EXHIBIT 99.1

TELWORX COMMUNICATIONS, LLC

Consolidated Financial Statements and

Supplementary Information

December 31, 2011 and 2010

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TELWORX COMMUNICATIONS, LLC

Table of Contents

 

		Page
Independent Auditors’ Report			1
Consolidated Financial Statements:
Consolidated Balance Sheets			2
Consolidated Statements of Income			3
Consolidated Statements of Members’ Equity			5
Consolidated Statements of Cash Flows			6
Notes to Consolidated Financial Statements			7
Supplementary Information:
Analysis of Cost of Goods Sold			24
EBITDA Analysis by Entity			24
Quarterly Statements of Income			25

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Independent Auditors’ Report

To the Members

TelWorx Communications, LLC

Lexington, North Carolina

We have audited the accompanying consolidated balance sheets of TelWorx Communications, LLC, as of December 31, 2011 and 2010, and the related consolidated statements of income, members’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. 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 statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of TelWorx Communications, LLC, as of December 31, 2011 and 2010, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

Our audit was conducted for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The supplementary information attached, is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements, and in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

/s/Rives & Associates, LLP

June 26, 2012

 

1

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TELWORX COMMUNICATIONS, LLC

Consolidated Balance Sheets

December 31, 2011 and 2010

 

		2011				2010
ASSETS
Current assets:
Cash		$	468,117			$	513,397
Accounts receivable			2,026,934				2,589,237
Employee loan			700				3,000
Marketable securities			20,000				—
Inventory			2,038,249				1,096,098
Total current assets			4,554,000				4,201,732
Net property and equipment:			2,744,423				2,898,790
Other assets:
Research and development			76,051				5,458
Intangible assets (net of accumulated amortization of $1,428,683 and $1,423,063)			218,229				223,849
Total other assets			294,280				229,307
Total assets		$	7,592,703			$	7,329,829
LIABILITIES AND MEMBERS’ EQUITY
Current liabilities:
Current maturities on capital leases		$	14,215			$	9,816
Current maturities on long-term debt			220,595				207,506
Lines of credit			1,477,892				1,381,260
Lease payable			—				3,144
Accounts payable			1,880,429				1,851,729
Accrued interest			6,967				8,009
Accrued liabilities			208,811				84,699
Total current liabilities			3,808,909				3,546,163
Long-term liabilities:
Capital leases, less current maturities			42,873				38,684
Long-term debt, less current maturities			2,318,054				2,538,649
Total long-term liabilities			2,360,927				2,577,333
Total liabilities			6,169,836				6,123,496
Members’ equity			1,422,867				1,206,333
Total liabilities and members’ equity		$	7,592,703			$	7,329,829

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

 

2

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TELWORX COMMUNICATIONS, LLC

Consolidated Statements of Income

For the Years Ended December 31, 2011 and 2010

 

		2011				2010
Revenue		$	18,117,971			$	18,134,468
Cost of goods sold			13,228,675				14,624,744
Gross profit			4,889,296				3,509,724
Sales and marketing expenses:
Wages			1,002,260				822,479
Commissions			471,829				307,920
Taxes and licenses			174,576				130,729
Telephone			52,962				30,972
Meals and entertainment			25,324				17,775
Travel			154,506				128,401
Retirement			46,573				23,060
Depreciation			47,174				46,726
Insurance			109,402				103,338
Office			8,743				6,829
Rent			21,285				43,139
Repairs and maintenance			4,443				5,858
Utilities			8,898				13,349
Supplies			5,827				9,365
Trade shows			90,941				13,532
Advertising			176,589				140,395
Other			5,715				4,930
Total sales and marketing expenses			2,407,047				1,848,797

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

 

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TELWORX COMMUNICATIONS, LLC

Consolidated Statements of Income (Continued)

For the Years Ended December 31, 2011 and 2010

 

		2011				2010
General and administrative expenses:
Wages		$	278,918			$	295,614
Commissions			9,871				7,800
Taxes and licenses			48,583				48,134
Telephone			25,801				16,554
Meals and entertainment			15,675				11,013
Travel			55,657				47,853
Retirement			11,443				8,186
Depreciation			36,533				32,909
Insurance			96,180				109,588
Office			6,912				3,074
Rent			—				1,408
Repairs and maintenance			4,099				3,996
Utilities			1,716				5,518
Supplies			3,290				5,110
Professional			62,210				44,423
Bank fees			68,330				37,913
Other			5,703				4,675
Total general and administrative expenses			730,921				683,768
Total operating expenses			3,137,968				2,532,565
Operating profit			1,751,328				977,159
Other income (expense):
Contributions			(12,655	)			(27,010	)
Amortization			(5,620	)			(263,377	)
Stock option amortization			(19,700	)			(19,700	)
Loss on disposition of fixed assets			—				(221,495	)
One time relocation			(82,000	)			—
Professional fees—legal			—				(270,610	)
Rental income			4,190				21,605
Interest income			1,940				1,975
Other income			14,773				17,862
Interest expense			(202,029	)			(208,308	)
Total other income (expenses)			(301,101	)			(969,058	)
Net income		$	1,450,227			$	8,101

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

 

4

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TELWORX COMMUNICATIONS, LLC

Consolidated Statements of Members’ Equity

For the Years Ended December 31, 2011 and 2010

 

		2011				2010
Members’ equity, beginning of year		$	1,206,333			$	973,748
Net income for the year			1,450,227				8,101
Deferred compensation from options			19,700				19,700
Contributions			—				549,507
Distributions			(1,253,393	)			(344,723	)
Members’ equity, end of year		$	1,422,867			$	1,206,333

