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EX-32.1 - EXHIBIT 32.1 - FTE Networks, Inc.v310564_ex32-1.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

þQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2012.

 

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______________ to __________________

 

Commission File No. 000-31355

 

BEACON ENTERPRISE SOLUTIONS GROUP, INC.

(Name of registrant in its charter)

 

Nevada   81-0438093
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 

9300 Shelbyville Road, Suite 1020, Louisville, KY 40222

(Address of principal executive offices)

 

502-657-3500

(Issuer’s telephone number)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes   þ No   ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes   No   þ

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes   o     No   þ

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o Accelerated filer o 

Non-accelerated filer  o

(Do not check if a smaller reporting company)

Smaller reporting company  þ

 

As of April 30, 2012, Beacon Enterprise Solutions Group, Inc. had a total of 37,611,396 shares of common stock issued and outstanding.

 

 
 

 

Beacon Enterprise Solutions Group, Inc.

FORM 10-Q

For the fiscal three and six months ended March 31, 2012

 

INDEX

 

 

PART I: FINANCIAL INFORMATION    
     
Item 1. Financial Statements   3
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   16
     
Item 4. Controls and Procedures   23
     
PART II: OTHER INFORMATION    
     
Item 1. Legal Proceedings   25
     
Item 5. Other information   25
     
Item 6. Exhibits   25
     
Signatures   26

 

Page 2
 

 

Beacon Enterprise Solutions Group, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(all amounts in 000's except share data)

 

   March 31,   September 30, 
   2012   2011 
   (unaudited)     
ASSETS          
Current assets:          
Cash and cash equivalents  $893   $861 
Accounts receivable, net   2,985    3,752 
Inventory, net   -    - 
Prepaid expenses and other current assets   2,048    1,345 
Total current assets   5,926    5,958 
           
Property and equipment, net   268    249 
Goodwill   2,792    2,792 
Other intangible assets, net   2,776    2,905 
Other assets   40    18 
Total assets  $11,802   $11,922 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
Current liabilities:          
Bridge note - related party  $100   $100 
Note payable   300    - 
Current portion of long-term debt   94    180 
Senior secured notes payable   4,196    2,952 
Accounts payable   2,427    3,204 
Accrued expenses and other current liabilities   2,326    1,691 
Total current liabilities   9,443    8,127 
           
Long-term debt, less current portion   -    24 
Deferred tax liability   241    212 
Total liabilities   9,684    8,363 
Commitments and contingencies (Note 6)          
Stockholders' equity          
Preferred Stock: $0.01 par value, 5,000,000 shares authorized, 1,598 and 1,491 shares outstanding in the following classes:          
Series A convertible preferred stock, $1,000 stated value, 4,500 shares authorized, 30 shares issued and outstanding at March 31, 2012 and September 30, 2011 respectively, (liquidation preference $99)   30    30 
Series A-1 convertible preferred stock, $1,000 stated value, 1,000 shares authorized, 311 shares issued and outstanding at March 31, 2012 and September 30, 2011 respectively, (liquidation preference $492)   311    311 
Series B convertible preferred stock, $1,000 stated value, 4,000 shares authorized, 700 shares issued and outstanding at March 31, 2012 and September 30, 2011 respectively, (liquidation preference $1,048)   700    700 
Series C-1 convertible preferred stock, $1,500 stated value, 400 shares authorized, 350 issued and outstanding at March 31, 2012 and September 30, 2011, respectively  (liquidation preference $724)   525    525 
Series C-2 convertible preferred stock, $1,500 stated value, 2,000 shares authorized, 100 issued and outstanding at March 31, 2012 and September 30, 2011, respectively (liquidation preference $204)   150    150 
Series C-3 convertible preferred stock, $1,500 stated value, 110 shares authorized, 107 issued and outstanding at March 31, 2012 (liquidation preference $211)   160    - 
Common stock, $0.001 par value 70,000,000 shares authorized  37,611,396 and 37,376,396 shares issued and outstanding at March 31, 2012 and September 30, 2011, respectively.   38    38 
Additional paid in capital   38,840    38,342 
Accumulated deficit   (38,747)   (36,583)
Accumulated other comprehensive income   111    46 
Total stockholders' equity   2,118    3,559 
Total liabilities and stockholders' equity  $11,802   $11,922 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

Page 3
 

 

Beacon Enterprise Solutions Group, Inc. and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

(all amounts in 000's except share and per share data)

 

   For the Three   For the Three   For the Six   For the Six 
   Months Ended   Months Ended   Months Ended   Months Ended 
   March 31,   March 31,   March 31,   March 31, 
   2012   2011   2012   2011 
Net sales  $3,317   $5,003   $9,319   $8,977 
Cost of goods sold   41    350    118    626 
Cost of services   2,034    3,253    5,642    5,776 
Total cost of sales and services   2,075    3,603    5,760    6,402 
Gross profit   1,242    1,400    3,559    2,575 
                     
Operating expenses                    
Salaries and benefits   1,433    1,863    2,897    3,538 
Selling, general and administrative   1,042    980    1,824    1,868 
Total operating expenses   2,475    2,843    4,721    5,406 
Loss from operations   (1,233)   (1,443)   (1,162)   (2,831)
                     
Other expenses                    
Interest expense   (159)   (77)   (291)   (133)
Effect of foreign currency transaction   57    88    (170)   (14)
Amortization of deferred finance fees   (167)   (69)   (399)   (84)
Other expenses   (24)   (207)   (39)   (319)
Total other expenses   (293)   (265)   (899)   (550)
                     
Net loss before income taxes   (1,526)   (1,708)   (2,061)   (3,381)
                     
Income tax (expense) benefit   2    (126)   (30)   (88)
                     
Loss from continuing operations   (1,524)   (1,834)   (2,091)   (3,469)
Income from discontinued operations   -    -    -    7,892 
                     
Net (loss) income   (1,524)   (1,834)   (2,091)   4,423 
                     
Preferred Stock:                    
Contractual dividends   (44)   (19)   (73)   (38)
Net (loss) income available to common stockholders  $(1,568)  $(1,853)  $(2,164)  $4,385 
                     
Net loss per share to common stockholders - basic and diluted                    
Net loss per share from continuing operations  $(0.04)  $(0.05)  $(0.06)  $(0.09)
Net (loss) income per share from discontinued operations   -    -    -    0.21 
   $(0.04)  $(0.05)  $(0.06)  $0.12 
                     
Weighted average shares outstanding basic and diluted   37,611,396    37,376,396    37,611,396    37,376,396 
                     
Other comprehensive income, net of tax                    
Net (loss) income  $(1,568)  $(1,853)  $(2,164)  $4,385 
Foreign currency translation adjustment   99    (43)   99    545 
Comprehensive (loss) income  $(1,469)  $(1,896)  $(2,065)  $4,930 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

Page 4
 

 

Beacon Enterprise Solutions Group, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders' Equity

(Unaudited)

(all amounts in 000's except share data)

 

   Series A Convertible   Series A-1 Convertible   Series B Convertible   Series C-1 Convertible   Series C-2 Convertible   Series C-3 Convertible                   Accumulated     
   Preferred Stock   Preferred Stock   Preferred Stock   Preferred Stock   Preferred Stock   Preferred Stock   Common Stock   Additional       Other     
       $1,000 Stated       $1,000 Stated       $1,000 Stated       $1,000 Stated       $1,000 Stated       $1,000 Stated       $0.001 Par   Paid-In   Accumulated   Comprehensive     
   Shares   Value   Shares   Value   Shares   Value   Shares   Value   Shares   Value   Shares   Value   Shares   Value   Capital   Deficit   Income   Total 
Balance at September 30, 2011   30   $30    311   $311    700   $700    350   $525    100   $150    -   $-    37,611,396   $38   $38,342   $(36,583)  $46   $3,559 
                                                                                           
