Beacon Enterprise Solutions Group, Inc.
FORM 10-K
For the fiscal year ended September 30, 20092011
INDEX
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PART I
Item 1. Business
Beacon Enterprise Solutions Group, Inc. and subsidiaries (collectively the“Company” “Company”) is a provider ofprovides global international and regional telecommunications and technology systems infrastructure services, encompassing a comprehensive suite of consulting, design, installation, and infrastructure management offerings. Beacon’s portfolio of infrastructure services spans all professional and construction requirements for design, build and management of telecommunications, network and technology systems infrastructure. Professional services offered include consulting, engineering, program management, project management, construction services and infrastructure management services. Beacon offersservices; these services underare offered either as a comprehensive contract vehicle or as unbundled to some global and regional clients.services. Beacon also offers special services in support of qualified projects in the smart buildings/campuses/cities and data center verticals. Finally, Beacon provides managed information technology and telecommunications services in selected local markets. In this report, the terms “Company,” “Beacon,” “we,” “us” or “our” mean Beacon Enterprise Solutions Group, Inc. and all subsidiaries included in our consolidated financial statements.
General
Beacon was formed for the purpose of acquiring and consolidating regional telecom businesses and service platforms into an integrated, national provider of high quality voice, data and VOIP communications to small and medium-sized business enterprises (the “SME Market”). The Company was originally formed to acquire companies that would allow it to serve the SME Marketsmall and medium-sized business enterprises (the “SME Market”) on an integrated, turn-key basis from system design, procurement and installation through all aspects of providing network service and designing and hosting network applications. InDuring the fiscal year ended September 30, 2010, in response to identification of a significant unservedunderserved market, our business strategy has shifted to become a leading providerglobal leader in the design, implementation and management of global, internationalhigh performance ITS infrastructure solutions. Beacon’s portfolio of ITS infrastructure services spans all professional and regionalconstruction requirements for design, build and management of telecommunications, network and technology systems infrastructure, while continuing to provide managed information technology and telecommunications services in selected local markets.
For the purpose of this report on Form 10-K, all amounts are in thousands except share and per share data. Beacon generated net sales of $18,894 for the year ended September 30, 2011. For the year ended September 30, 2011, Beacon recognized net income of approximately $3,222. Total assets were $11, 922 as of September 30, 2011.
Operations
Services
Beacon provides global telecommunications and technology systems infrastructure services encompassing a comprehensive suite of consulting, design, installation, and infrastructure management offerings, while continuing to provide managed informationofferings. 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 telecommunicationsinfrastructure management services; these services in selected local markets.are offered either as a comprehensive contract vehicle or as unbundled services
Beacon generated revenue of approximately $11.1 million for the year ended September 30, 2009 as it pursued this new strategy. For the year ended September 30, 2009, Beacon recognized a net loss of approximately ($6.3) million. Total assets were approximately $12.8 million as of September 30, 2009.
Share Exchange Transaction and Phase I Acquisitions
Until December 20, 2007, Beacon Enterprise Solutions Group, Inc., an Indiana corporation (“Beacon (IN))” was a development stage enterprise with no operating history until the completion of the share exchange in which the shareholders of Beacon (IN) became the majority owners of Suncrest Global Energy Corp. (“Suncrest”), a Nevada corporation. Suncrest was incorporated in the State of Nevada on May 22, 2000. Prior to the Share Exchange Transaction, Suncrest was a publicly-traded corporation with nominal operations of its own.
Pursuant to a Securities Exchange Agreement, Suncrest acquired all of the outstanding no par value common stock of Beacon (IN) on December 20, 2007. Suncrest, in exchange for such Beacon (IN) common stock issued 1 share of its own $0.001 par value common stock directly to Beacon (IN)’s stockholders for each share of their common stock (the “Share Exchange Transaction”). Following the Share Exchange Transaction, the existing stockholders of Suncrest retained 1,273,121 shares of Suncrest’s outstanding common stock and Beacon’s stockholders became the majority owners of Suncrest. Beacon paid a $305,000 fee to the stockholders of Suncrest in connection with completing the Share Exchange Transaction which is included as a component of selling, general and administrative expense in the accompanying consolidated statement of operations.
After the Share Exchange Transaction, Suncrest was the surviving legal entity and Beacon was its wholly-owned subsidiary. Suncrest changed its name to Beacon Enterprise Solutions Group, Inc. on February 15, 2008 and continued to carry on the operations of Beacon (IN). The Share Exchange Transaction
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has been accounted for as a reverse merger and recapitalization transaction in which the original Beacon is deemed to be the accounting acquirer. Accordingly, the accompanying consolidated financial statements present the historical financial position, results of operations and cash flows of Beacon (IN), adjusted to give retroactive effect to the recapitalization of Beacon (IN) into Suncrest.