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

 

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TELWORX COMMUNICATIONS, LLC

Consolidated Statements of Cash Flows

Years Ended December 31, 2011 and 2010

 

		2011				2010
Cash flows from operating activities:
Net income		$	1,450,227			$	8,101
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			237,923				220,388
Amortization			5,620				263,377
Stock option amortization			19,700				19,700
Cash flows from change in:
Accounts receivable			562,303				(398,208	)
Prepaid expenses			—				12,920
Employee loan			2,300				—
Inventory			(942,151	)			214,722
Research and development			(70,593	)			(1,658	)
Marketable securities			(20,000	)			—
Lease payable			(3,144	)			(12,473	)
Accounts payable			28,700				231,139
Accrued interest			(1,042	)			(2,997	)
Accrued liabilities			124,112				9,460
Net cash provided by operating activities			1,393,955				564,471
Cash flows from investing activities:
Net purchase of property and equipment			(83,556	)			(666,291	)
Net cash used by investing activities			(83,556	)			(666,291	)
Cash flows from financing activities:
Payments on capital leases			8,588				48,500
Payments on bank loans			(207,506	)			(65,455	)
Payments on line of credit			96,632				50,333
Contributions by members			—				549,507
Distributions to members			(1,253,393	)			(344,723	)
Net cash used by financing activities			(1,355,679	)			238,162
Net increase (decrease) in cash			(45,280	)			136,342
Cash, beginning of year			513,397				377,055
Cash, end of year		$	468,117			$	513,397
Supplemental disclosures:
Cash paid for income taxes		$	—			$	—
Cash paid for interest		$	203,071			$	205,311

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

 

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TELWORX COMMUNICATIONS, LLC

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2011 and 2010

Note 1—NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

TelWorx Communications, LLC, (the Company), which is headquartered in Lexington, North Carolina, is a certified purchaser and reseller of new telecom, surplus telecom and refurbished telecom equipment for the telecommunications market. Also, the Company is a leader in wire line services and wireless applications that support everyone from telecom providers, to telecom resellers and users of major voice, video and data communication technologies. They support entities ranging from telecom providers and resellers to government and all users of major voice, video and data communication technologies. The Company has employees and sales nationwide.

The accounting policies and principles which significantly affect the determination of financial position and results of operations are summarized below:

Basis of Consolidation:

These consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated. The condensed consolidated financial statements include the accounts of TelWorx Communications, LLC, TowerWorx LLC, TowerWorx International, Inc. and Scronce Real Estate, LLC. Information on the consolidated entities is as follows:

TowerWorx, LLC:

TowerWorx, LLC, which is headquartered in Pryor, Oklahoma manufactures mobile cell phone towers with global operations across North America, India, China, and Africa. TowerWorx, LLC organized as a limited liability company on August 3, 2007. TowerWorx, LLC has a highly qualified leadership team with over 60 years collective experience in manufacturing, telecom, defense, engineering, and mobile tower industries.

The manufacturing facility is located near Tulsa, OK. The facility has access to major transportation facilities via truck or train to ensure a timely delivery. The facility is large enough to enable TowerWorx, LLC to scale and meet large quantity orders and support inventory for quick turnaround delivery.

TowerWorx International, Inc.:

In December of 2008 the members of TowerWorx, LLC formed an Interest Charge Domestic to International Sales Company (IC-DISC) called TowerWorx International, Inc. TowerWorx International, Inc. receives commissions on TowerWorx, LLC’s sales to foreign purchasers. The purpose of forming the IC-DISC is to take advantage of tax incentives for export sales. All significant inter-company accounts and transactions have been eliminated.

Scronce Real Estate, LLC:

Scronce Real Estate, LLC is owned solely by the wife of the of 99% owner TelWorx Communications, LLC. Scronce Real Estate, LLC rents to TelWorx Communications, LLC the primary office and warehouse facility in Lexington ,North Carolina.

 

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TELWORX COMMUNICATIONS, LLC

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2011 and 2010

 

Note 1—NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Foreign Operations:

The Company is exposed to foreign currency fluctuations due to its foreign operations and because products are sold internationally. The functional currency for the Company’s foreign operations is predominantly the applicable local currency. Accounts of foreign operations are translated into U.S. dollars using the year-end exchange rate for assets and liabilities and average monthly rates for revenue and expense accounts. Management has determined that no adjustments were required resulting from translations.

Basis of Accounting:

The Company uses the accrual basis of accounting.

Cash Equivalents:

The Company considers all short-term investments with an original maturity of three months or less to be cash equivalents. At December 31, 2011, the Company had no cash equivalents.

Fair Value of Financial Instruments:

Cash and cash equivalents are measured at fair value and investments are recognized at amortized cost in the Company’s financial statements. Accounts receivable and other investments are financial assets with carrying values that approximate fair value due to the short-term nature of these assets. Accounts payable and short-term debt are financial liabilities with carrying values that approximate fair value due to the short-term nature of these liabilities. The Company follows Fair Value Measurements and Disclosures (“ASC 820”), which establishes a fair value hierarchy that requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instruments categorization within the hierarchy is based on the lowest level of input that is significant to the fair value measurement. ASC 820 establishes three levels of inputs that may be used to measure fair value:

Level 1: inputs are unadjusted quoted prices in active markets for identical assets or liabilities.

Level 2: inputs other than level 1 that are observable, either directly or indirectly, such as quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of assets or liabilities.