Employee stock compensation                                                                         368              368 
Warrants issued consulting agreements                                                                         5              5 
Amortization of market value of Common stock vested for investor relations agreement                                                                         93              93 
Amortization of non-employee stock options issued for performance of services                                                                         32              32 
Preferred Stock issued in private placement                                                     107    160                             160 
Preferred Stock contractual dividends                                                                              (73)        (73)
Net loss                                                                              (2,091)        (2,091)
Net change in accumulated other comprehensive income                                                                                   65    65 
Balance at March 31, 2012   30   $30    311   $311    700   $700    350   $525    100   $150    107   $160    37,611,396   $38   $38,840   $(38,747)  $111   $2,118 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

Page 5
 

 

Beacon Enterprise Solutions Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(all amounts in 000's)

 

   For the Six   For the Six 
   Months Ended   Months Ended 
   March 31,   March 31, 
   2012   2011 
CASH FLOWS FROM OPERATING ACTIVITIES          
Net loss  $(2,091)  $(3,469)
           
Adjustments to reconcile net loss to net cash used in operating activities:          
Provision for obsolete inventory   (5)   30 
Provision for doubtful accounts   14    138 
Depreciation and amortization   223    258 
Non-cash interest   -    156 
Share based payments   498    503 
Amortization of deferred finance fees   399    84 
Amortization of debt discount   48    37 
Change in deferred tax liability   30    30 
Changes in operating assets and liabilities:          
Accounts receivable   716    739 
Inventory   5    15 
Prepaid expenses and other assets   (452)   (360)
Accounts payable   (748)   (608)
Accrued expenses and other current liabilities   563    1,130 
NET CASH USED IN OPERATING ACTIVITIES   (800)   (1,317)
           
CASH FLOWS FROM INVESTING ACTIVITIES          
Capital expenditures   (115)   (95)
NET CASH USED IN INVESTING ACTIVITIES   (115)   (95)
           
CASH FLOWS FROM FINANCING ACTIVITIES          
           
Proceeds from issuance of senior secured notes payable, net of offering costs   3,529    2,667 
Proceeds from sale of preferred stock, net of offering costs   160    263 
Proceeds from issuance of promissory note   300    - 
Proceeds from non-current line of credit - related party   -    310 
Payments on non-current line of credit - related party   -    (940)
Payments on senior secured notes payable   (3,012)   - 
Payments on notes payable   (109)   (448)
           
NET CASH PROVIDED BY FINANCING ACTIVITIES   868    1,852 
           
Effect of exchange rate changes on cash and cash equivalents   79    (40)
           
NET INCREASE IN CASH AND CASH EQUIVALENTS   32    400 
           
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD   861    246 
           
CASH AND CASH EQUIVALENTS - END  OF PERIOD  $893   $646 
           
Supplemental disclosures          
           
Cash paid for:          
           
Interest  $219   $91 
           
Income taxes  $-   $- 
           
Non-cash investing and financing activites:          
           
Accrued dividends  $73   $46 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

Page 6
 

 

BEACON ENTERPRISE SOLUTIONS GROUP, INC.

 

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Amounts in thousands, except share and per share data)

 

NOTE 1 —BASIS OF PRESENTATION, DESCRIPTION OF BUSINESS, LIQUIDITY AND CAPITAL RESOURCES

 

The condensed consolidated financial statements include the accounts of Beacon Enterprise Solutions Group, Inc., a Nevada corporation and its wholly-owned subsidiaries including BESG Ireland Ltd. and Beacon Solutions S.R.O, collectively referred to as “Beacon” or the “Company”. Datacenter Contractors AG (formerly Beacon Solutions AG) acquired on July 29, 2009 and discontinued as of June 30, 2010, has been deconsolidated as of December 14, 2010 due to the cessation of the Company’s controlling financial interest in the subsidiary. All significant intercompany accounts and transactions have been eliminated in consolidation.

 

The accompanying unaudited condensed consolidated financial statements for the three and six months ended March 31, 2012 have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (“SEC”) and on the same basis as the annual audited consolidated financial statements. The unaudited Condensed Consolidated Balance Sheet as of March 31, 2012, and Condensed Consolidated Statement of Operations for the three and six months ending March 31, 2012, and Condensed Consolidated Statements of Cash Flows and Stockholders’ Equity for the six months ended March 31, 2012 are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which Beacon considers necessary for a fair presentation of the financial position, operating results and cash flows for the periods presented. The results for the three and six months ended March 31, 2012 are not necessarily indicative of results to be expected for the year ending September 30, 2012 or for any future interim period. The accompanying condensed consolidated financial statements should be read in conjunction with Beacon’s consolidated financial statements and notes thereto included in Beacon’s Annual Report on Form 10-K, which was filed with the SEC on December 12, 2011.

 

Beacon provides international telecommunications and information technology systems (ITS) infrastructure services, encompassing a comprehensive suite of consulting, design, installation, and infrastructure management offerings. Beacon’s portfolio of infrastructure services spans all professional and construction requirements for design, build and management of telecommunications, network and technology systems infrastructure. Professional services offered include consulting, engineering, program management, project management, construction services and infrastructure management services. Beacon offers these services under either a comprehensive contract option or unbundled to the Company’s global and regional clients.

 

Liquidity and Capital Resources

 

For the six months ended March 31, 2012, the Company generated a net loss of $2,091, which included non-cash expenses aggregating $1,207. Cash used in continuing operations amounted to $800 for the six months ended March 31, 2012. The Company’s accumulated deficit amounted to $38,747, with cash and cash equivalents of $893 and a working capital deficit of $3,517.

 

On October 6, 2011, the Company initiated a private placement of up to $4,500 of 12 month Senior Secured Notes (“Notes”). The Notes bear interest at 13% APR. Net proceeds were used to repay and replace previously existing Senior Secured Bank Notes totaling approximately $3,000 and for additional working capital. As of March 31, 2012, the Company has raised net proceeds of $3,529 (gross proceeds of $4,208 less costs of $679). See Note 4.

 

On October 14, 2011, the Company raised $160 in cash proceeds from the sales 107 units of Series C-3 Convertible Preferred Stock. See Note 7.

 

On March 28, 2012 the Company issued a 90 day promissory note in the amount of $300 bearing interest at 12% per annum.

 

Despite the temporary delays in the orders from the Company's largest customer, year-to-date sales continue to compare favorably with the previous fiscal year. As a result of the improved sales and cost reduction measures implemented and those that are still to be reflected in the financial results, operations are expected to generate a positive cash flow, although there can be no such assurances. The principal payments on the Notes previously discussed will begin to come due in June of fiscal 2012, which could cause the Company to have a potential cash shortfall. Accordingly, the Company will need to secure additional financing or arrange for extensions in order to service these principal payments. Therefore management is currently in discussions with potential lenders for additional financing as well as the holders of the Notes. While management believes it will be successful, there can be no assurance at this time that they will secure the required arrangements. To the extent that the Company is unsuccessful in its plans to obtain new financing arrangements or extend the existing Notes, the Company will be required to take additional measures to conserve liquidity. These measures may include curtailing its business development activities, suspending the execution of the Company's business plan, controlling overhead expenses and extending certain obligations.

 

 

Page 7
 

 

NOTE 2 —SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Use of Estimates

 

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of net sales and expenses during the reporting period. Actual results could differ from those estimates. These estimates and assumptions include valuing equity securities in financing transactions and in share based payment arrangements, accounts receivable reserves, inventory reserves, deferred taxes and related valuation allowances, and estimating the fair values of long lived assets to assess whether impairment charges may be necessary. Certain of the Company’s estimates, including accounts receivable and inventory reserves and the carrying amounts of intangible assets could be affected by external conditions including those unique to the Company’s industry and general economic conditions. It is reasonably possible that these external factors could have an effect on the Company’s estimates that could cause actual results to differ from the Company’s estimates. The Company re-evaluates all of its accounting estimates at least quarterly based on these conditions and record adjustments, when necessary.

