings, Inc. was filed with the State of Delaware on January 6, 2012.  Series C Preferred shares have a stated value of $1,000.00 per share; receive cumulative dividends at a rate of 10% per annum and paid quarterly. Series C Preferred shareholders have a two year option to convert their Series C shares to Common Stock at a rate of .025% per share of the issued and outstanding Common Stock at the time of the conversion. On January 6, 2012 the Company raised $500,000 in capital from the sale of the Series C preferred stock to several investors.
 
OUR COMMON STOCK IS QUOTED IN THE OVER THE COUNTER MARKET ON THE BULLETIN BOARD.

Our common stock is now quoted on the OTC Bulletin Board (OTCBB).  The OTCBB is an electronic quotation system that displays real-time quotes, last-sale prices, and volume information for many OTC securities that are not listed on the Nasdaq Stock Market or a national securities exchange.    Because our common stock is quoted on the OTCBB, it is possible that fewer brokers or dealers would be interested in making a market in our common stock which may adversely impact its liquidity.

THE TRADABILITY OF OUR COMMON STOCK IS LIMITED UNDER THE PENNY STOCK REGULATIONS WHICH MAY CAUSE THE HOLDERS OF OUR COMMON STOCK DIFFICULTY SHOULD THEY WISH TO SELL THE SHARES.

Because the quoted price of our common stock is less than $5.00 per share, our common stock is considered a “penny stock,” and trading in our common stock is subject to the requirements of Rule 15g-9 under the Securities Exchange Act of 1934.  Under this rule, broker/dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements. The broker/dealer must make an individualized written suitability determination for the purchaser and receive the purchaser’s written consent prior to the transaction.

SEC regulations also require additional disclosure in connection with any trades involving a “penny stock,” including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and its associated risks. These requirements severely limit the liquidity of securities in the secondary market because few broker or dealers are likely to undertake these compliance activities and this limited liquidity will make it more difficult for an investor to sell his shares of our common stock in the secondary market should the investor wish to liquidate the investment.  In addition to the applicability of the penny stock rules, other risks associated with trading in penny stocks could also be price fluctuations and the lack of a liquid market.

 
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ITEM 1B
UNRESOLVED STAFF COMMENTS.

Not applicable to a smaller reporting company.

ITEM 2
DESCRIPTION OF PROPERTY.

Our principal executive offices are located at Digital Comm.  The Company through Digital Comm has a lease on its office premises occupying approximately 1,000 square feet at 2500 N. Military Trail, Suite 275, Boca Raton, Florida 33431 with Crystal Investors Florida, LLC pursuant to the terms of a five year lease commencing in August 2010.  Under the terms of the lease we pay an annual base rent of $21,155 for the first year escalating to $23,810 in the fifth year, together with additional annual rent of approximately $13,000.

ITEM 3
LEGAL PROCEEDINGS.

We are not a party to any pending or threatened litigation.

ITEM 4
MINE SAFETY DISCLOSURES

Not applicable to our company.

PART II

ITEM 5
MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS.

Market Price of and Dividends on Common Equity and Related Stockholder Matters

Our common stock is quoted in the over-the-counter market on the Pink Sheets under the symbol GGHO.  The reported high and low last sale prices for the common stock are shown below for the periods indicated. The quotations reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not represent actual transactions.

 
Low
High
     
2010
   
First quarter ended March 31, 2010
.08
.30
Second quarter ended June 30, 2010
.15
.65
Third quarter ended September 30, 2010
.06
.17
Fourth quarter ended December 31, 2010
.08
.16
     
2011
   
First quarter ended March 31, 2011
.08
.14
Second quarter ended June 30, 2011
.06
.18
Third quarter ended September 30, 2011
.04
.15
Fourth quarter ended December 31, 2011
.003
.06

The last sale price of our common stock as reported on the OTC Markets was $0.0072 per share on April 4, 2012.  As of April 4, 2012, there were approximately 335 record owners of our common stock.