Level 3: unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

All of the Company’s investments at December 31, 2011 are considered Level 3 assets. Management believes that the value of its marketable securities at December 31, 2011 to be near its original cost of $20,000.

 

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TELWORX COMMUNICATIONS, LLC

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2011 and 2010

 

Note 1—NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Accounts Receivable and Allowance for Doubtful Accounts:

Accounts receivable are recorded at net realizable value consisting of the carrying amount less the allowance for uncollectible accounts, as needed. The Company uses the allowance method to account for uncollectible receivable balances. Under the allowance method, if needed, an estimate of uncollectible customer balances is made based upon specific account balances that are considered uncollectible. The Company considers any account 120 days past due to be uncollectible. The Company believes that no allowance was needed at December 31, 2011 and 2010. Accounts receivable had balances of $2,254,934 and $2,589,237 at December 31, 2011 and 2010, respectively.

Inventories:

Inventory consists of new, refurbished, and consigned telecommunications equipment and are carried at the lower of cost or market. The Company carries consigned inventory in its warehouse. These items are only recognized as costs when the inventory is sold. The Company constantly evaluates if an allowance to reduce the value of inventory to the lower of cost or market, including allowances for excess and obsolete inventory. At December 31, 2011 and 2010 no allowance was considered necessary. The balance of inventory at December 31, 2011 and 2010 was $2,038,249 and $1,096,098, respectively.

Prepaid and Other Current Assets:

Prepaid assets are stated at cost and are amortized over the useful lives (up to one year) of the assets.

Property and Equipment:

Property and equipment are stated at cost and are depreciated using the straight-line method over the estimated useful lives of the assets. The useful lives range from 27.5 to 40 years for buildings and 5 to 7 years for equipment. Leasehold improvements are amortized over the shorter of the corresponding lease term or useful life. Depreciation expense and gains and losses on the disposal of property and equipment are included in cost of sales and operating expenses in the consolidated statements of income. Maintenance and repairs are expensed as incurred. Depreciation expense for the years ended December 31, 2011 and 2010 was $237,923 and $220,388, respectively.

 

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TELWORX COMMUNICATIONS, LLC

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2011 and 2010

 

Note 1—NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Property and Equipment (Continued):

An breakdown of property and equipment for the years ended December 31, 2011 and 2010 are as follows:

 

		Balance December 31, 2011				Balance December 31, 2010
Land		$	268,000			$	268,000
Buildings			2,204,778				2,204,778
Furniture and fixtures			427,903				380,818
Machinery and equipment			273,997				273,997
Computer equipment			150,996				150,996
Vehicles			132,785				104,984
Totals			3,458,459				3,383,573
Less accumulated depreciation			(714,036	)			(484,783	)
Net book value		$	2,744,423			$	2,898,790

Revenue Recognition:

The Company sells telecom products and services. The Company recognizes revenue when the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, price is fixed and determinable, and collectability is reasonably assured.

The Company recognizes revenue for sales of the products when the product ships from its warehouse. The Company recognizes revenue for its services when the job is completed and all expenses for the job are recognized. The Company allows its customers to return products under specified terms and conditions.

Research and Development Costs:

The Company expenses research and development costs as incurred. To date, the Company has expensed all software development costs related to research and development because the costs incurred subsequent to the products reaching technological feasibility were not significant.

Advertising Costs:

Advertising costs are expensed in the period in which they are incurred. Advertising expense was $176,589 and $140,395, respectively for the years ended December 31, 2011 and 2010.

 

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TELWORX COMMUNICATIONS, LLC

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2011 and 2010

 

Note 1—NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Sales and Value Added Taxes:

Taxes collected from customers and remitted to governmental authorities are presented on a net basis in goods sold in the accompanying consolidated statements of income.

Shipping and Handling Costs:

Shipping and handling costs are included on a gross basis in cost of goods sold in the accompanying consolidated statements of income.

Income Taxes:

No income tax provision has been included in the financial statements since the income or losses of the Company are required to be reported by the members on their income tax returns. Taxable income or loss will differ from the income or loss reported in the financial statements, due to the different carrying values of assets, and different revenue recognition methods for financial reporting and income tax purposes. Management has determined that the Company has no uncertain tax positions that would require the Company to record a liability for unrecognized tax benefits. Management believes that the Company’s tax years ended December 31, 2011, 2010, and 2009 remain subject to examination by federal and state tax jurisdictions.

Warranty Reserve and Sales Returns:

TelWorx Communications, LLC offers a 90 day warranty on products directly manufactured by TelWorx Communications, LLC. Any products resold by TelWorx Communications, LLC from other suppliers carry the original manufacturers warranty. TelWorx Communications, LLC offers returns with a 25% restocking fee.

TowerWorx, LLC warrants that products manufactured by TowerWorx, LLC, when properly installed and serviced by authorized service representatives and when properly used and maintained in conformance with the standards and limitations set forth by TowerWorx, LLC shall be free from defects in material and workmanship for a period of one (1) year from the date of original purchase or shipping date, whichever is earlier in time. TowerWorx, LLC’s obligation under this warranty shall be limited to replacing or repairing the defective part or parts or, at TowerWorx LLC’s option, the product itself, in part or in whole, which contains the defective part or parts. All TowerWorx, LLC sales are final after completion of the tower. Orders can be canceled or rescheduled within 10 days of shipment with written notice.

TelWorx Communications, LLC offers a 90 day warranty on products directly manufactured by TelWorx Communications, LLC. Any products resold by TelWorx Communications, LLC from other suppliers carry the original manufacturers warranty.