Phase I Acquisitions
On December 20, 2007, Beacon acquired substantially all of the assets and assumed certain liabilities of Advance Data Systems, Inc., CETCON Inc., and Strategic Communications, Inc. under the terms of three separate asset purchase agreements. In addition, Beacon acquired substantially all of the assets and certain liabilities of Bell-Haun Systems Inc. in a stock purchase agreement. These acquisitionsservices are referred to as the “Phase I Acquisitions.”
During the year ended September 30, 2008, Beacon focused on the consolidation of various operational elements of the Phase I Acquisitions into a single core infrastructure. For further information regarding these acquisitions, please see Note 4 to the consolidated financial statements.
Operations
Services
Beacon provides professional, construction and management servicesprovided to clients who require a global reach, proven experience and resources, and the consistent, predictable results that can only be offered by a single global company. Today’s global and international clientclients and international enterprises demand the competitive advantage obtained through outsourcing, without the additional cost, internal overhead and multiple points of failure that come from bidding for siloed services from small regional professional services firms or contractors. Beacon offers these global, multi-national or regional companies a competitive, single-source advantage for consulting, design, implementation, program management, project management and managed services regardless of the location. By overcoming the native barriers to entry found in the telecommunications and technology systems channels, Beacon is offering the Fortune 1,0001000 client a vehicle to more fully integrate global enterprise standards, reduce internal pressure on scarce IT and Facilities resources, reduce the risk that comes with multiple points of failure and increase operating income through the efficiencies that accompany true global strategic sourcing. The question is no longer whether to outsource a capability or activity, but rather how to source any activity in the value chain. Beacon offers this sourcing capability to our clients on a global, multi-national and regional basis.
Management Services. In addition to offering consulting, design, engineering and installation of telecommunications and technology systems infrastructure, Beacon offers our clients infrastructure management services to address planning, moves, adds and changes to their telecommunications and technology systems. This service effectively bundles together all Beacon infrastructure services and offeroffers them to clients under a global, multi-national or regional umbrella agreement.agreements. To protect client investments and reduce total cost of ownership; global, multi-national or regional infrastructure management isservices are designed to: (i) reduce internal cost and complexity for obtaining engineering, installation or management related expenses, (ii) facilitate enterprise-wide standardization, (iii) eliminate duplicated effort, (iv) protect warranties, and (v) reduce costs associated with moves, adds and changes. The previously unavailable data which may be extracted from the Beacon management system can provide strategic planning insight and empirical data for management decisions, including the viability of new enterprise initiatives. Infrastructure management services also allow the telecommunications and technology systems infrastructure to be maintained by a planned and budgeted continuum, rather than as a reaction to a series of disconnected projects. Although Beacon clients may begin by using one of our discrete, project-oriented services (described below), the business model indicates that they will frequently evolve into a global, multi-national or regional infrastructure management client.
Design, Engineering & Construction Services. The increasing economic, regulatory and environmental issues facing executives, IT and Facilities professionals mean that there are an increasinghas increased the number of complex technical and operational issues that need to be solved for each customer. In order to address these issues, Beacon has moved beyond the expected baseline of technical and educational requirements (Professional
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Engineer, RCDD, PMP, CPP, CISSP, etc.) and into a new paradigm of cross-disciplinary business and technical professionals who understand the benefit of standardization, predictability and consistency when provided within a process-driven solution. Companies can no longer rely on ownership of the internal capabilities to contract for a wide variety of services from a pool of subcontractors, but now must develop a smaller number of global or regional relationships that allow them to control and make the most of critical capabilities, whether or not they reside on the corporate balance sheet. Beacon provides each client with access to world-class engineering, design and installation resources, but offers them within a manner designed to permit a reduction in bottom line expenditures while reducing the workload of scarce internal resources. This contrasts the traditional bid mentality where clients lose any cost-benefit gained from the bid or proposal process, through increased pressure on internal resources needed to maintain the corporate standard while controlling the cost of administration of multiple vendors for identical tasks across a global enterprise. Beacon’s solution to the dramatic changes in world markets — geopolitical, macroeconomics, and technology, is to make business capability portable by providing the processes needed to make services delivery available on a global, multi-national or regional basis.