Dividend Policy

We have never paid cash dividends on our common stock.  Under Delaware law, we may declare and pay dividends on our capital stock either out of our surplus, as defined in the relevant Delaware statutes, or if there is no such surplus, out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year.  If, however, the capital of our company, computed in accordance with the relevant Delaware statutes, has been diminished by depreciation in the value of our property, or by losses, or otherwise, to an amount less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets, we are prohibited from declaring and paying out of such net profits any dividends upon any shares of our capital stock until the deficiency in the amount of capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets shall have been repaired.
 
 
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Recent Sales of Unregistered Securities

ITEM 6
SELECTED FINANCIAL DATA.
                  
On February 28, 2011, the Company sold 138,888 shares of common stock to a third party for $25,000. The shares were issued on June 20, 2011.
 
On July 5, 2011 the Company sold 3,270,000 shares of the company’s common stock to lender Tekmark for $30,000 as an equity investment.

ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
The following discussion of our financial condition and results of operation for 2009 and 2008 should be read in conjunction with the financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Item 1A. Risk Factors, Cautionary Notice Regarding Forward-Looking Statements and Business sections in this Form 10-K.  We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.

On January 14, 2010 the Company acquired all the outstanding shares of Digital Comm in exchange for 50,000,000 shares of our common stock. Digital was originally formed on September 13, 2006 and, on January 14, 2010 was merged into Genesis as a wholly owned subsidiary. Digital is a provider of specialty contracting services, primarily in the installation of fiber optic telephone cable. These services are provided throughout the United States and include engineering, construction, maintenance and installation services to telecommunications providers, underground facility locating services to various utilities including telecommunications providers, and other construction and maintenance services to electric and gas utilities and others.
 
On August 22, 2011 the Company acquired 100% interest in Tropical Communications, Inc. (“Tropical”), a Florida corporation, based in Miami, Florida. Tropical is a State licensed Low Voltage and Underground contractor and provides services to construct, install, optimize and maintain structured cabling for commercial and governmental entities in the South Florida area. . The purchase price for Tropical was $90,000 paid with 1,000,000 shares of common stock in the Company valued at $.09  per share and an earn-out provision for additional shares of stock in the Company based on a formula tied to future earnings of Tropical.

On December 29, 2011 the Company acquired a 49% stake in Rives Monteiro Engineering LLC.( “RME”), an engineering firm and certified WBE with offices in Houston, Texas and Tuscaloosa, Al.  The Company also acquired 100% of Rives Monteiro Leasing LLC an equipment provider for the cable-engineering services. The Company has an option to purchase the remaining 51% of RME.  The entire combined transaction was paid with 7.5 million shares of Common Stock in the Company, $100,000 in cash and an additional $0.2 million to be paid pursuant to a six month promissory note.
 
Outlook
 
The telecommunications industry has undergone and continues to undergo significant changes due to governmental deregulation, advances in technology, increased competition as the telephone and cable companies converge, and growing consumer demand for enhanced and bundled services. As a result of these factors, the networks of our customers increasingly face demands for more capacity and greater reliability. Telecommunications providers continue to outsource a significant portion of their engineering, construction and maintenance requirements in order to reduce their investment in capital equipment, provide flexibility in workforce sizing, expand product offerings without large increases in incremental hiring and focus on those competencies they consider core to their business success. These factors drive customer demand for our services.

 
17

 
 
Telecommunications network operators are increasingly relying on the deployment of fiber optic cable technology deeper into their networks and closer to consumers in order to respond to demands for capacity, reliability, and product bundles of voice, video, and high speed data services. Fiber deployments have enabled an increasing number of cable companies to offer voice services in addition to their traditional video and data services. These voice services require the installation of customer premise equipment and at times the upgrade of in-home wiring. Additionally, fiber deployments are also facilitating the provisioning of video services by local telephone companies in addition to their traditional voice and high speed data services. Several large telephone companies have pursued fiber-to-the-premise and fiber-to-the-node initiatives to compete actively with cable operators. These long-term initiatives and the likelihood that other telephone companies pursue similar strategies present opportunities for us.

Telecommunication companies have undertaken additional projects relating to the deployment of fiber optic cable to cell sites. As wireless carriers have successfully marketed smart phones and other wireless data devices, the amount of cellular traffic that must be "backhauled" from cell sites to wired telecommunications networks has increased dramatically. Traditional copper based networks are incapable of cost effectively addressing the data traffic expected as wireless carriers begin to roll out advanced fourth generation wireless data services. The increase in fiber backhaul services is expected to continue during 2011, resulting in demand for the type of services we provide.
 