 

Reclassifications

 

Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation. These reclassifications had no impact on previously report net income (loss).

 

Concentrations of Credit Risk

 

For the three months ended March 31, 2012 and 2011, respectively the Company’s largest customer accounted for approximately 78% and 73% of total sales. For the six months ended March 31, 2012 and 2011, respectively the Company’s largest customer accounted for approximately 82% and 72% of total sales. This customer had an accounts receivable balance of $1,738 and $3,541, respectively as of March 31, 2012 and 2011. Although the Company expects to have a high degree of customer concentration, its customer engagements are typically covered by multi-year contracts or master service agreements under which we have been operating for a number of years. In addition, this customer is comprised of multiple semi-autonomous operating units covered by a master services agreement which the Company believes mitigates potential risk. Also, current economic conditions could harm the liquidity of and/or financial position of the Company’s customers or suppliers, which could in turn cause such parties to fail to meet their contractual or other obligations to the Company.

 

The Company maintains deposits in financial institutions which are insured by the Federal Deposit Insurance Corporation (“FDIC”). At various times, the Company has deposits in these financial institutions in excess of the amount insurance by the FDIC.

 

Accounts Receivable

 

Accounts receivable of $4,346 and $5,117 as of March 31, 2012 and September 30, 2011, respectively include customer billings on invoices issued after the service is rendered or the sale earned. Credit is extended based on an evaluation of customer’s financial condition and advance payment is required for some of the Company’s services.

 

The Company establishes an allowance for doubtful accounts based on the Company’s best estimate of the amount of potential credit losses based on specific customer information and historical experience. Changes in economic conditions might result in changes to the estimated allowance. The allowance for doubtful accounts amounted to $1,361 and $1,365 as of March 31, 2012 and September 30, 2011, respectively.

 

Inventory

 

Inventory consists of parts and system components of $65 and $70 as of March 31, 2012 and September 30, 2011, respectively, and is stated at the lower of cost (first-in, first-out method) or market. In the case of slow moving items, the Company calculates a reserve for obsolescence to reflect a reduced marketability for the items. As of March 31, 2012 and September 30, 2011, the inventory was fully reserved.

 

Page 8
 

 

Income Taxes

 

Deferred tax liabilities represent the difference between the financial reporting and income tax bases of tax deductible goodwill, which is an asset with an indefinite life and therefore cannot be used to offset net deferred tax assets for purposes of establishing a valuation allowance.

 

Net Loss Per Share

 

Basic net loss per share is computed by dividing net income or loss per share available to common stockholders by the weighted average shares of common stock outstanding for the periods presented. Diluted net income per share reflects the potential dilution that could occur if securities or other instruments to issue common stock were exercised or converted into common stock. Potentially dilutive securities, consisting of options and warrants, are excluded from the calculation of diluted per share data when they have an anti-dilutive effect or their per share exercise price is greater than the average market price of common stock during the periods presented. The computation of net income (loss) available to common stockholders per share for the three and six months ended March 31, 2012 and 2011, respectively, excludes potentially dilutive securities because their inclusion could be anti-dilutive.

 

Shares of common stock issuable upon conversion or exercise of potentially dilutive securities as of March 31, 2012 and 2011 are as follows:

 

   2012       2011 
           Total               Total 
   Stock   Common   Common       Stock   Common   Common 
   Options and   Stock   Stock       Options and   Stock   Stock 
   Warrants   Equivalents   Equivalents       Warrants   Equivalents   Equivalents 
Series A Convertible Preferred Stock with Warrants   20,131    40,263    60,394    -    20,131    40,263    60,394 
Series A-1 Convertible Preferred Stock with Warrants   207,260    414,518    621,778    -    207,260    414,518    621,778 
Series B Convertible Preferred Stock with Warrants   350,000    875,000    1,225,000    -    350,000    875,000    1,225,000 
Series C Convertible Preferred Stock with Warrants   628,333    1,256,666    1,884,999    -    175,000    350,000    525,000 
Common Stock Offering Warrants   2,807,322    -    2,807,322    -    2,807,322    -    2,807,322 
Placement Agent Warrants   2,973,052    -    2,973,052    -    2,847,497    -    2,847,497 
Affiliate Warrants   55,583    -    55,583    -    55,583    -    55,583 
Bridge Financing   285,500    166,667    452,167    -    285,500    166,667    452,167 
Convertible Notes Payable Warrants   50,000    -    50,000    -    50,000    -    50,000 
Senior Secured Notes Payable Warrants   449,999    -    449,999    -    449,999    -    449,999 
Compensatory Warrants   300,000    -    300,000    -    300,000    -    300,000 
Bonding Warrants   33,120    -    33,120    -    33,120    -    33,120 
Equity Financing Arrangements Warrants   881,662    -    881,662    -    836,662    -    836,662 
Consulting Warrants   2,500,000         2,500,000    -    2,500,000         2,500,000 
Employee Stock Options   5,669,263    -    5,669,263    -    3,952,414    -    3,952,414 
Non-Employee Stock Options   275,000    -    275,000    -    250,000    -    250,000 
    17,486,225    2,753,115    20,239,340         15,120,488    1,846,448    16,966,936 

 

Recently Adopted Accounting Pronouncements   

 

In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (“ASU”) No.2011-08, “Intangibles – Goodwill and Other (Topic 350): Testing for Goodwill Impairment” which 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 Topic 350. The amendments in this update are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company has elected early adoption with no significant impact on the Company’s consolidated financial statements.

 

In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220)”. The amendments in this Update supersede certain pending paragraphs in Accounting Standards Update 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, to effectively defer only those changes in Update 2011—5 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. For public entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company does not expect this update to have a significant impact on the Company’s consolidated financial statements.

 

In June 2011, the FASB issued ASU 2011-05 Comprehensive Income (Topic 220): Presentation of Comprehensive Income. Under this ASU, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments in this ASU should be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company does not expect this update to have a significant impact on the Company’s consolidated financial statements.

 

Page 9
 

 

NOTE 3 —ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

Accrued expenses and other current liabilities consist of the following:

 

   As of   As of 
   March 31,   September 30, 
   2012   2011 
Service delivery  $1,052   $568 
Compensation related   359    334 
Customer Deposits   136    88 
Dividends   320    247 
Interest   49    39 
Other   410    415 
           
   $2,326   $1,691 

 

NOTE 4 —NOTES PAYABLE AND LINE OF CREDIT – RELATED PARTY

 

Notes Payable

 

On March 28, 2012 the Company issued a 90 day promissory note in the amount of $300 bearing interest at 12% per annum.

 

On October 6, 2011, the Company initiated a private placement (the “Placement”) of up to $4,500 of 12 month Senior Secured Notes (“Notes”) bearing interest at 13%APR due on various dates through November 30, 2012. Net proceeds were used to repay and replace an existing Senior Secured Bank Note totaling approximately $3,000 and for additional working capital. The Placement expired on March 1, 2012. The notes are secured by all business assets of the Company, as defined. As of March 31, 2012, the Company has issued $4,196 of notes. The Company incurred financing fees of $679 which have been recognized as part of Prepaid Expenses and Other Current Assets and are being amortized ratably over the life of the debt.