Special Services. There are two vertical markets in FY 2010 that allow Additionally, Beacon to leverageleverages existing areas of internal expertise for projects involving data centers and smart (intelligent) buildings/campuses/cities in both the federal and private space; the nature of these engagements are unique and as such will qualify for designation as a Beacon Special Service. They are data centers and smart (intelligent) buildings/campuses/cities. Data Center Special Services rely on existing expertise in consulting, design, project management, bid management and construction of data centers. Service delivery for data centers range from one or more compartmentalized professional services up to acting as the prime contractor for the construction or retrofit of the entire data center. The approach to smart or intelligent buildings/campuses/cities is primarily an engineering or design service, but can involve design/build projects. Enabled by the increasing availability of Internet compatible building systems, with demand created by pressure on building developers and managers to become more sensitive to energy management and reduction of carbon footprint for the built environment, the experience and knowledge required to design the infrastructure for the more than 15 low-voltage systems found in most offices are escalating in demand. Beacon has this ability internally and offers these services in higher demand areas such as the Middle East, Europe and some areas of the Pacific Rim.
Managed Information Technology and Telecommunications Services. Beacon continues to provide information technology and telecommunications services on a managed services basis in select local markets. These services are typically not portable and do not scale in the same manner as our Professional, Construction and Management Services as the customer base is largely middle market businesses with localized needs. We typically target medium sized businesses with limited information technology resources and offer high margin, value added services that allow the customer to concentrate on their business while we provide the tools necessary to supply their information technology and telecommunications needs. While profitable, we expect these services will diminish as a percentage of our overall business.
Customers
Because Beacon provides infrastructure management services to global and multi-national clients,customers, the primary target clients can be defined as the Fortune 1000, or the broader Forbes Global 2000. Global clients may also elect to use Beacon’s services in an a laala carte fashion, typically using Design & Engineering services which are more portable when used outside of an infrastructure managed services contract vehicle. The business model for global, multi-national, federal and regional clients who use one or more unbundled services allows for migration to a fully managed services offering where all services are offered under a single contractual umbrella. At the beginning of FY 2010, Beacon unveiled a regional branch business model that allowed larger local companies, especially those with multiple sites to leverage the same consulting, design, contracting, project management or even infrastructure management services offered to our global clients. This regional branch model allows smaller companies who have no interest in global managed infrastructure services, or who want to sample Beacon’s services to do so with minimal risk associated with a long term contract. Further, this regional branch model allows Beacon to increase the depth of resources across a given country or region, adding scalability to global and multi-national service delivery, while providing an intake vehicle for future global clients.
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Suppliers
Beacon establishes manufacturer, distributor and subcontractsubcontractor relationships from the global perspective. The lack of competitors offering infrastructure management services with a global reach provides Beacon with a distinct advantage. In addition, the global managed services business model provides an exclusive client relationship which is also attractive to suppliers. Beacon has accounts with various suppliers that provide services, products and materials necessary to fulfill our services and the needs of our customers. Such services and products are typically available from more than one supplier and we routinely review our supplier relationships to determine the suppliers withwhich have the most attractive footprint, logistics offerings and volume-based pricing. We use multiple criteria to evaluate our suppliers and purchase with those that provide us with the best service. The majority of Beacon’s services delivery is accomplished using internal resources. Fromtime-to-time there is a need to engage theoverall fit.
Beacon also engages professional orand construction-related services of contracted firms. Thefirms as contractors in specialized geographical areas, the qualification and selection of these firms’ usesis based on the same stringent background, chemical screening (where permissible by law) and technical assessments used in the hiring of our employees. Contractors are held to the same high levels of service delivery, knowledge of customer and industry standards, and compliance with Beacon and industry best practices. Contractors are only used with customer knowledge and consent and in those cases when geographical challenges or special skills are needed and cannot be overcome with internal resources.
Seasonality
Due to the breadth of services offered to Beacon clients, seasonality issues are minimal. Some seasonality deltas are noted between professional and construction services, however the volume core services and infrastructure management services tend to mitigate the seasonal differences for the unbundled services offered on a global or regional basis.
Customer Concentration
For the years ended September 30, 20082011 and 2009,2010, our largest customer accounted for approximately 19%78% and 25%64% of sales.sales, respectively. Although we expect we will continue to have a high degree of customer concentration, our customer engagements are typically covered by multi-year contracts or master service agreements under which we and our predecessor companies have been operating for a number of years. In addition, current economic conditions could harm the liquidity ofand/or financial position of our customers or suppliers, which could in turn cause such parties to fail to meet their contractual or other obligations to us.