Management has determined that through analysis of historical return and warranty data that no reserve for warranty or sales returns should be included in the financial statements.

 

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TELWORX COMMUNICATIONS, LLC

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2011 and 2010

 

Note 1—NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Leased Equipment Capitalized:

The imputed cost of leased equipment is capitalized and charged to earnings using the straight-line method of depreciation over an estimated useful life of ten years for financial reporting purposes. Generally, when items of leased property are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected.

Use of Estimates:

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

Date of Management’s Review:

The Company has evaluated events through June 26, 2012, which is the date the financial statements were available to be issued, for possible recognition or disclosure in the financial statements.

Note 2—INTANGIBLE ASSETS

A detailed schedule of intangible assets are as follows:

 

Intangible assets:		Original Value				Amortization Expense 2010				Accumulated Amortization 12/31/2010				Balance 12/31/2010
Goodwill		$	206,667			$	—			$	—			$	206,667
Trade name			379,945				69,657				379,945				—
Noncompete agreement			687,000				125,950				687,000				—
Customer relationships			339,000				62,150				339,000				—
Organization and start-up costs			34,300				5,620				17,118				17,182
		$	1,646,912			$	263,377			$	1,423,063			$	223,849

 

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TELWORX COMMUNICATIONS, LLC

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2011 and 2010

 

Note 2—INTANGIBLE ASSETS (Continued)

 

A detailed schedule of intangible assets are as follows:

 

		Balance 12/31/2010				Amortization Expense 2011				Accumulated Amortization 12/31/2011				Balance 12/31/2011
Intangible assets:
Goodwill		$	206,667			$	—			$	—			$	206,667
Trade name			—				—				379,945				—
Noncompete agreement			—				—				687,000				—
Customer relationships			—				—				339,000				—
Organization and start-up costs			17,182				5,620				22,802				11,562
		$	223,849			$	5,620			$	1,428,747			$	218,229

Goodwill:

The Company performs an annual impairment test of goodwill at the end of each year (December 31). If the Company’s fair value is greater than its book value, then further impairment tests are not necessary. If the Company’s fair value is less than its book value, then further tests are performed to determine the Company’s fair value of goodwill. The implied fair value is then compared against the book value of goodwill to determine the amount of goodwill impairment. According to Statement of Financial Accounting Standards No. 142, goodwill is not amortized. Generally accepted accounting principles require that the unamortized value of purchased goodwill be evaluated annually to determine whether the amount reflected on the balance sheet as an asset has been impaired. In management’s opinion, there has been no impairment to the value of recorded goodwill during the year ended December 31, 2011. Goodwill is amortized for income tax purposes using the straight-line method over fifteen years.

The process of evaluating the potential impairment of goodwill is subjective because it requires the use of estimates and assumptions. The Company uses both the Income Approach and the Market Approach for determining the fair value of the reporting unit. Although the Company bases the cash flow forecasts on assumptions that are consistent with plans and estimates the Company uses to manage the business, there is considerable judgment in determining the cash flows. Assumptions related to future cash flows and discount rates involve significant management judgment and are subject to significant uncertainty.

 

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TELWORX COMMUNICATIONS, LLC

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2011 and 2010

 

Note 2—INTANGIBLE ASSETS (Continued)

 

Goodwill (Continued):

While the use of historical results and future projections can result in different valuations for a company, it is a generally accepted valuation practice to apply more than one valuation technique to establish a range of values for a business. Since each technique relies on different inputs and assumptions, it is unlikely that each technique would yield the same results. However, it is expected that the different techniques would establish a reasonable range. In determining the fair value, the Company weighs the two methods equally in determining the fair value because the Company believes both methods have an equal probability of providing an appropriate fair value.

The Company recognized goodwill of $206,667 with the acquisition of assets from TelWorx Communications, LLC. The Company’s market capitalization as of the date of the acquisition exceeded the book value of the Company. Since there was not a triggering event for goodwill impairment, the Company did not perform the two-step goodwill impairment test.

Trade Name:

The Company assessed intangible assets as of the original acquisition on November 21, 2005. The Company determined the value of goodwill associated with the purchase price to be allocated towards the trade name to be $379,945 on the acquisition date. The trade name intangible assets was amortized over a five year period and carried a book value of $0 at December 31, 2011 and 2010. The amortization expense for the years ended December 31, 2011 and 2010 associated with these agreements was $0 and $69,657, respectively.

Noncompeting Agreement:

The Company executed a Noncompete agreement with the previous owners upon the acquisition of the Company on November 21, 2005. The value of these agreements at the acquisition date was $687,000. The agreements were amortized over a five year period and carried a book value of $0 at December 31, 2011 and 2010. The amortization expense for the years ended December 31, 2011 and 2010 associated with these agreements was $0 and $125,950, respectively.

Customer Relationships:

The Company assessed intangible assets as of the original acquisition on November 21, 2005. The Company determined the value of existing customer relationships to be $339,000 on the acquisition date. The customer relationships were amortized over a five year period and carried a book value of $0 at December 31, 2011 and 2010. The amortization expense for the years ended December 31, 2011 and 2010 associated with these agreements was $0 and $62,150, respectively.

Organization and Start-Up Costs:

Costs incurred in connection with the organization of TowerWorx, LLC have been capitalized and are being amortized using the straight-line method. The original costs totaled $34,300. The intangible assets will be amortized from 5 to 15 years. Amortization expense associated with this intangible asset for the years ended December 31, 2011 and 2010 was $5,620.