Results of Operations
 
Revenues increased in 2011 by approximately $1,859,000 or 195% as compared to 2010 revenues primarily from the Company’s acquisitions and the increased revenues derived from our Master Service Agreement with Verizon Wireless.  .
 
Cost of revenues  in 2011 was 66% of revenues as compared to 105% in 2010. Cost of revenues  in 2011 increased $848,000, or 85% as compared to 2010,  primarily as a result of increased efficiencies as a result of the increased revenue.

Cost of  revenues includes all direct costs of providing services under our contracts, including costs for direct labor provided by employees, services by subcontractors, operation of capital equipment (excluding depreciation and amortization), direct material and other related costs. For a majority of the contract services we perform, our customers provide all necessary materials and we provide the personnel, tools, and equipment necessary to perform installation and maintenance services.
 
Salaries and wages, which includes stock compensation, increased approximately $4,279,000 or approximately 272% in 2011 from 2010. Stock compensation expense for 2011 increased $4,129,000 or 474% from 2010 from the issuance of stock primarily to employees and officers and to consultants for services rendered.

General and administrative costs include all of our corporate costs, as well as costs of our subsidiaries' management personnel and administrative overhead. These costs primarily consist of office rental, legal, consulting and professional fees, travel and other costs that are not directly related to performance of our services under customer contracts.  General and administrative expenses increased $650,593 or approximately 108% in 2011 from 2010.  Included in the increased expenses in 2010 were increases in salaries and wages of $151,000 (22%) resulting from the hiring of additional personnel, consulting and professional due to requirements of new job contracts.

The unrealized gain on the changes in fair value of the derivative increased $81,966 or 22% in 2011 from 2010.
 
Interest expense increased by approximately $973,000 or 364% in 2011 as compared to 2010, primarily from the third party loans to finance the operations of the Company.

In 2011 an impairment for the goodwill of $437,000 was recognized from the acquisition of Tropical.

Liquidity and Capital Resources

Liquidity is the ability of a company to generate sufficient cash to satisfy its needs for cash. At December 31, 2010 the Company had a working capital deficit of approximately $1,277,000 as compared to a working capital deficit of approximately $1,184,000 at December 31, 2010. The increase in working capital deficit of $94,000 was comprised mainly from the additional notes payable balance as of December 31, 2011
 
 
 
18

 
 
The approximate 134%  increase in accounts receivable and approximate 91% increase in accounts payable at December 31, 2011 compared to December 31, 2010 are both the result of the change in additional customers deriving revenue for our subsidiaries.  

Net cash used by operating activities was approximately $1,172,000 as compared with approximately $1,143,000 in 2010, which reflects the losses incurred by the Company.

Net cash used in investing activities in 2011 was approximately $119,000, which represents capital expenditures of $75,000 for equipment and machinery, as compared to approximately $181,000 in 2010, along with $100,000 for the purchase of a non-controlling interest in Rives-Monteiro Engineering, which was offset by approximately $57,000 of cash acquired in the acquisition of Rives-Monteiro Engineering.

Net cash provided by financing activities in 2011 was approximately $1,356,000 and resulted primarily from the loans from Tekmark and Munro Capital. Net cash provided by financing activities in 2010 was approximately $1,344,000 which resulted primarily from third party and bank borrowings coupled with loans from shareholders.
 
We anticipate that our cash and cash equivalents on hand, our borrowing availability under the Tekmark Financing   assuming we are able to continue access funds under that agreement, our Series C Preferred Stock proceeds and our future cash flow from operations will provide sufficient cash to enable us to meet our future operating needs, debt service requirements, and planned capital expenditures. We expect that our capital spending in 2012 will be reasonably consistent with our 2011 capital spending. Although we believe that we have adequate cash and availability under our credit facility to meet these needs, our involvement in any large-scale projects may require additional working capital, depending upon the size and duration of the project and the financial terms of the underlying agreement.