Competition
Beacon’s service delivery offerings, and therefore its competitors, can be divided into two broad categories. First, services that are offered individually, generally in response to the client needs for a single service within a single project or task, and secondly, services that are offered as a single source package (managed services and outsourcing) and delivered as part of a regional, national, multi-national or global contract, generally with a specified window of time vs. for a single project or task.time. When offering a single service in response to a single project or task, there are numerous competitors. These midtend to be mid- to small-sized competitors tend to bethat are single site or confined to smallspecific geographic regions and generally aggressively compete for private or publicly announced work. Further, they typically specialize in and are good at only one service out of the 5 or 6 thatmultiple services the client may actually need. These smaller, single service competitors are generally viewed as being commoditized. Beacon’s Branch model allows us to successfully leverage the bigger managed services offering and introduce scalability by allowing our clients the option to expand the number of services offered and the geography over which the service is delivered. By removing the business risk associated with having only a single service to offer to new and existing clients, it further allows Beacon to differentiate itself by offering a higher level of service with a more predictable price. So by leveraging the multi-service, global capabilities of Beacon, this provideswe attain a significant competitive edge for the first category of competitors, but reducesas well as reduce the pool of competitors for the full-spectrum managed infrastructure services offered across broad geographic areas. There are several national infrastructure firms such as Black Box and Netversant that have the size and possibly the funding to become direct competitors, but by nature of their size and current business models they would experience significant internal resistance to change. Their past successes in the narrowly focused
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services arena, combined with their size would provide internal and external barriers to entry, and may well convert many potential competitors into clients as the value of the expanded Beacon managed services model gains wider recognition and market share.
Employees
Beacon currently employs approximately 9176 people 87 full time and 4 part time, in theoffices located in Louisville, KY, Columbus, OH, Louisville, KY, Raritan, , NJ, and Cincinnati, OH markets. Beacon currently employs 7 people in Siebnen, Switzerland.and Prague, Czech Republic. None of Beacon’s employees is subject to a collective bargaining agreement.
Available Information
Our Internet address iswww.askbeacon.com, where we make available, free of charge, our Annual Reports onForm 10-K, Quarterly Reports onForm 10-Q, Current Reports onForm 8-K and any amendments to those reports, as soon as practicable after such reports are electronically filed with, or furnished to, the SEC. The SEC reports can be accessed through the “SEC Reports”Filings” link in the “Investor Relations” section of our website. Other information found on our website is not part of this or any other report we file with, or furnish to, the Securities and Exchange Commission, or the SEC.
Code of Ethics
We have adopted a Code of Ethics that applies to all of our directors, officers and employees. The Code is available on our website. If any waivers of the Code are granted, the waivers will be disclosed in an SEC filing onForm 8-K. Our website also includes the Charters of the Audit Committee and the Compensation Committee. Suite 205 Stockholders may request free copies of these documents by writing to Robert R. Mohr, 1311 Herr Lane,Greg Guilford, 9300 Shelbyville Road, Suite 1020, Louisville, KY 40222, by calling502-657-3500 or by sending an email request to robert.mohr@askbeacon.com.greg.guilford@askbeacon.com.
The public may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, atwww.sec.gov.
Item 1A. Risk Factors
You should carefully consider the risks described below together with all of the other information includedincluded in this report before making an investment decision with regard to our securities. The statements contained in or incorporated into this report that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. If any of the following risks actually occurs, our business, financial condition or results of operations could be harmed. In that case, the trading price of Beacon Common Stock could decline, and you may lose all or part of your investment.
Risks Relating to the Business
In this discussion of the “Risks Relating to the Business,” unless otherwise noted or required by the context, references to “us,” “we,” “our,” “Beacon” and similar terms refer to Beacon, as defined above, which is comprised of the operating business of Beacon, as described above, after the consummation of the Share Exchange.above.
Beacon has had a history of losses.
Beacon has incurred losses since its inception. While we expect to achieve a positive cash flow basis after the full integration of our acquired operations, there can be no assurance thatand have taken significant steps to do so, this willmay not occur. Our ability to operate profitably is dependent upon our ability to operatemanage the businesses in the Phase I Acquisitions and the
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new servicesportfolio of ITS infrastructure service offerings i.e. Infrastructure Management Services, in an economically successful manner but, no assurances can be given that we willmay not be able to do this. Our prospects must be considered in light of the numerous risks, expenses, delays and difficulties frequently encountered in the intensely competitive and high risk telecommunications and ITITS services industry, as well as the risks generally inherent in the acquisition of companies and successfully integrating them. There can be no assurance that we will evercurrent economic environment. We may never achieve sustained recurring revenuenet sales and profitability on a consistent and growing basis.