 

Line of Credit – Related Party

 

On August 17, 2010, the Company entered into a long term line of credit facility, with an initial term of up to 18 months, with one of its directors for $4,000. The facility had an annual interest rate of 7.73% on any outstanding balance Additionally, 15,000 warrants, with a five year term at $1.00 per share, per month will be paid for each month the facility is outstanding. On August 12, 2011, the Company modified this agreement, extending the term another 24 months, and reducing the credit facility to $2,000, with an annual interest rate of 7.75% on any outstanding balance.  On October 26, 2011, the Company terminated the line of credit facility.

 

NOTE 5 —RELATED PARTY TRANSACTIONS

 

The Company has obtained insurance through an agency owned by one of its founding stockholders/directors. Insurance expense of $58 and $52 was paid to the agency for the three months ended March 31, 2012 and 2011, respectively. Insurance expense of $83 was paid to the agency for the both six month periods ended March 31, 2012 and 2011.

 

NOTE 6 —COMMITMENTS AND CONTINGENCIES

 

Litigation

 

During the year ended September 30, 2011, Beacon was named a party in a lawsuit filed in Swiss court, seeking approximately $232 of unpaid liabilities incurred in connection with the discontinued Datacenter Contractors AG (“DC”, formerly “Beacon Solutions AG”) subsidiary.  Although the outcome of this matter cannot be predicted at this time, a motion to dismiss was filed in commercial court and the Company’s counsel has advised that its basis for procedural arguments is strong. As such no provision has been made as of March 31, 2012 related to this action, as the Company believes that the ultimate disposition of this matter will not have a material adverse effect on the Company’s financial position or results of operations, but there are no assurances that the Company will prevail.

 

On March 21, 2012, the Company received a demand letter seeking payment for an alleged liability incurred in connection with DC. The Company is currently analyzing this assertion with the assistance of counsel. Should this matter proceed further, the Company intends to vigorously defend itself in this action.

 

Page 10
 

 

Engagement for Advisory Services

 

On January 1, 2009, we entered into a three year advisory agreement with a stockholder, whereby the party will provide corporate finance and business strategy advisory services pertaining to Beacon’s business affairs in the areas of business combinations, financing, etc. This agreement was subsequently extended to a total of five years in April 2011. Additionally during the six months ended March 31, 2012 the Company entered into additional agreements with the same stockholder for investor relations strategy services to be performed over the next fiscal year. The Company recorded $73 and $9 of professional fees expense under these agreements for the three months ended March 31, 2012 and 2011, respectively; and $113 and $19 for the six months ended March 31, 2012 and 2011 respectively.

 

Employment Agreement

 

On October 1, 2011, the Company entered into an employment agreement with the Principal Financial Officer detailing total compensation and including a provision for a payout equal to six month’s pay, at the then current salary, in the event a change of control occurs. Additionally, the agreement provides a grant of options to purchase 25,000 shares of common stock, with a fair value of $6, at an exercise price of $1.00 per share granted on October 1, 2011 and vesting in equal amounts over a three year period on the anniversary of the grant.

 

Operating Leases

 

The Company has entered into operating leases for office facilities in Louisville, KY, Columbus, OH, Cincinnati, OH, and Prague, Czech Republic. Rent expense for the three months ended March 31, 2012 and 2011, respectively amounted to $71 and $87. For the six months ended March 31, 2012 and 2011, rent expense was $128 and $137, respectively. A summary of the minimum lease payments due on these operating leases, exclusive of the Company’s share of operating expenses and other costs, is as follows:

 

For the Year ended
September 30,
     
2012 (remaining)  $133 
2013   240 
2014   240 
2015   223 
2016   122 
      
   $958 

 

NOTE 7 —STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

On October 14, 2011 Beacon completed a private placement of 107 units (the "Series C-3 Units"), at a purchase price of $2 per Series C-3 Unit. Each Series C-3 Unit is comprised of (i) one (1) share of $1.5 Stated Value Series C-3 Convertible Preferred Stock (with each share having 125% nonparticipating liquidation preference, bearing cumulative dividends at a rate of 6% per annum payable quarterly in cash or additional Preferred Stock at the company’s option (but subordinate to the rights of the previously issued series of preferred stock) and convertible at the holder’s discretion into 3,333 shares of the Company’s Common Stock, at a conversion price of $0.45, and (ii) a five (5) year warrant to purchase 1,667 shares of its Common Stock (each, an "Investor Warrant") at a purchase price of $0.45 per share (collectively the "Series C-3 Offering"). Total proceeds from the placement were $160 and investors received an aggregate of 178,333 warrants.

 

For services performed in connection with Series C-3 private placements, Beacon issued 35,555 five year placement agent warrants with an exercise price of $0.45. Using the Black Scholes pricing model, the Company determined the fair value of the warrants to be $5.

 

Page 11
 

 

The Company evaluated the conversion options embedded in the preferred stock securities to determine (in accordance with ASC 480 and ASC 815) whether they should be bifurcated from their host instruments and accounted for as separate derivative financial instruments. The Company determined the risks and rewards of the common shares underlying the conversion feature are clearly and closely related to those of the host instrument. Accordingly, the conversion features are being accounted for as embedded conversion options.

 

 The Company applies the classification and measurement principles enumerated in ASC 480 and ASC 815 with respect to accounting for its issuances of the preferred stock. The Company is required, under Nevada law, to obtain the approval of its Board of Directors in order to effectuate a merger, consolidation or similar event resulting in a more than 50% change in control or a sale of all or substantially all of its assets.

 

The Company evaluates convertible preferred stock at each reporting date for appropriate balance sheet classification.

 

Preferred Stock Dividends

 

Each share of preferred stock has voting rights equal to the equivalent number of common shares into which it is convertible. The holders of the Series A and Series A-1 are entitled to receive contractual cumulative dividends in preference to any dividend on the common stock at the rate of 10% per annum on the initial investment amount commencing on the date of issue. The holders of the Series B, C-1, C-2 and C-3 are entitled to receive contractual cumulative dividends in preference to any dividend on the common stock (but subject to the rights of the previously issued series of preferred stock) at the rate of 6% per annum on the initial investment amount commencing on the date of issue. Such dividends are payable on January 1, April 1, July 1 and October 1 of each year. Dividends accrued but unpaid as March 31, 2012, are $49, $86, $144, $32, $7 and $2 for Series A, A-1, B, C-1, C-2 and C-3 respectively.

 

Stock Options and Other Equity Compensation Plans

 

During the three months ended December 31, 2011, the Company’s Board of Directors authorized the grant of employee stock options to purchase an aggregate of 1,210,000 shares of common stock.  The options have ten year terms with vesting periods ranging from 1 to 3 years.  The Company calculated the $282 fair value of the options using the Black-Scholes option pricing model with the assumptions shown below.

 

During the three months ended March 31, 2012, the Company’s Board of Directors authorized the grant of employee stock options to purchase an aggregate of 1,628,750 shares of common stock.  The options have ten year terms with vesting periods ranging from 1 to 3 years.  The Company calculated the $380 fair value of the options using the Black-Scholes option pricing model with the assumptions shown below in the following table. Certain of the Company's options contain performance conditions. The fair value of these options has been measured but not recorded since determined to not be probable.

 

   For the Three   For the Six 
   Months Ended   Months Ended 
   March 31,   March 31, 
   2012   2012 
Stock Price  $0.29 - $0.31   $0.25 - $0.31 
Expected Life (range)   6.0 - 6.50    5.50 - 6.50 
Volatility   165% - 166%   165% - 167%
Risk-free interest rate   1.06%   1.06%
Dividend Yield   0%   0%
Fair value of options  $0.23   $0.23 

 

The Company recognized $185 and $190 of non-cash share-based employee compensation expenses as follows for the three months ended March 31, 2012 and 2011, respectively. For the six months ended March 31, 2012 and 2011, non-cash share based employee compensation expense was $368 and $369, respectively.