Note and Warrant Purchase Agreement with UTA Capital LLC

On August 6, 2010, we secured a working capital loan from UTA Capital LLC, with Digital Comm as the borrower.   The loan is evidenced by a Note and Warrant Purchase Agreement between the Company, Digital Comm and UTA Capital, LLC dated August 6, 2010.  Additionally, the Company issued to UTA Capital, LLC warrants initially to purchase 20,952,381 shares of our common stock with an exercise price of $0.15 per share.
 
In or about February 14, 2011 we entered into a Loan Extension and Modification Agreement with UTA Capital, extending the maturity date to September 30, 2011.   There is currently $750,000, plus interest due under the Note.
 
The term of the warrant is for five years from the later of the date we are current in our reporting obligations with the SEC or five years from the date the warrant is first exercisable.  The warrant is exercisable on a cashless basis.  Upon 10 trading days notice to the holder that we intend to redeem the warrant, and providing that there is an effective registration statement covering the shares underlying the warrant, the average trading volume and price meets certain thresholds, then the warrant shall be deemed to have been issued on a cashless basis.  The number of shares of common stock underlying the warrant and the exercise price of the warrant are subject to proportional adjustment in the event of stock splits, dividends and similar corporate transactions.  In addition, if we should issue any shares of common stock, other than certain excepted issuances, without consideration or for a consideration per share less than the exercise price, then the exercise price is reduced in accordance with the formula set forth in the warrant and the number of shares underlying the warrant are concurrently increased so that the aggregate equity percentage represented by the warrant remains at 16%.

The exercise price of the warrant and the number of shares underlying the warrant are also subject to further adjustment at any time we issue convertible securities at a per share value less than the exercise price.  In such event the exercise price and number of shares underlying the warrant shall be adjusted in accordance with the same formula as set forth above.
 
 
19

 
 
We believe that we are in compliance of all material financial terms of the UTA Agreement as modified. We have not received any notices of default to date, and have been working with and are in frequent communication with UTA Capital.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities” (SPEs).

Recent Accounting Pronouncements

ASC Topic 855, Subsequent Events (“ASC Topic 855”), establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the date the financial statements are issued or available to be issued. ASC Topic 855 requires companies to reflect in their financial statements the effects of subsequent events that provide additional evidence about conditions at the balance sheet date. In February 2010, the FASB issued Accounting Standards Update No. 2010-09 – Subsequent Events (Topic 855) — Amendments to Certain Recognition and Disclosure Requirements (“ASU 2010-09”). ASU 2010-09 provides amendments which clarify that SEC filers are not required to disclose the date through which subsequent events have been evaluated. The adoption of this guidance had no impact on the Company’s consolidated financial statements.
 
In April 2010, the FASB issued Accounting Standards Update No. 2010-12, Income Taxes (Topic 740) – Accounting for Certain Tax Effects of the 2010 Health Care Reform Acts (“ASU 2010-12”). ASU 2010-12 addresses changes in accounting for income taxes resulting from the recently issued Health Care and Education Reconciliation Act of 2010 and the Patient Protection and Affordable Care Act. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.
 
In December 2010, the FASB issued Accounting Standards Update No. 2010-29, Business Combinations (Topic 805) (“ASU 2010-29”).  ASU 2010-29 is intended to address diversity in practice regarding pro-forma revenue and earnings disclosure requirements for business combinations.  ASU 2010-29 specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only.  The amendments also expand the supplemental pro-forma disclosures to include a description of the nature and amount of material, non-recurring pro-forma adjustments directly attributable to the business combination included in the reported pro-forma revenue and earnings.  The amendments affect any public entity as defined by ASU 2010-29 that enters into business combinations that are material on an individual or aggregate basis.  ASU 2010-29 is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period after December 15, 2010.  The adoption of this guidance is not expected to have a material effect on the Company’s condensed consolidated financial statements.

In December 2010, the FASB issued Accounting Standards Update No. 2010-28, Intangibles - Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (“ASU 2010-28”). ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The amendments in ASU 2010-28 are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010.  The adoption of this guidance is not expected to have a material effect on the Company’s condensed consolidated financial statements.
 