 

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TELWORX COMMUNICATIONS, LLC

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2011 and 2010

 

Note 3—RELATED PARTY TRANSACTIONS

The Company’s CEO, Timothy Scronce’s wife, Brenda Scronce, is the sole member of Scronce Real Estate, LLC, which leases the operating facility to TelWorx Communications, LLC. Rent paid from TelWorx Communications, LLC to Scronce Real Estate, LLC was $167,976 for the years ended December 31, 2011 and 2010. These amounts were netted against rent expense on the statement of income. Scronce Real Estate, LLC currently has an outstanding loan at NewBridge Bank that is secured by the operating facility (see Note 11). The balance sheet and statements of income and member’s equity for Scronce Real Estate, LLC for the years ended December 31, 2011 and 2010 are as follows:

SCRONCE REAL ESTATE, LLC

Balance Sheets

December 31, 2011 and 2010

 

		2011				2010
ASSETS
Current assets:
Cash		$	100			$	100
Property and equipment:
Land			268,000				268,000
Buildings			2,204,778				2,204,778
Total property and equipment			2,472,778				2,472,778
Less, accumulated depreciation			(291,240	)			(162,973	)
Net property and equipment			2,181,538				2,309,805
Total assets		$	2,181,638			$	2,309,905
LIABILITIES AND MEMBER’S EQUITY
Current liabilities:
Current maturities on long-term debt		$	105,113			$	101,252
Long-term liabilities:
Long-term liabilities, less current maturities			1,619,184				1,724,297
Total liabilities			1,724,297				1,825,549
Member’s equity			457,339				484,356
Total liabilities and members’ equity		$	2,181,636			$	2,309,905

 

15

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TELWORX COMMUNICATIONS, LLC

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2011 and 2010

 

Note 3—RELATED PARTY TRANSACTIONS (Continued)

 

SCRONCE REAL ESTATE, LLC

Statements of Income and Member’s Equity

For the years ended December 31, 2011 and 2010

 

		2011				2010
Other income (expenses):
Rental income		$	167,976			$	167,976
Depreciation			(128,267	)			(126,657	)
Interest			(66,726	)			(70,154	)
Net loss for the year			(27,017	)			(28,835	)
Member’s equity, beginning of year			484,356				(36,316	)
Contributions			—				549,507
Distributions			—				—
Member’s equity, end of year		$	457,339			$	484,356

Timothy Scronce, CEO:

The Company’s CEO, Timothy Scronce is a member and salaried employee that has invested capital into the Company. Timothy Scronce has also secured and guaranteed several of the Company’s outstanding loans and he has personally guaranteed litigation sales.

TowerWorx, LLC and TowerWorx International, Inc.:

The Company’s CEO, Timothy Scronce, is the spouse of the majority member of TowerWorx, LLC. The Company purchases and sells materials to TowerWorx, LLC. All outstanding intercompany receivables and payables were eliminated in the consolidation.

 

16

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TELWORX COMMUNICATIONS, LLC

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2011 and 2010

 

Note 4—CONCENTRATION OF CREDIT RISK

The Company places its cash and cash equivalents on deposit with financial institutions in the United States. On July 21, 2010, the Federal Deposit Insurance Corporation (FDIC) permanently increased insured coverage to $250,000 for substantially all depository accounts held in FDIC-insured institutions. Beginning December 31, 2010 through December 31, 2012, all non-interest bearing transaction accounts are fully insured, regardless of the balance of the account, at all FDIC-insured institutions. During the year, the Company from time to time may have had amounts on deposit in excess of the insured limits. As of December 31, 2011 and 2010, the Company's deposits were fully insured.

Note 5—RENTAL INCOME

Prior to the litigation described in Note 12, the Company leased towers through TowerWorx, LLC. Income from these leases are broken out in other income on the consolidated statements of income. TowerWorx, LLC has seized leasing towers since the litigation.

Note 6—VARIABLE INTEREST ENTITY

Management has determined that TowerWorx, LLC and Scronce Real Estate, LLC are variable interest entities under FIN 46, subsequently titled under the FASB Accounting Standards Codification (ASC) as ASC 810. The accounts of TowerWorx, LLC, TowerWorx International, Inc. and Scronce Real Estate, LLC are included in these consolidated financial statements.

Management has determined that a joint venture between TowerWorx, LLC and an Egyptian company is not a variable interest entity under FIN 46, subsequently titled under the FASB Accounting Standards Codification (ASC) as ASC 810. The transactions of this joint venture are not consolidated in the financial statements. The Company has $0 invested in the joint venture.

Note 7—POSTRETIREMENT BENEFIT PLAN

The Company sponsors a defined contribution postretirement plan in the form of a safe harbor 401-K plan. The plan is contributory, with retiree contributions adjusted annually. The Company’s funding policy is to contribute annually an amount equal to three percent of the covered employee’s salary. The Company may terminate this plan at any time.

Note 8—OPERATING LEASES

The Company leases its facility for TowerWorx, LLC from FeatherLite in Pryor, Oklahoma. The lease arrangement is month by month rent. During the years ended December 31, 2011 and 2010, rents totaled $67,773 and $244,785, respectively for the leasing of the TowerWorx, LLC facility.

 

17

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TELWORX COMMUNICATIONS, LLC

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2011 and 2010

 

Note 9—LINES OF CREDIT

TelWorx Communications, LLC Line of Credit:

The Company currently has an outstanding revolving line of credit at Newbridge Bank. The revolving line of credit is secured by the Company’s assets and is personally guaranteed by the Company’s CEO Timothy Scronce. The balance of the credit line as of December 31, 2011 and 2010 was $927,892 and $981,260, respectively. The credit line has a maximum amount of $2,000,000. Interest is charged at the prime rate minus 0.75%.