 

A summary of the status of the Company’s stock option plan and the changes during the six months ended March 31, 2012, is presented in the table below:

 

Page 12
 

 

           Weighted     
           Average     
       Weighted   Remaining   Aggregate 
   Number   Average   Contractual   Intrinsic 
   Of Options   Exercise Price   Life   Value 
                 
Options Outstanding at October 1, 2011   3,684,696   $1.42           
Granted   2,863,750    1.00           
Forfeited   (604,183)   (1.12)          
Options Outstanding at March 31, 2012   5,944,263    1.30    8.57   $- 
                     
Options Exercisable at March 31, 2012   1,953,505   $1.22    7.49   $- 

 

As of March 31, 2012, there was $609 in unamortized share-based compensation cost. This cost is expected to be recognized over the remaining weighted average vesting period of approximately 6 years.

 

NOTE 8 — Segment Reporting

 

 In accordance with ASC 280 “Segment Reporting,” the Company’s operating segments are those components of its business for which separate and discrete financial information is available and is used by the Company’s chief operating decision makers, or decision-making group, in making decisions on how the Company allocates resources and assesses performance.

 

In accordance with ASC 280, the Company’s operating segments are divided into Professional Services, Project Services and Other and are further divided by North American and International units. Previously, the Company reported segments as North America and Europe but as the Company has grown and begun to manage operations more discretely, additional segment data is utilized to manage the business.

 

Professional Services represents design, engineering, project management and other services which typically deliver higher gross margins. Project Services represents the Company’s ITS construction management and contracted services operations. These engagements tend to be shorter in duration with lower gross margins. The remaining Other segment represents corporate, administrative, sales and other shared functions that are essential for the Company’s operations but do not directly facilitate the delivery of sales.

 

The accounting policies of the segments are the same as those described in the “Summary of Significant Accounting Policies.” Segment data includes net sales, operating profitability, and total assets. Assets are not specifically used or identifiable with each operating segment so are included in the Other unit for both the North American and International segments. 

 

For the three months ended March 31, 2012 the Company’s segment data is as follows:

 

Page 13
 

 

North America  Professional
Services
   Project Services   Other   Total 
Net sales  $552   $1,498   $-   $2,050 
Income (loss) from operations   92    217    (1,346)   (1,037)
Depreciation and amortization   -    -    101    101 
Net income (loss)   92    217    (1,779)   (1,470)
                     
Capital expenditures   -    -    30    30 

 

International   Professional
Services
    Project Services    Other    Total 
                     
Net sales  $576   $691   $-   $1,267 
Income (loss) from operations   445    120    (761)   (196)
Depreciation and amortization   -    -    10    10 
Net income (loss)   445    120    (619)   (54)
                   - 
Capital expenditures   -    -    -    - 

 

For the three months ended March 31, 2011 the Company's segment data is as follows:

 

North America  Professional Services   Project Services   Other   Total 
Net sales  $1,089   $1,378   $-   $2,467 
Income (loss) from operations   206    (455)   (1,556)   (1,085)
Depreciation and amortization   -    -    116    116 
Net income (loss)   206    (455)   (1,927)   (2,176)
Capital expenditures   -    -    60    60 

 

International  Professional Services   Project Services   Other   Total 
Net sales  $1,735   $801   $-   $2,536 
Income (loss) from operations   698    35    (371)   362 
Depreciation and amortization   -    -    10    10 
Net income (loss)   698    35    (391)   (342)
Capital expenditures   -    -    -    - 

 

Page 14
 

 

For the six months ended March 31, 2012 the Company’s segment data is as follows:

 

North America  Professional
Services
   Project Services   Other   Total 
Net sales  $1,229   $4,378   $(97)  $5,510 
Income (loss) from operations   337    1,030    (2,502)   (1,135)
Depreciation and amortization   -    -    203    203 
Net income (loss)   337    1,030    (3,314)   (1,947)
    -    -    -      
Capital expenditures   -    -    102    102 

 

International   Professional
Services
    Project Services    Other    Total 
Net sales  $2,431   $1,378   $-   $3,809 
Income (loss) from operations   1,298    229    (1,554)   (27)
Depreciation and amortization   -    -    20    20 
Net income (loss)   1,298    229    (1,671)   (144)
                   - 
Capital expenditures   -    -    13    13 

 

For the six months ended March 31, 2011 the Company's segment data is as follows:

 

North America  Professional Services   Project Services   Other   Total 
Net sales  $1,954   $3,223   $-   $5,177 
Income (loss) from operations   523    (321)   (2,691)   (2,489)
Depreciation and amortization   -    -    238    238 
Net income (loss)   523    (321)   (3,261)   (3,059)
Capital expenditures   -    -    95    95 

 

International  Professional Services   Project Services   Other   Total 
Net sales  $2,214   $1,586   $-   $3,800 
Income (loss) from operations   762    103    (1,207)   342 
Depreciation and amortization   -    -    20    20 
Net income (loss)   762    103    (1,275)   (410)
Capital expenditures   -    -    -    - 

 

NOTE 9 —SUBSEQUENT EVENTS

 

Management has evaluated all subsequent events or transactions occurring through the date the financial statements were issued.

 

Page 15
 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Beacon Enterprise Solutions Group, Inc. and subsidiaries (collectively the “Company”) is a provider of international telecommunications and technology systems infrastructure services, encompassing a comprehensive suite of consulting, design, installation, and infrastructure management offerings. Beacon’s portfolio of infrastructure services spans all professional and construction requirements for design, build and management of telecommunications, network and technology systems infrastructure. Professional services offered include consulting, engineering, program management, project management, construction services and infrastructure management services. Beacon offers these services under a comprehensive contract vehicle or unbundled to some global and regional clients. Beacon also offers special services in support of qualified projects in the smart buildings/campuses/cities and data center verticals. In this report, the terms “Company,” “Beacon,” “we,” “us” or “our” mean Beacon Enterprise Solutions Group, Inc. and all subsidiaries included in our consolidated financial statements.

 

Cautionary Statements — Forward Outlook and Risks

 

Certain statements contained in this quarterly report on Form 10-Q, including, without limitation, statements containing the words “believes,” “anticipates,” “intends,” “expects,” “assumes,” “trends” and similar expressions, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon the Company’s current plans, expectations and projections about future events. However, such statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These factors include, among others, the following:

 

general economic and business conditions that may affect demand for our services and products and the ability of our customers to pay for such services and products;

 

effects of competition in the markets in which the Company operates;

 

liability and other claims asserted against the Company;

 

ability to attract and retain qualified personnel;

 

availability and terms of capital;

 

loss of significant contracts or reduction in revenue associated with major customers;

 

business disruption due to natural disasters or terrorist acts;

 

changes in, or failure to comply with, existing governmental regulations; and

 

For a detailed discussion of these and other factors that could cause the Company’s actual results to differ materially from the results contemplated by the forward-looking statements, please refer to Item 1A “Risk Factors” in the Company’s Current Report on Form 10-K filed on December 12, 2011. The reader is encouraged to review the risk factors set forth therein. The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Except as required by law, the Company assumes no responsibility for updating forward-looking statements to reflect unforeseen or other events after the date of this report.

 

Organic Growth Strategy

 

With respect to our plans to increase net sales organically, we have identified, and are currently pursuing, several significant strategies including:

 

·Strengthening existing customer relationships to ensure we are their partner for all design, implementation and management of ITS infrastructure solutions.
·Add additional major account sales resources to facilitate the introduction of Fortune 1000, Global 2000 and qualifying multi-national firms. We refer to these current and future clients as Fortune 1000.

 

Page 16
 

 

·Continued expansion of the a la carte services offered to existing major national, multi-national and global clients who have not already signed an infrastructure managed services agreement.