Beacon’s success depends upon making and integrating acquisitions.
There can be no assurance that we will be successful in identifying, negotiating, closing, integrating and adding value with respect to any further acquisitions. Failure to either augment the revenue and profit of companies acquired or acquire new companies on an accretively valued basis would constitute a failure of our business plan and could mean that investors will fail to realize any return of their investment in Beacon.
Beacon willmay require additional financing.
Beacon willmay require substantial additional capital to implement its long-term business plan and make further acquisitions. There can be no assurance that suchplan. Such financing, willif needed, may not be available to Beacon or, if it is, that it willmay not be available on terms andor at a valuation that would be accretivebeneficial to the interests of current stockholders. In this regard, failure by Beacon to secure additional financing, if needed, on favorable terms could have severe adverse consequences relative to Beacon’s ability to grow Beacon substantially through the additional acquisitions it contemplates,and/or fully leverage existing business relationships and agreements, which ultimately could mean that Beacon may not be viable.
Rapid technological change and obsolescence could adversely affect Beacon’s business.
Our business is subject to rapid technological innovation, with old technologies superseded by innovative ones. Suchsuch developments couldpotentially adversely affectaffecting the business and operations of Beacon in the future.
Beacon’s success depends upon agreements with third parties.
Our proposed business plan contemplatesrelies upon working with third party vendors in multiple aspects of the business. The success of our plan assumes successful relationships with third party vendors for contractor services, network access as well asand hardware and software products and services which Beacon seeks to offerutilizes and sell.sells. If Beacon is unable to attract competent corporate partners, or if such partners’ efforts are inadequate, Beacon’s business could be harmed.
Beacon has operations outside the United States.
Part of our growth strategy relies on further development of operations outside the United States;States such international operations are subject to additional risks, including:
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| • | local political or economic instability; |
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| • | changes in governmental regulation; |
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| • | changes in import/export duties; |
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| • | trade restrictions; |
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| • | lack of experience in foreign markets; |
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| • | difficulties and costs of staffing and managing operations in certain foreign countries; |
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| • | work stoppages or other changes in labor conditions; |
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| • | difficulties in collecting accounts receivables on a timely basis or at all; and |
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| • | adverse tax consequences or overlapping tax structures. |
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changes in governmental regulation;
changes in import/export duties;
lack of experience in foreign markets;
difficulties and costs of staffing and managing operations in certain foreign countries;
work stoppages or other changes in labor conditions;
difficulties in collecting accounts receivables on a timely basis or at all; and
adverse tax consequences or overlapping tax structures.
We plan to continue to market and sell our products internationally to respond to customer requirements and market opportunities. Establishing and maintaining operations in any foreign country or region presents risks such as those described above as well as risks specific to the particular country or region. In addition, until a payment history is established over time with customers in a new geography or region, the likelihood of collecting receivables generated by such operations could be less than our expectations. As a result, there is a greater risk that reserves set with respect to the collection of such receivables may be inadequate. If our operations in any foreign country are unsuccessful, we could incur significant losses and wewhich may not achieveimpact profitability.
In addition,Additionally, changes in policies or laws of the United States or foreign governments resulting in, among other things, changes in regulations and the approval process, higher taxation, currency conversion limitations, restrictions on fund transfers or the expropriation of private enterprises, could reduce the anticipated benefits of our international expansion. If we fail to realize the anticipated revenuenet sales growth of our future international operations, our business and operating results could suffersuffer.
Beacon does not manufacture the equipment that it relies upon.
Beacon does not and will not have any of its own equipment or manufacturing capacity and must rely on agreements with third parties to supply all products used in Beacon’s business. An interruption in the supply of such equipment could harm the business of Beacon.
Beacon’s business is subject to inherent risks including those arising from customer acceptance, lost customers, and market competition, customer liability and increasing expenses.competition.
Customer Acceptance. Beacon’s intended customers may be unfamiliar with the services and technologies offered by Beacon for any number of reasons and therefore hesitant to use Beacon’s products and services. As a result, the sales cycle involved in obtaining new customers could be slower and more expensivelonger than initially budgeted.forecasted. Beacon will need to educate customers as to the benefits of its products and services, whichservices; this education ismay be costly and time consuming. Thus, Beacon cannot accurately forecast the timing and recognition of revenuenet sales from marketing of its products and services to new customers. Delays in market acceptance of Beacon’s products and services could harm Beacon.Beacon’s profitability.