TowerWorx, LLC Line of Credit:

The Company has a $550,000 asset based commercial line of credit with SunTrust Bank for working capital needs of TowerWorx, LLC. The line of credit is secured against all the Company’s assets. As of December 31, 2011 the rate was the London Interbank Offering Rate plus 2.5%. The Company is required to make monthly interest payments, and the principal balance is due April 22, 2012, although the Company expects to renew the note on an annual basis. At December 31, 2011 and 2010, the Company’s unpaid balances were $550,000 and $400,000 respectively.

Note 10—CAPITAL LEASES

The Company purchased a van for use in business operations on August 14, 2010 and entered into a capital lease agreement with Modern Chevrolet, LLC for the purchase. The capital lease, with an original amount of $25,672, has an interest rate of 2.9%, requires monthly payments in the amount of $461 and matures on August 14, 2015.

 

		2011				2010
Balance, December 31:		$	19,207			$	24,262
Less, additional principal payments			—				161
Less, current maturities			5,038				4,894
Capital lease, less current maturities		$	14,169			$	19,207

The current maturities for the years ending December 31, are as follows:

 

2012		$	5,038
2013			5,186
2014			5,339
2015			3,644
		$	19,207

 

18

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TELWORX COMMUNICATIONS, LLC

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2011 and 2010

 

Note 10—CAPITAL LEASES (Continued)

 

The Company purchased a van for use in business operations on August 14, 2010 entered into a capital lease agreement Modern Chevrolet, LLC for the purchase. The capital lease, with an original amount of $25,815, has an interest rate of 2.9%, requires monthly payments in the amount of $463 and matures on August 14, 2015.

 

		2011				2010
Balance, December 31:		$	19,316			$	24,238
Less, current maturities			5,066				4,922
Capital lease, less current maturities		$	14,250			$	19,316

The current maturities for the years ending December 31, are as follows:

 

2012		$	5,066
2013			5,215
2014			5,368
2015			3,667
		$	19,316

The Company purchased a truck for use in business operations on February 15, 2011 and entered into a capital lease agreement with Modern Chevrolet, LLC for the purchase. The capital lease, with an original amount of $21,797, has an interest rate of 5.0%, requires monthly payments in the amount of $412 and matures on February 15, 2016.

 

		2011				2010
Balance, December 31:		$	18,565			$	—
Less, current maturities			4,111				—
Capital lease, less current maturities		$	14,454			$	—

The current maturities for the years ending December 31, are as follows:

 

2012		$	4,111
2013			4,321
2014			4,543
2015			4,775
2016			815
		$	18,565

 

19

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TELWORX COMMUNICATIONS, LLC

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2011 and 2010

 

Note 11—LONG-TERM DEBT

Commercial Loan:

The Company has an outstanding commercial loan with NewBridge Bank. The note is personally insured by CEO Timothy Scronce. The balance of the note at December 31, 2011 was $814,352. Interest is charged at the rate of 6.5%.

 

		2011				2010
Balance, December 31:		$	814,352			$	920,606
Less, current maturities			115,482				106,254
Mortgage payable, less current maturities		$	698,870			$	814,352

The current maturities for the years ending December 31, are as follows:

 

2012		$	115,482
2013			123,216
2014			131,468
2015			140,272
2016			149,667
Thereafter			154,247
		$	814,352

Commercial loan-Scronce Real Estate, LLC

The Company has an outstanding loan with NewBridge Bank for the Company’s headquarters in Lexington North Carolina. The loan is in the name of Scronce Real Estate, LLC and is collateralized by the land and buildings at the main headquarters. The loan, with an original amount of $1,915,000.

 

		2011				2010
Balance, December 31:		$	1,724,297			$	1,825,549
Less, current maturities			105,113				101,252
Mortgage payable, less current maturities		$	1,619,184			$	1,724,297

 

20

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TELWORX COMMUNICATIONS, LLC

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2011 and 2010

 

Note 11—LONG-TERM DEBT (Continued)

 

The current maturities for the years ending December 31, are as follows:

 

2012		$	105,113
2013			109,123
2014			113,286
2015			117,608
2016			122,905
Thereafter			1,156,262
		$	1,724,297

Interest expense on this loan for the years ended December 31, 2011 and 2010 was $66,726 and $70,154, respectively.

Note 12—LITIGATION AND AGREEMENT

In 2010 the Company was involved in a lawsuit with All-Tech concerning the manufacturing of towers in violation of a patent. Incurred legal fees associated with the lawsuit totaled $270,610. A settlement was reached between TowerWorx, LLC and All-Tech. The agreement, settled in February 2011, allows for TowerWorx, LLC to cease production of the towers named in the lawsuit and have All-Tech manufacture towers for TowerWorx, LLC with a mark up of 52.52% for a period of five years. The agreement also guaranteed All-Tech a total of $2.3 million dollars in sales for the first two years personally guaranteed by CEO Timothy Scronce.

Note 13—ONE TIME RELOCATION

The Company experienced costs in 2011 associated with the shutdown of its manufacturing facility due to the litigation and agreement discussed in Note 12. The costs are broken out separately on the balance sheets due to the fact the no additional costs or fees are expected in the future. The total costs incurred in 2011 associated with the relocation was $82,000.