 

Results of Operations

 

For the three months ended March 31, 2012 and 2011

 

 The following tables set forth items in the Company’s unaudited condensed financial statements by reporting segment:

 

North American Operations

 

   2012 
   Professional
Services
       Project
Services
       Other   Total North
America
     
Net Sales  $552    100%  $1,498    100%       $2,050    100%
Cost of materials sold   -         41         -    41      
Cost of services   309    56%   1,061    71%        1,370    67%
Gross profit   243    44%   396    26%   -    639    31%
Operating expense                                   
Salaries and benefits   92    17%   132    9%   1,024    1,248    61%
Selling, general and administrative   59    11%   47    3%   754    860    42%
Intercompany services   -         -         (432)   (432)     
Income (loss) from operations  $92    17%  $217    14%  $(1,346)  $(1,037)   -51%

 

   2011 
   Professional
Services
       Project
Services
       Other   Total North
America
     
Net Sales  $1,089    100%  $1,378    100%  $-   $2,467    100%
Cost of materials sold   5    0%   330    24%   -    335    14%
Cost of services   634    58%   1,028    75%   -    1,662    67%
Gross profit   450    41%   20    1%   -    470    19%
Operating expense                                   
Salaries and benefits   161    15%   355    26%   1,236    1,752    71%
Selling, general and administrative   83    8%   120    9%   546    749    30%
Intercompany services   -         -         (226)   (226)     
Income (loss) from operations  $206    19%  $(455)   -33%  $(1,556)  $(1,805)   -73%

 

Overall Net sales from our North American operations for the three months ended March 31, 2012 decreased by 17% from the same period a year ago due to several design/build projects being delayed due to internal changes within our largest customer. This decrease was offset by an 8% increase in Project Services revenue. We expect the delayed projects to be resumed later in this fiscal year.

 

   2012   2011 
   Professional
Services
   Project
Services
   Other   Total North
America
   Professional
Services
   Project
Services
   Other   Total North
America
 
                                 
Cost of services                                        
Direct labor  $152   $150   $-   $302   $197   $198   $-   $395 
Subcontractor   147    911    -    1,058    237    818    -    1,055 
Project expenses   10    -    -    10    200    12    -    212 
Intercompany Services   -    -    -    -    -    -    -    - 
Total cost of services  $309   $1,061   $-   $1,370   $634   $1,028   $-   $1,662 

 

Page 17
 

 

Cost of services sold decreased by 18% for the three months ended March 31, 2012 compared to the same period in 2011 as a result of the sales decrease. The continued shift in our business mod el whereby we utilize subcontractors to perform a larger portion of our service delivery, as opposed to internal resources, reduced the material costs compared to last year and resulted in overall gross margin improvement in our Project Services segment.

 

Salaries and benefits decreased over prior year reflecting a right-sizing of our administrative operations.

 

   2012   2011 
   Professional
Services
   Project
Services
   Other   Total North
America
   Professional
Services
   Project
Services
   Other   Total North
America
 
Selling, general and administrative                                        
Travel  $29   $14   $98   $141   $5   $9   $80   $94 
Depreciation & Amortization   -    -    100    100    -    -    (13)   (13)
Office related   23    10    87    120    31    26    49    106 
Professional fees   -    -    101    101    -    -    94    94 
Outside services   -    -    78    78    2    -    27    29 
Other administrative services   7    23    290    320    45    85    309    439 
Total Selling, general & administrative  $59   $47   $754   $860   $83   $120   $546   $749 

 

Selling, general and administrative (SG&A) expenses are primarily recorded in the Other segment and represent costs from corporate, customer service, sales and other shared services areas. For the three months ended March 31, 2012 SG&A expenses increased by 15% due to increased depreciation expenses and travel e xpenses incurred to visit existing customers and develop new accounts.

 

International Operations

 

   2012 
   Professional
Services
       Project
Services
       Other   Total
International
     
Net Sales  $576    100%  $691    100%  $-   $1,267    100%
Cost of materials sold   -    0%   -    0%   -    -    0%
Cost of services   93    16%   571    83%   -    664    52%
Gross profit   483    84%   120    17%   -    603    48%
Operating expense                                   
Salaries and benefits   15    3%   -    0%   170    185    15%
Selling, general and administrative   23    4%   -    0%   159    182    14%
Intercompany services   -         -         432    432      
Income (loss) from operations  $445    77%  $120    17%  $(761)  $(196)   -15%

 

   2011 
   Professional
Services
       Project
Services
       Other   Total
International
     
Net Sales  $1,735    100%  $801    100%  $-   $2,536    100%
Cost of materials sold   15    1%   -    0%   -    15    1%
Cost of services   886    51%   705    88%   -    1,591    63%
Gross profit   834    48%   96    12%   -    930    37%
Operating expense                                   
Salaries and benefits   43    2%   -    0%   68    111    4%
Selling, general and administrative   93    5%   61    8%   77    231    9%
Intercompany services   -         -         226    226      
Income (loss) from operations  $698    40%  $35    4%  $(371)  $362    14%

 

Page 18
 

 

 

Net sales from International operations for the three months ended March 31, 2012 decreased by 50% from the same period a year ago due to several design/build projects being delayed due to internal changes within our largest customer. This decrease was offset by a 16% increase in Project Services revenue. We expect the delayed projects to resume later in this fiscal year.

 

   2012   2011 
   Professional
Services
   Project Services   Other   Total
International
   Professional
Services
   Project Services   Other   Total
International
 
                                 
Cost of services                                        
Direct labor  $63   $-   $-   $63   $46   $-   $-   $46 
Subcontractor   20    567    -    587    814    716    -    1,530 
Project expenses   10    4    -    14    26    (11)   -    15 
Total cost of services  $93   $571   $-   $664   $886   $705   $-   $1,591 

  

Cost of services sold decreased by 58% for the three months ended March 31, 2012 compared to the same period in 2011 as a result of the sales decrease.

 

Increased salaries and benefits for the three months ending March 31, 2012 over 2011 reflect our increased investment in personnel in our International operations.

 

   2012   2011 
   Professional
Services
   Project Services   Other   Total
International
   Professional
Services
   Project Services   Other   Total
International
 
Selling, general & administrative                                        
Travel  $22   $-   $3   $25   $10   $-   $4   $14 
Depreciation & Amortization   -    -    10    10    -    -    2    2 
Office related   1    -    39    40    3    -    52    55 
Professional fees   -    -    7    7    -    -    15    15 
Outside services   -    -    91    91    61    -    4    65 
Other administrative services   -    -    9    9    19    61    -    80 
Total Selling, general & administrative  $23   $-   $159   $182   $93   $61   $77   $231 

  

Selling, general and administrative (SG&A) expenses are primarily recorded in the Other segment and represent costs from corporate and other shared services areas, for the three months ended March 31, 2012 SG&A expenses decreased by 21%, as the infrastructure had been properly established in the same period last fiscal year to position this segment for growth.

 

The Company expects net sales for both segments to trend back to the first quarter levels for the remainder of the fiscal year with gross margins being consistent to those achieved in the three months ended March 31, 2012.