Lost Customers. There is no guarantee that customers will continue to use the products and services of Beacon. The business is inherently very competitive on a pricecertain commoditized aspects of our service offerings and service basis and there can be no assurance that Beacon as a new entrant, willmay not be successful with its business model in attracting and retaining customers.
Competition. There are many companies operating in certain areas of Beacon’s basic market niche that have longer operating histories and greater financial, technical, marketing, sales, or other resources when compared to Beacon. While Beacon intends to enter into relationships with third parties to offset these competitive factors, there is no guarantee that Beacon will respond more effectively than its competitors to new or emerging products or changes in customer requirements. Increased competition, either from individual firms or collaborative ventures may harm Beacon’s ability to sell products and services on favorable terms, which in turn could lead to price cuts, reduced gross margins, or loss of market share. These factors could seriously harm Beacon’s business.
Liability. Beacon’s business involves providing customers with mission-critical communications products and services on a 24/7 basis. Failure by Beacon to maintain delivery of these services could place Beacon at risk of litigation and judgments for consequential and punitive damages.
Expense. Beacon plans to grow the businesses it acquires, which will involve incurring increased costs. Beacon will, as a result of such expansion, incur significant expenses arising from multiple necessary activities including attending marketing trade shows and conferences, hiring full-time professional sales and marketing management, consultants, attorneys, and expandingday-to-day operations. There can be no assurance that the incurrence of these costs will have the desired result of increasing revenue to the degree needed to achieve and maintain profitability.
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Our common stock, par value $.001 per share, has been traded on the OTC Bulletin Board, first under the symbol “BESG.OB” subsequently changed to the symbol “BEAC.OB,” since January 7, 2008. Prior to that time, our common stock was traded on the OTC Bulletin Board under the symbol “SGEG.OB.”
The public market for our stock is limited and sporadic. The following table sets forth, for the period indicated, the high and low last sale price for our common stock as reported on the OTC Bulletin Board:
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Quarter Ended | | High | | Low |
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Fiscal 2009 | | | | | | | | |
December 31, 2008 | | $ | 1.52 | | | $ | 0.55 | |
March 31, 2009 | | $ | 1.10 | | | $ | 0.30 | |
June 30, 2009 | | $ | 1.65 | | | $ | 0.69 | |
September 30, 2009 | | $ | 1.73 | | | $ | 0.92 | |
Fiscal 2008 | | | | | | | | |
December 31, 2007 | | $ | — | | | $ | — | |
March 31, 2008 | | $ | 1.90 | | | $ | 1.04 | |
June 30, 2008 | | $ | 1.20 | | | $ | 0.95 | |
September 30, 2008 | | $ | 1.50 | | | $ | 0.51 | |
Quarter Ended | | High | | | Low | |
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Fiscal 2010 | | | | | | |
| | | | | | |
December 31, 2009 | | $ | 1.01 | | | $ | 0.81 | |
March 31, 2010 | | $ | 1.50 | | | $ | 1.02 | |
June 30, 2010 | | $ | 1.53 | | | $ | 1.01 | |
September 30, 2010 | | $ | 1.10 | | | $ | 0.35 | |
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Fiscal 2011 | | | | | | | | |
| | | | | | | | |
December 31, 2010 | | $ | 0.75 | | | $ | 0.35 | |
March 31, 2011 | | $ | 0.70 | | | $ | 0.38 | |
June 30, 2011 | | $ | 0.53 | | | $ | 0.25 | |
September 30, 2011 | | $ | 0.40 | | | $ | 0.18 | |
Holders
As of December 10, 2009,5, 2011, we had approximately 330215 stockholders of record.
Dividends
We have not paid cash dividends on shares of our common stock and do not anticipate doing so in the foreseeable future. The payment of dividends on shares of our common stock will depend on earnings, financial condition and other business and economic factors affecting us at such time as our board of directors may consider relevant.
Under our Articles of Incorporation and the CertificateCertificates of Designation of Series B, C-1 and C-2 Preferred Stock, without the consent of holders of a majority of each seriesSeries of the Series A,A-1 and B Preferred Stock, we may not pay any dividends upon shares of Common Stock until we have paid the aggregate accrued dividends upon such preferred stock and such amounts that the holders of such preferred stock would receive if they were to convert their shares of preferred stock into shares of common stock.