 

21

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TELWORX COMMUNICATIONS, LLC

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2011 and 2010

 

Note 14—STOCK OPTIONS

In 2007 and 2008, the Company entered into stock option agreements with three employees for a total of 200,000 shares of class A restricted, non-voting, common stock. The first set had a fair value of $.48 per share at 1/1/2007 for a total value of $72,000. The second set of issued options had a value of $.53 per share at 1/1/2008 for a total value of $26,500. Both issuance of options vest over a period of five years and vest 20% per year over the five year period. The total fair value of $98,500 was recorded as an increase to members’ equity and deferred compensation, a contra-equity account. The deferred compensation will be amortized into expense over the vesting period of the restricted stock. For the years ended December 31, 2011 and 2010, the Company recognized $19,700 of amortization expense related to the vesting of the restricted shares. The first set of issued options were fully vested at December 31, 2011 and the second set of issued options will be fully vested at December 31, 2012, 20,000 shares vesting in 2012. As of December 31, 2011 and 2010, the holders of the common stock from these options, pursuant to the restricted stock grant, had $190,000 and 150,000 shares, respectively. The value of the options were determined annually be management.

Under the Company’s stock option plan, the Company may grant options to purchase up to 10,000,000 shares of common stock to employees, directors, and consultants as either incentive stock options or nonqualified stock options. Incentive stock options may be granted with exercise prices not less than 100% of the fair market value of the common stock on the dale of such grant. Options granted under the plan generally vest up to three years and expire 10 years from the date of the grant.

 

		Outstanding Options
		No. of Shares				Weighted Avg. Exercise Price
Balance at January 01, 2010			150,000			$	0.49
Granted			—				—
Forfeited			—				—
Exercised			20,000				0.49
Balance at January 01, 2011			170,000				0.49
Granted			—				—
Forfeited			—				—
Exercised			20,000				0.49
Balance at December 31, 2011			190,000			$	0.49

 

22

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TELWORX COMMUNICATIONS, LLC

Notes to Consolidated Financial Statements

For the Years Ended December 31, 2011 and 2010

 

Note 14 —STOCK OPTIONS (Continued)

 

The following table summarizes information as of December 31, 2011 and 2010 related to all outstanding and vested options:

 

		2011								2010
Exercise Price		Number of Shares				Weighted Avg. Remaining				Number of Shares				Weighted Avg. Remaining
$    0.48			—				—				30,000				14,400
$    0.53			10,000				5,300				10,000				5,300
			10,000				5,300				40,000				19,700

 

23

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Supplementary Information

---

TELWORX COMMUNICATIONS, LLC

Supplementary Information

For the Years Ended December 31, 2011 and 2010

1 Analysis of Cost of Goods Sold:

 

		2011				2010
Cost of goods sold:
Product		$	12,108,645			$	12,704,777
Wages			283,475				890,446
Commissions			20,408				16,600
Tax and licenses			122,873				153,255
Telephone			9,785				17,307
Meals and entertainment			23,288				16,522
Travel			67,595				67,830
Retirement			20,776				10,662
Depreciation			154,216				140,753
Insurance			149,919				119,506
Office			40,428				44,540
Rent			46,488				200,502
Repairs and maintenance			38,426				44,331
Utilities			47,768				84,891
Supplies			37,130				59,893
Warranty			21,200				15,199
Other			36,255				37,730
		$	13,228,675			$	14,624,744

2 EBITDA Analysis by Entity:

 

		2011				2010
TelWorx Communications, LLC		$	1,633,166			$	727,709
TowerWorx, LLC			188,110				301,863
Scronce Real Estate, LLC			167,976				167,976
		$	1,989,252			$	1,197,548

 

24

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TELWORX COMMUNICATIONS, LLC

Supplementary Information

Consolidated Statements of Income (Unaudited)

For the Four Quarters Ended December 31, 2011 (all numbers in 000s)

 

		Total 2011				Q1—2011				Q2—2011				Q3—2011				Q4—2011
Revenue			18,118				4,044				4,679				5,112				4,283
Product			12,109				2,520				3,286				3,612				2,692
Wages			284				80				74				58				71
Commissions			20				6				5				5				4
Tax and licenses			123				15				32				30				46
Telephone			10				2				3				3				3
Meals and entertainment			23				6				5				7				5
Travel			68				21				13				24				10
Retirement			21				4				5				6				6
Depreciation			155				39				39				39				39
Insurance			150				20				38				48				43
Office			41				9				11				10				11
Rent			46				12				12				12				12
Repairs and maintenance			38				10				10				12				7
Utilities			48				14				11				22				0
Supplies			37				7				14				9				8
Warranty			21				5				5				5				5
Other			36				6				4				17				10
Cost of goods sold			13,229				2,776				3,564				3,918				2,970
Gross profit			4,889				1,268				1,115				1,194				1,312
Sales and marketing expenses:
Wages			1,004				209				272				299				223
Commissions			470				137				112				127				94
Taxes and licenses			175				40				46				61				28
Telephone			53				6				14				13				20
Meals and entertainment			25				5				7				7				7
Travel			154				41				31				47				35
Retirement			47				14				9				17				7
Depreciation			47				9				12				13				13
Insurance			110				28				27				27				27
Office			9				1				2				3				3
Rent			21				5				6				5				6
Repairs and maintenance			4				1				1				1				1
Utilities			9				2				2				3				2
Supplies			6				2				1				3				0
Trade shows			91				7				24				15				45
Advertising			177				43				46				43				44
Other			6				1				1				3				2
Total sales and marketing expenses			2,407				552				613				688				554

 

25

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TELWORX COMMUNICATIONS, LLC

Supplementary Information

Consolidated Statements of Income (Unaudited)

For the Four Quarters Ended December 31, 2011 (all numbers in 000s)

 