 

Page 19
 

 

For the six months ended March 31, 2012 and 2011

 

 The following tables set forth items in the Company’s unaudited condensed financial statements by reporting segment:

 

North American Operations

 

   2012 
   Professional
Services
       Project
Services
       Other   Total North
America
     
Net Sales  $1,229    100%  $4,378    100%  $(97)  $5,510    100%
Cost of materials sold   -         103         -    103      
Cost of services   627    51%   2,928    67%   (97)   3,458    63%
Gross profit   602    49%   1,347    31%   -    1,949    35%
Operating expense                                   
Salaries and benefits   142    12%   262    6%   2,146    2,550    46%
Selling, general and administrative   123    10%   55    1%   1,307    1,485    27%
Intercompany services   -    0%   -    0%   (951)   (951)   -17%
Income (loss) from operations  $337    27%  $1,030    24%  $(2,502)  $(1,135)   -21%

 

   2011 
   Professional Services       Project Services       Other   Total North
America
     
Net Sales  $1,954    100%  $3,223    100%  $-   $5,177    100%
Cost of materials sold   9    0%   602    19%   -    611    12%
Cost of services   1,054    54%   2,087    65%   -    3,141    61%
Gross profit   891    46%   534    17%   -    1,425    28%
Operating expense                                   
Salaries and benefits   222    11%   636    20%   2,454    3,312    64%
Selling, general and administrative   146    7%   219    7%   1,190    1,555    30%
Intercompany services   -         -         (953)   (953)     
Income (loss) from operations  $523    27%  $(321)   -10%  $(2,691)  $(2,489)   -48%

 

Overall Net sales from our North American operations for the six months ended March 31, 2012 increased by 6% from the same period a year ago. However due to several design/build projects being delayed by internal changes within our largest customer Professional Services revenue decreased by 37% while Project Services continued to strengthen by increasing by 36%.

 

   2012   2011 
   Professional
Services
   Project
Services
   Other   Total North
America
   Professional
Services
   Project
Services
   Other   Total North
America
 
                                 
Cost of services                                        
Direct labor  $257   $300   $-   $557   $402   $462   $-   $864 
Subcontractor   332    2,541    -    2,873    379    1,560    -    1,939 
Project expenses   38    87    -    125    273    65    -    338 
Intercompany Services   -    -    (97)   (97)        -    -    - 
Total cost of services  $627   $2,928   $(97)  $3,458   $1,054   $2,087   $-   $3,141 

 

Cost of services sold increased by 10% for the six months ended March 31, 2012 compared to the same period in 2011 as a result of the continued shift in our business model whereby we utilize subcontractors to perform a larger portion of our service delivery as opposed to internal resources. This change in business model was also the source of the reduction in our cost of materials and direct labor expenses in 2011 compared to the same period in 2011. Additionally, service product mix and optimization of resources/subcontractors enabled the Company to increase gross margins over prior year.

Page 20
 

 

Salaries and benefits decreased over prior year reflecting a right-sizing of our administrative operations.

 

   2012   2011 
   Professional
Services
   Project
Services
   Other   Total North
America
   Professional
Services
   Project
Services
   Other   Total North
America
 
Selling, general and administrative                                        
Travel  $55   $22   $168   $245   $14   $17   $125   $156 
Depreciation & Amortization   -    -    202    202    -    -    109    109 
Office related   46    10    163    219    62    64    93    219 
Professional fees   -    -    155    155    -    -    243    243 
Outside services   -    -    127    127    2    -    37    39 
Other administrative services   22    23    492    537    68    138    583    789 
Total Selling, general & administrative  $123   $55   $1,307   $1,485   $146   $219   $1,190   $1,555 

 

Selling, general and administrative (SG&A) expenses are primarily recorded in the Other segment and represent costs from corporate, customer service, sales and other shared services areas. For the six months ended March 31, 2012 SG&A expenses decreased by 5% as a result of continued management and review of operations and cost structure.

 

International Operations

 

   2012 
   Professional
Services
       Project
Services
       Other   Total
International
     
Net Sales  $2,431    100%  $1,378    100%  $-   $3,809    100%
Cost of materials sold   15    1%   -    0%   -    15    0%
Cost of services   1,043    43%   1,141    83%   -    2,184    57%
Gross profit   1,373    56%   237    17%   -    1,610    42%
Operating expense                                   
Salaries and benefits   46    2%   -    0%   301    347    9%
Selling, general and administrative   29    1%   8    1%   302    339    9%
Intercompany services   -         -         951    951      
Income (loss) from operations  $1,298    53%  $229    17%  $(1,554)  $(27)   -1%

 

   2011 
   Professional
Services
       Project
Services
       Other   Total
International
     
Net Sales  $2,214    100%  $1,586    100%  $-   $3,800    100%
Cost of materials sold   15    1%   -    0%   -    15    0%
Cost of services   1,213    55%   1,422    90%   -    2,635    69%
Gross profit   986    45%   164    10%   -    1,150    30%
Operating expense                                   
Salaries and benefits   114    5%   -    0%   112    226    6%
Selling, general and administrative   110    5%   61    4%   142    313    8%
Intercompany services   -                   953    953      
Income (loss) from operations  $762    34%  $103    6%  $(1,207)  $(342)   -9%

 

Net sales from International operations for the six months ended March 31, 2012 remained flat versus the same period prior year. In spite of project delays we were able to increase presence and increase Professional Service revenue by 10%; these gains were offset by a reduction in Project Services of 13%. We expect sales to trend up for the rest of the fiscal year toward first quarter levels and beyond.

 

Page 21
 

 

   2012   2011 
   Professional
Services
   Project Services   Other   Total
International
   Professional
Services
   Project Services   Other   Total
International
 
                                 
Cost of services                                        
Direct labor  $118   $-   $-   $118   $119   $-   $-   $119 
Subcontractor   892    1,137    -    2,029    998    1,384    -    2,382 
Project expenses   33    4    -    37    96    38    -    134 
Total cost of services  $1,043   $1,141   $-   $2,184   $1,213   $1,422   $-   $2,635 

  

The decrease in cost of services sold primarily reflects the decrease in Project Services sales, which are mainly delivered via our subcontractor business model, thereby decreasing the expense to deliver service. The service product mix, weighted toward Professional Services attributes to increased margins over prior year as this segment typically consists of higher margin services.

 

Increased salaries and benefits for the six months ending March 31, 2012 over 2011 reflect our increased investment in personnel in our International operations.

 

   2012   2011 
   Professional
Services
   Project Services   Other   Total
International
   Professional
Services
   Project Services   Other   Total
International
 
Selling, general & administrative                                        
Travel  $26   $-   $14   $40   $18   $-   $7   $25 
Depreciation & Amortization   -    -    20    20    -    -    7    7 
Office related   1    -    91    92    3    -    77    80 
Professional fees   -    -    32    32    -    -    36    36 
Outside services   -    7    104    111    61    -    8    69 
Other administrative services   2    1    41    44    28    61    7    96 
Total Selling, general & administrative  $29   $8   $302   $339   $110   $61   $142   $313 

 

Selling, general and administrative (SG&A) expenses are primarily recorded in the Other segment and represent costs from corporate and other shared services areas, for the six months ended March 31, 2012 SG&A expenses increased, primarily related to facilities and infrastructure, to reflect expansion and investment in the International operations as the business continues maturating.

 

The Company expects net sales for both segments to trend back to the first quarter levels for the remainder of the fiscal year with gross margins being consistent to those achieved in the three months ended March 31, 2012.

 

Liquidity and Capital Resources

 

For the six months ended March 31, 2012, the Company generated a net loss of $2,091, which included non-cash expenses aggregating $1,207. Cash used in continuing operations amounted to $800 for the six months ended March 31, 2012. The Company’s accumulated deficit amounted to $38,747, with cash and cash equivalents of $893 and a working capital deficit of $3,517.

 

On October 6, 2011, the Company initiated a private placement of up to $4,500 of 12 month Senior Secured Notes (“Notes”). The Notes bear interest at 13% APR. Net proceeds were used to repay and replace previously existing Senior Secured Bank Notes totaling approximately $3,000 and for additional working capital. As of March 31, 2012, the Company has raised net proceeds of $3,529 (gross proceeds of $4,208 less costs of $679). See Note 4.

 

On October 14, 2011, the Company raised $160 in cash proceeds from the sales 107 units of Series C-3 Convertible Preferred Stock. See Note 7.