In September 2011, the FASB issued ASU No. 2011-09, Compensation-Retirement Benefits-Multiemployer Plans (Subtopic 715-80): Disclosures about an Employer's Participation in a Multiemployer Plan. This update requires enhanced disclosures in the annual financial statements of employers that participate in multiemployer plans. Under the new guidance, employers are required to explain the general nature of multiemployer pension plans and their participation in the plans, including how the plans are different from single-employer plans. In addition, certain disclosures are required in tabular format for each multiemployer plan that is individually significant to an employer's financial statements. The guidance also requires a description of the nature and effect of any significant changes affecting comparability of the employer's total contributions from period to period. The ASU was adopted by the Company in December 2011 and retrospectively applied. There was no impact to the Company's financial position, results of operations or cash flows as the changes related only to additional disclosures.
 
In September 2011, the FASB issued ASU No. 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment. This update was intended to simplify how entities test goodwill for impairment. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is "more-likely-than-not" that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC 350. The "more-likely-than-not" threshold is defined as having a likelihood of more than 50%. ASU 2011-08 was effective for annual and interim goodwill impairment tests performed for reporting periods beginning after December 15, 2011. The Company does not expect the adoption of the provisions of ASU 2011-08 in 2012 to have an effect on the Company's financial position, results of operations or cash flows.
 
In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The update requires entities to disclose information about offsetting and related arrangements of financial instruments and derivative instruments. ASU 2011-11 is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Company currently believes there will be no significant impact of adopting this standard on its consolidated financial statements.
 
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
 
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
Not applicable for a smaller reporting company.

 
20

 
 
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
 
  7900 Glades Road, Suite 540
Boca Raton., FT, 33434
Tel: 561.886.4200
Fax: 561.886.3330
infoesherbcpa.cona
SHERB & CO., LLP Offices in New York and Florida
Certified Public Accountants  
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Board of Directors
Genesis Group Holdings, Inc.
 
We have audited the accompanying consolidated balance sheets of Genesis Group Holdings, Inc. and Subsidiaries as of December 31, 2011 and 2010, respectively, and the related consolidated statements of operations, changes in stockholders' deficit and cash flows for the years ended December 31, 2011 and 2010, respectively. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company and its subsidiaries as of December 31, 2011 and 2010, respectively, and the results of their operations and cash flows for the years ended December 31, 2011, and 2010, respectively, in conformity with accounting principles generally accepted in the United States of America.
 
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 14 to the consolidated financial statements, the Company has suffered losses from operations, and has an accumulated deficit and net cash used in operations of $1,172,416 for the year ended December 31, 2011. This raises substantial doubt about its ability to continue as a going concern. Management's plans in regards to these matters are described in Note 14 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
 
     
  /s/ Sherb & Co., LLP  
 
Boca Raton, FL
April 10, 2012
 
 
 

 
 
GENESIS GROUP HOLDINGS, INC.
 
CONSOLIDATED BALANCE SHEETS
 
   
             
   
DECEMBER 31,
   
DECEMBER 31,
 
   
2011
   
2010
 
Assets
           
             
Current Assets
           
Cash and cash equivalents
 
$
89,285
   
$
22,476
 
Accounts receivable
   
347,607
     
148,811
 
Inventory
   
10,992
     
13,235
 
Deferred loan costs
   
53,848
     
-
 
Other current assets
   
8,701
     
-
 
                 
Total Current Assets
   
510,433
     
184,522
 
                 
Property & equipment, net
   
338,759
     
237,935
 
                 
Intangible assets
   
636,736
     
-
 
                 
Deposits
   
304,084
     
7,926
 
                 
Total Assets
 
$
1,790,012
   
$
430,383
 
                 
Liabilities and Stockholders' Deficiency
               
                 
Current liabilities
               
Accounts payable
 
$
563,449
   
$
294,689
 
Bank debt, current portion
   
114,358
     
64,105
 
Accrued expenses
   
227,854
     
151,497
 
Notes payable, related parties
   
5,364
     
348,471
 
Notes payable, other, current portion
   
876,522
     
509,268
 
                 
Total Current Liabilities
   
1,787,547
     
1,368,030
 
                 
Other Liabilities:
               