Recent Sales of Unregistered Securities
Information related to sales of unregistered securities has been included in our Quarterly Reports onForm 10-Q for the periods ended December 31, 2007,2009, March 31, 20082010 and June 30, 2008, December 31, 2008,2010, March 31, 20092011 and June 30, 20092011 as well as our Current Reports onForm 8-K filed on December 28, 2007, January 11, 2008, January 22, 2008, February 19, 2008, March 13, 2008, March 18, 2008, July 16, 2008, August 6, 2008, August 13, 2008, August 25, 2008, September 8, 2008, September 22, 2008, October 7, 2008, October 9, 2008, October 14, 2008, October 30, 2008, December 9, 2008, January 5, 2009, January 22, 2009, January 28, 2009, February 5, 2009, February 17, 2009, February 20, 2009, February 23, 2009, February 24, 2009, March 11, 2009, March 25, 2009, April 3, 2009, April 10, 2009, April 17, 2009, April 20, 2009, April 29, 2009, May 8, 2009, May 13, 2009, May 19, 2009, June 2, 2009, July 2, 2009, July 23, 2009, August 12, 2009, August 18, 2009, September 01, 2009, October 2, 2009, October 15, 2009, October 19, 2009, November 3, 2009, November 12, 2009, November 24, 2009 and December 15, 2009 and incorporated herein by reference.May 30, 2011.
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Securities Authorized for Issuance Underunder Compensation Plans
On MarchAt the Company’s annual meeting on May 26, 2008, our Board of Directors reserved2011, shareholders approved a resolution to reserve and authorizedauthorize an additional 1,000,000 shares of our Common Stock under the 2008 Long-Term Incentive Compensation Plan. This plan was approved byPlan, bringing the shareholders on April 16 2009.total reserved and authorized to 2,000,000.
Equity Compensation Plan Information
| | | | | | | | | | | | |
| | (a)
| | | (b)
| | | (c)
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| | Number of Securities to
| | | Weighted-Average
| | | Number of Securities Remaining
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| | be Issued Upon Exercise
| | | Exercise Price of
| | | Available for Future Issuance Under
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| | of Outstanding Options,
| | | Outstanding Options,
| | | Equity Compensation Plans (Excluding
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As of September 30, 2009 | | Warrants and Rights | | | Warrants and Rights | | | Securities Reflected in Column (a)) | |
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Plan Category | | | | | | | | | | | | |
Equity compensation plans approved by security holders | | | 300,000 | | | $ | 1.57 | | | | 700,000 | |
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| | (a) | | | (b) | | | (c) | |
| | Number of securities to | | | Weighted-average | | | Number of securities remaining | |
| | be issued upon exercise | | | exercise price of | | | available for future issuance under | |
| | of outstanding options, | | | outstanding options, | | | equity compensation plans (excluding | |
As of September 30, 2011 | | warrants and rights | | | warrants and rights | | | securities reflected in column (a)) | |
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Equity compensation plans approved by security holders | | | 934,696 | | | $ | 1.23 | | | | 1,065,304 | |
Issuer Purchases of Equity Securities
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Item 7. | Management’s Discussion and Analysis of Financial Condition, Plans and Results of Operations |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Beacon Enterprise Solutions Group, Inc. and subsidiaries (collectively the“Company” “Company”) is a provider of global, international and regional telecommunications and technology systems infrastructure services, encompassing a comprehensive suite of consulting, design, installation, and infrastructure management offerings. Beacon’s portfolio of infrastructure services spans all professional and construction requirements for design, build and management of telecommunications, network and technology systems infrastructure. Professional services offered include consulting, engineering, program management, project management, construction services and infrastructure management services. Beacon offers these services under a comprehensive contract vehicle or unbundled to some global and regional clients. Beacon also offers special services in support of qualified projects in the smart buildings/campuses/cities and data center verticals. Finally, Beacon provides managed information technology and telecommunications services in selected local markets. In this report, the terms “Company,” “Beacon,” “we,” “us” or “our” mean Beacon Enterprise Solutions Group, Inc. and all subsidiaries included in our consolidated financial statements.
Cautionary Statements — Forward Outlook and Risks
Certain statements contained in this annual report onForm 10-K, 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 our current plans, expectations and projections about future events. However, such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements 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:
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| • · | Our business may be materially adversely affected by the current economic environment. The recent disruptions in both domestic and global financial and credit markets have significantly impacted domestic and global economic activity and leadled to an economic recession. As a result of these disruptions, our customers and markets have been adversely affected. If we experience reduced demand because of these disruptions in the macroeconomic environment, our business, results of operation and financial condition could be materially adversely affected. If we are unable to successfully anticipate changing economic and financial conditions, we may be unable to effectively plan for and respond to these changes and our business could be adversely affected; |
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| • · | effects of competition in the markets in which we operate; |
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| • · | liability and other claims asserted against us; |
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| • · | ability to attract and retain qualified personnel; |
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| • · | availability and terms of capital; |
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| • · | loss of significant contracts or reduction in revenuenet sales associated with major customers; |
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| • · | ability of customers to pay for services; |
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| • · | business disruption due to natural disasters or terrorist acts; |
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| • · | ability to successfully integrate the operations of acquired businesses and achieve expected synergies and operating efficiencies from the acquisitions, in each case within expected time-frames or at all; |
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| • · | changes in, or failure to comply with, existing governmental regulations; and |
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| • · | changes in estimates and judgments associated with critical accounting policies and estimates. |
For a detailed discussion of these and other factors that could cause our actual results to differ materially from the results contemplated by the forward-looking statements, please refer to Item 1(A) Risk Factors in this annual report onForm 10-K. 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, we assume no responsibility for updating forward-looking statements to reflect unforeseen or other events after the date of this report.