 

On March 28, 2012 the Company issued a 90 day promissory note in the amount of $300 bearing interest at 12% per annum.

 

Despite the reductions in revenue discussed above, year-to-date sales continue to compare favorably with the previous fiscal year. As a result of the improved sales and cost reduction measures implemented and those that are still to be reflected in the financial results, operations are expected to generate a positive cash flow in the current fiscal year, although there are no assurances it will happen. The principal payments on the Notes previously discussed will begin to come due in June of fiscal 2012 and the Company will need to secure additional financing or arrange for extensions in order to service these principal payments. Therefore management is currently in discussions with potential lenders for additional financing as well as the holders of the Notes. While management believes it will be successful, there can be no assurance at this time that they will secure the required arrangements. To the extent that the Company is unsuccessful in its plans to obtain new financing arrangements or extend the existing Notes, the Company will be required to take additional measures to conserve liquidity. These measures may include curtailing its business development activities, suspending the execution of the Company's business plan, controlling overhead expenses and extending certain obligations.

 

Page 22
 

 

Dividends on Series A and A-1 Preferred Stock are payable quarterly at an annual rate of 10% and Series B, C-1 and C-2 Preferred Stock are payable quarterly at an annual rate of 6% in cash or the issuance of additional shares of Preferred Stock, at our option for Series A, A-1, B and C-2. Series C-1 is payable in cash or additional stock at the holders discretion. If we were to fund dividends accruing during the year ending September 30, 2012 in cash, the total obligation would be $320 based on the number of shares of preferred Stock outstanding as of March 31, 2012.

  

We currently anticipate the cash requirements for capital expenditures, operating lease commitments and working capital will likely be funded with our existing fund sources and cash provided from operating activities. In the aggregate, total capital expenditures are not expected to be significant for the year ended September 30, 2012 and could be curtailed should we experience a shortfall in expected financing.

 

 Off-Balance Sheet Arrangements

 

We have operating lease commitments for real estate used for office and warehouse space.

 

Concentrations of Credit Risk

  

For the three months ended March 31, 2012 and 2011, respectively the Company’s largest customer accounted for approximately 78% and 73% of total sales. For the six months ended March 31, 2012 and 2011, respectively the Company’s largest customer accounted for approximately 82% and 72% of total sales. This customer had an accounts receivable balance of $1,738 and $3,541, respectively as of March 31, 2012 and 2011. Although the Company expects to have a high degree of customer concentration, its customer engagements are typically covered by multi-year contracts or master service agreements under which we have been operating for a number of years. In addition, this customer is comprised of multiple semi-autonomous operating units covered by a master services agreement which the Company believes mitigates potential risk. Also, current economic conditions could harm the liquidity of and/or financial position of the Company’s customers or suppliers, which could in turn cause such parties to fail to meet their contractual or other obligations to the Company.

 

The Company maintains deposits in financial institutions which are insured by the Federal Deposit Insurance Corporation (“FDIC”). At various times, the Company has deposits in these financial institutions in excess of the amount insurance by the FDIC.

 

Employees

 

 Beacon currently employs approximately 78 people in the Columbus, OH, Louisville, KY, Raritan, NJ, Cincinnati, OH and Prague, Czech Republic.

 

Recent Accounting Pronouncements

 

See Note 2 to our condensed consolidated financial statements included in this document.

 

Certain Relationships and Related Party Transactions

 

 The Company has obtained insurance through an agency owned by one of its founding stockholders/directors. Insurance expense of $58 and $52 was paid to the agency for the three months ended March 31, 2012 and 2011, respectively. Insurance expense of $83 was paid to the agency for the both six month periods ended March 31, 2012 and 2011.

 

Filing Status

 

Beacon Enterprise Solutions Group, Inc., a Nevada corporation has in the past filed reports with the SEC and will continue to do so as Beacon. You can read and copy any materials we file with the SEC at its Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission, including us.

 

ITEM 4. CONTROLS AND PROCEDURES

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our filings under the Exchange Act is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC. This information is accumulated and communicated to our executive officers to allow timely decisions regarding required disclosure. As of March 31, 2012, our Chief Executive Officer, who acts in the capacity of principal executive officer and our Vice President Corporate Controller, who acts in the capacity of principal financial officer, have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and the Vice President Corporate Controller have concluded that our disclosure controls and procedures were not effective as of March 31, 2012, based on their evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.

 

Page 23
 

 

DISCLOSURE CONTROLS AND INTERNAL CONTROLS

 

Disclosure controls are designed with the objective of ensuring that such information is accumulated and communicated to our management, including our Chief Executive Officer, President and Chief Operating Officer, Chief Administrative Officer and Vice President, Corporate Controller and Treasurer, as appropriate, to allow timely decisions regarding required disclosure. Internal controls are procedures which are designed with the objective of providing reasonable assurance that our transactions are properly authorized, recorded and reported and our assets are safeguarded against unauthorized or improper use, to permit the preparation of our financial statements in conformity with generally accepted accounting principles, including all applicable SEC regulations.

 

Management of our Company had reported at previous dates of assessment that we identified various deficiencies in our accounting processes and procedures that constitute material weaknesses in internal control over financial reporting and disclosure controls; additionally we have experienced difficulty applying complex accounting principles. During the three and six months ended March 31, 2012, we took certain steps in an effort to correct these material weaknesses, including implementation of a fully integrating operating and reporting system that will allow for more complete segregation of duties but as of March 31, 2012, these weaknesses continue to exist.

 

Although we believe that these steps have enabled us to improve our internal controls, additional time is still required to fully document our systems, implement control procedures and test their operating effectiveness before we can definitively conclude that we have remediated our deficiencies.

 

We believe that our internal control risks are sufficiently mitigated by the fact that our Chief Executive Officer and Vice President, Corporate Controller and Treasurer review and approve substantially all of our major transactions and we have, when needed, hired outside experts to assist us with implementing complex accounting principles. Additionally, we believe the addition of the aforementioned Vice President, Corporate Controller and Treasurer will enable us to continue implementing the proper controls and making the necessary changes until these material weaknesses are remediated.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting during our last fiscal quarter that materially affected or are reasonably likely to materially affect our internal control over financial reporting.

 

Page 24
 

  

PART II: OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We are subject to various legal proceedings in the normal course of business, none of which is required to be disclosed under this Item 1.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

31.1   Certification of Principal Executive Officer, pursuant to Rules 13a-14(a) of the Sarbanes-Oxley Act of 2002.
     
31.2   Certification of Principal Financial Officer, pursuant to Rules 13a-14(a) of the Sarbanes-Oxley Act of 2002.
     
32.1   Certification of Principal Executive Officer, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
     
32.2   Certification of Principal Financial Officer, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
     
101.INS   XBRL Instance Document **
     
101.SCH   XBRL Taxonomy Extension Schema Document **
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document **
     
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document **
     
101.LAB   XBRL Taxonomy Extension Label Linkbase Document **
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document **
     
*   This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934
     
**   Pursuant to applicable securities laws and regulations, the Company is deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and is not subject to liability under any anti-fraud provisions of the federal securities laws as long as the Company has made a good faith attempt to comply with the submission requirements and promptly amends the interactive data files after becoming aware that the interactive data files fails to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability.

 

Page 25
 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

Date: May 1, 2012  Beacon Enterprise Solutions Group, Inc.  
     
  By:   /s/ Bruce Widener    
    Bruce Widener   
   

Chief Executive Officer and Chairman of the Board of Directors

 

and 

 
 
Date: May 1, 2012  By:   /s/ S. Scott Fitzpatrick    
    S. Scott Fitzpatrick   
    Principal Financial Officer   
 
Page 26