Bank debt, net of current portion
   
698,289
     
229,542
 
Notes payable, related parties, net of current
   
110,293
         
Notes payable, other,net of current portion
   
825,761
     
-
 
Derivative liability
   
1,143
     
459,897
 
                 
Total Other Liabilities
   
1,635,486
     
689,439
 
                 
Redeemable Series B, convertible preferred stock,
               
      $0.0001 par value,authorized 60,000 shares, 15 issued
   
15,000
     
-
 
                 
Stockholders' Deficiency:
               
Preferred stock, $.0001 par value, 50,000,000 authorized;
               
     Series A, convertible preferred stock,$0.0001 par value,
               
          authorized 20,000,000 shares, 2,000,000 issued and outstanding
   
200
     
-
 
     Series C, convertible preferred stock, 10% cumulative,
               
          annual dividend $1,000 stated value, authorized
               
          1,500 shares, no shares issued and outstanding
   
-
     
-
 
     Series D, convertible preferred stock, 10% cumulative,
               
          annual dividend $1,000 stated value, authorized
               
          1,000 shares, 366 shares issued and outstanding
   
366
     
-
 
Common stock, $.0001 par value,  500,000,000 shares
               
      authorized; 158,737,602 and 105,973,976 shares issued and
   
15,873
     
10,597
 
      outstanding
               
Additional paid-in-capital
   
7,850,944
     
581,800
 
Accumulated deficit
   
(9,620,926
)
   
(2,219,483
)
Total Genesis Holdings, Inc. stockholders' deficiency
   
(1,753,543
)
   
(1,627,086
)
Non-controlling interest
   
105,522
     
-
 
                 
Total Stockholders' Deficiency
   
(1,648,0213
)
   
(1,627,086
)
                 
Total Liabilities and Stockholders' Deficiency
 
$
1,790.012
   
$
430,383
 
                 
See Notes to Consolidated Financial Statements
 
 
 
 
 
21

 
 
 
GENESIS GROUP HOLDINGS, INC.
 
CONSOLIDATED STATEMENTS OF OPERATIONS
 
   
             
   
FOR THE YEARS ENDED
 
   
DECEMBER 31,
 
   
2011
   
2010
 
             
Revenues
  $ 2,812,210     $ 952,839  
                 
                 
OPERATING EXPENSES
               
Cost of revenues earned
    1,851,018       1,002,781  
Depreciation and amortization
    39,229       26,191  
Salaries and wages (including stock compensation of $5,001,000
               
     and $872,000)
    5,853,600       1,574,374  
General and administrative
    1,251,102       600,509  
                 
TOTAL OPERATING EXPENSES
    8,994,949       3,203,855  
                 
LOSS FROM OPERATIONS
    (6,182,739 )     (2,251,016 )
                 
OTHER (INCOME) EXPENSES
               
Unrealized gain on fair value of derivative
    (458,754 )     (376,788 )
Interest expense
    1,240,457       267,368  
Goodwill impairment
    437,000       -  
                 
TOTAL OTHER (INCOME)EXPENSE
    1,218,703       (109,420 )
                 
NET  LOSS
  $ (7,401,442 )   $ (2,141,596 )
                 
LOSS PER COMMON SHARE
               
Basic and fully diluted
  $ (0.06 )   $ (0.02 )
                 
Weighted average number of common shares
               
           outstanding-basic and diluted
    125,408,014       136,148,976  
                 
See Notes to Consolidated Financial Statements
 
 
 
22

 
 
 
GENESIS GROUP HOLDINGS, INC.
 
Consolidated Statement of Changes in Stockholders' Equity
 
For the Years Ended December 31,2010 and 2011
 
   
               
Preferred Stock
               
 
             
   
Common Stock
   
Series A Convertible
   
Series B Convertible
   
Series C Convertible
   
Series D Convertible
   
Additional
Paid-in
   
Accumulated
   
Stock
Subscription
   
Non-Controlling
       
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Deficit
   
Receivable
   
Interest
   
Total
 
                                                                                           
Balance December31, 2009
    159,591,438     $ 15,959       -     $ -       -     $ -       -     $ -       -     $ -     $ 4,811,041     $ (77,887 )   $ (4,800,000 )   $ -     $ (50,887 )
                                                                                                                         
Recapitalization from acquisition of Digital Comm, Inc.
    1,499,062       150                                                                       (325,608 )                             (325,458 )
                                                                                                                         