		Total 2011				Q1—2011				Q2—2011				Q3—2011				Q4—2011
General and administrative expenses:
Wages			279				78				73				57				70
Commissions			10				2				3				3				2
Taxes and licenses			49				6				13				12				18
Telephone			26				5				7				7				7
Meals and entertainment			16				4				3				5				4
Travel			56				17				11				20				8
Retirement			11				2				3				3				3
Depreciation			37				9				9				9				9
Insurance			96				13				24				31				28
Office			7				2				2				2				2
Rent			—				—				—				—				—
Repairs and maintenance			4				1				1				1				1
Utilities			2				0				0				1				0
Supplies			3				1				1				1				1
Professional			62				8				22				23				10
Bank fees			68				13				15				14				25
Other			6				1				1				3				2
Total general and administrative expen			731				163				187				192				189
Total operating expenses			3,138				714				801				879				743
Operating profit			1,751				553				314				314				569
Other income (expense):
Contributions			(13	)			(2	)			(1	)			(10	)			(1	)
Amortization			(6	)			(1	)			(1	)			(1	)			(1	)
Stock option amortization			(20	)			(5	)			(5	)			(5	)			(5	)
Loss on disposition of fixed assets			—				—				—				—				—
One time relocation			(82	)			(21	)			(21	)			(21	)			(21	)
Professional fees—legal			—				—				—				—				—
Rental income			4				1				1				1				1
Interest income			2				1				0				1				—
Other income			15				4				4				7				—
Interest expense			(202	)			(51	)			(51	)			(51	)			(50	)
Total other income (expenses)			(301	)			(73	)			(72	)			(79	)			(77	)
Net income			1,450				480				242				236				492

 

26

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TELWORX COMMUNICATIONS, LLC

Supplementary Information

Consolidated Statements of Income (Unaudited)

For the Four Quarters Ended December 31, 2010 (all numbers in 000s)

 

		Total 2010				Q1—2010				Q2—2010				Q3—2010				Q4—2010
Revenue			18,135				3,756				3,847				5,023				5,508
Product			12,705				2,754				2,604				3,513				3,835
Wages			890				208				230				207				246
Commissions			17				3				3				5				5
Tax and licenses			153				34				41				40				38
Telephone			17				4				5				4				4
Meals and entertainment			17				5				3				5				5
Travel			68				12				18				18				20
Retirement			11				4				2				1				3
Depreciation			140				37				37				38				29
Insurance			120				38				32				29				21
Office			45				13				13				8				11
Rent			200				45				45				50				60
Repairs and maintenance			44				13				12				10				9
Utilities			85				27				17				19				21
Supplies			60				18				19				17				7
Warranty			15				4				4				4				4
Other			38				8				10				14				6
Cost of goods sold			14,625				3,226				3,095				3,980				4,323
Gross profit			3,510				530				752				1,043				1,184
Sales and marketing expenses:
Wages			823				179				169				228				248
Commissions			308				72				79				72				85
Taxes and licenses			130				27				26				40				37
Telephone			31				7				8				8				8
Meals and entertainment			18				4				5				4				5
Travel			127				36				22				35				34
Retirement			23				4				6				6				7
Depreciation			47				17				9				6				14
Insurance			104				27				27				28				21
Office			7				2				2				2				1
Rent			43				13				12				7				11
Repairs and maintenance			6				1				1				1				2
Utilities			13				4				4				3				3
Supplies			9				3				2				2				2
Trade shows			13				4				3				5				1
Advertising			142				41				12				17				72
Other			5				1				1				2				1
Total sales and marketing expenses			1,849				441				390				465				552

 

27

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TELWORX COMMUNICATIONS, LLC

Supplementary Information

Consolidated Statements of Income (Unaudited)

For the Four Quarters Ended December 31, 2010 (all numbers in 000s)

 

		Total 2010				Q1—2010				Q2—2010				Q3—2010				Q4—2010
General and administrative expenses:
Wages			296				69				76				69				82
Commissions			8				2				2				2				2
Taxes and licenses			48				11				13				12				12
Telephone			17				4				5				4				4
Meals and entertainment			11				3				2				3				3
Travel			48				8				13				13				14
Retirement			8				3				2				1				2
Depreciation			33				8				9				9				7
Insurance			110				35				29				27				19
Office			3				1				1				0				1
Rent			1				0				0				0				0
Repairs and maintenance			4				1				1				1				1
Utilities			6				2				1				1				1
Supplies			5				1				2				1				1
Professional			44				16				14				14				(0	)
Bank fees			38				5				15				9				9
Other			5				1				1				2				1
Total general and administrative expenses			684				171				185				169				159
Total operating expenses			2,533				612				576				634				711
Operating profit (loss)			977				(82	)			177				409				473
Other income (expense):
Contributions			(27	)			(5	)			(0	)			(21	)			(0	)
Amortization			(264	)			(65	)			(66	)			(66	)			(66	)
Stock option amortization			(20	)			(5	)			(5	)			(5	)			(5	)
Loss on disposition of fixed assets			(221	)			(55	)			(55	)			(55	)			(55	)
One time relocation			—				—				—				—				—
Professional fees—legal			(271	)			(68	)			(68	)			(68	)			(68	)
Rental income			22				5				5				5				5
Interest income			2				1				0				1				0
Other income			19				4				5				6				3
Interest expense			(208	)			(52	)			(62	)			(48	)			(46	)
Total other income (expenses)			(969	)			(241	)			(245	)			(251	)			(232	)
Net income (loss)			8				(322	)			(68	)			158				241

 

28