Issuance of shares to former management and debt holders
    3,183,476       318       -       -                                                       (318 )     -       -               -  
                                                                                                                         
Issuance of shares to officer pursuant to employment contract
    4,000,000       400                                                                       799,600                               800,000  
                                                                                                                         
Issuance of shares to officer in settlement of unpaid salary
    1,200,000       120                                                                       71,880                               72,000  
                                                                                                                         
Cancellation of shares relating to
                                                                                                                       
     proposed acquisition of STS
    (60,000,000 )     (6,000 )                                                                     (4,794,000 )             4,800,000               -  
                                                                                                                         
Cancellation of shares
    (3,500,000 )     (350 )                                                                     350                               -  
                                                                                                                         
Computed debt discount on warrant issuance to UTA
                                                                                    455,540                               455,540  
                                                                                                                         
Derivative liability from warrant issuance
                                                                                    (836,685 )                             (836,685 )
                                                                                                                         
Contributed capital by officers from
                                                                                                                       
   waiver of salaries
                                                                                    400,000                               400,000  
                                                                                                                         
Net loss
                                                                                            (2,141,596 )                     (2,141,596 )
                                                                                                                         
Balance December 31, 2010
    105,973,976     $ 10,597       -     $ -       -     $ -       -     $ -       -     $ -     $ 581,800     $ (2,219,483 )   $ -     $ -     $ (1,627,086 )
                                                                                                                         
See Notes to Consolidated Financial Statements.
 
 
 
23

 
 
GENESIS GROUP HOLDINGS, INC.
 
Consolidated Statement of Changes in Stockholders' Equity
 
For the Years Ended December 31,2010 and 2011
 
   
               
Preferred Stock
   
 
         
 
             
   
Common Stock
   
Series A Convertible
   
Series B Convertible
   
Series C Convertible
   
Series D Convertible
   
Additional
Paid-in
   
Accumulated
   
Stock
Subscription
   
Non-Controlling
       
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
Deficit
   
Receivable
   
Interest
   
Total
 
                                                                                           
Issuance of shares to UTA pursuant to loan modifications (792,439 shares unissued)
    2,074,523     $ 207       -     $ -       -     $ -       -     $ -       -     $ -     $ 242,495     $ -     $ -     $ -     $ 242,701  
                                                                                                                         
Computed debt discount on warrant issuance to UTA from 2nd modification
                                                                                    301,876                               301,876  
                                                                                                                         
Issuances from sale of shares
    3,408,888       341       -       -                                                       54,659       -       -               55,000  
                                                                                                                         
Issuance of shares for consulting services
    3,000,000       300       -       -                                                       349,700       -       -               350,000  
                                                                                                                         
Issuances of shares pursuant to loans
    6,000,000       600       -       -                                                       372,826       -       -               373,426  
                                                                                                                         
Issuance of shares to employees
    2,000,000       200       -       -                                                       255,800       -       -               256,000  
                                                                                                                         
Issuance of shares to officers
    8,500,000       850       2,000,000       200                                                       3,503,950       -       -               3,505,000  
                                                                                                                         
Recognition of officers stock compensation
                                                                                                                       
   from 2010 issuance
    -       -       -       -                                                       800,000       -       -               800,000  
                                                                                                                         
Issuances of shares from conversion of notes payable
    14,673,215       1,467       -       -                                                       122,531       -       -               123,998  
                                                                                                                         
Issuance of shares for pending acquisition
    2,107,000       211       -       -                                                       290,555       -                       290,766  
                                                                                                                         
Issuance of shares for Tropical  acquisition
    1,000,000       100       -       -                                                       116,175       -       -               116,275  
                                                                                                                         
Issuance of shares for Rives Monteiro acquisition
    7,500,000       750       -       -                                                       28,321       -       -       105,522       134,593  
                                                                                                                         
Issuances of shares in settlement of note payable
    2,500,000       250       -       -                                                       24,750       -       -               25,000  
                                                                                                                         
Issuance of shares from conversion of note payable to officer
                                                                    366       366       405,506                               405,872  
                                                                                                                         
Contributed capital by officers from
                                                                                    400,000                               400,000  
   waiver of salaries
                                                                                                                       
    <