Overview
We were formed for the purpose of acquiring and consolidating regional telecom businesses and service platforms into an integrated, national provider of high quality voice, data and VOIP communications to small and medium-sized business enterprises (the “MBE Market”). The Company was originally formed to acquire companies that would allow it to serve the SME Market on an integrated, turn-key basis from system design, procurement and installation through all aspects of providing network service and designing and hosting network applications. In response to identification ofis a significant un-served market, our business strategy has shifted to become a leading provider of global internationaldesign, implementation and regionalmanagement of high performance Information Technology Systems (ITS) infrastructure solutions. Beacon’s portfolio of ITS infrastructure services spans all professional and construction requirements for design, build and management of telecommunications, network and technology systems infrastructureinfrastructure. Professional services encompassing a comprehensive suite ofoffered include consulting, design, installation,engineering, program management, project management, construction services and infrastructure management offerings, while continuingservices. Beacon offers these services under a comprehensive contract vehicle or unbundled to providesome global and regional clients. Beacon also offers special services in support of qualified projects in the smart buildings/campuses/cities and data center verticals. Finally, Beacon provides managed information technology and telecommunications services in selected local markets.
Beacon was a development stage enterprise with no operating history until the completion of the share exchange transaction in which the shareholders of Beacon become the majority owners of Suncrest (“Share Exchange Transaction”) completed on December 20, 2007. Concurrent with the Share Exchange Transaction, we also completed the acquisition of four complementary information technology and telecommunications businesses (the “Phase I Acquisitions”) described below.
Phase I Acquisitions
On December 20, 2007, Beacon acquired the substantially all of the assets and assumed certain liabilities of Advance Data Systems, Inc., CETCON Inc., and Strategic Communications, Inc. under the terms of three separate asset purchase agreements. In addition, Beacon acquired substantially all of the assets and certain liabilities of Bell-Haun Systems Inc. in a stock purchase agreement. These acquisitions are referred to as the “Phase I Acquisitions.”
During the year ended September 30, 2008, Beacon focused on the consolidation of various operational elements of the Phase I Acquisitions into a single core infrastructure. For further information regarding these acquisitions, please see Note 4 to the consolidated financial statements.
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Acquisition Growth Strategy
We are continuing to pursue mergers and acquisitions for a portion of our growth.
On July 30, 2009 we completed the acquisition of Symbiotec Solutions AG located outside Zurich Switzerland. This has been renamed Beacon Solutions AG, relocated to a new facility in Altendorf, and engaged in a number of projects supporting our global accounts.
A key component of our growth strategy is through strategic acquisitions. These potential acquisition candidates must meet specific criteria including the following;
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| • | Accretive to earnings in the first year. |
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| • | Strategic locations throughout the US and Europe where we have significant concentrations of demand for our service offerings. |
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| • | Highly trained technical staff that can meet our internal requirements and the requirements of our Global customers. |
We may not continue to be successful in our search for potential acquisition candidates that are acceptable for our business model, or we may not be successful in our attempts to acquire new businesses that we have identified as attractive acquisition candidates.
Organic Growth Strategy
With respect to our plans to increase revenuenet sales organically, we have identified, and are currently pursuing, several significant strategies;strategies, including:
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| • · | The first strategy is to expand theExpansion of our a la carte services offered to existing major national, multi-national and global clients who have not already signed an infrastructure managed services agreement. This has been initiated by the hiring of branch level account managers focusedreorganizing sales/marketing on the sale of individual infrastructure services and the global managed services offering. With reorganization of the professional services team structure, it permits Beacon to accommodate branch level services delivery to potential global clients. |
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| • · | The second strategy is to continue to add regional branches to the existing branches in Columbus and Cincinnati, Ohio, Louisville, Kentucky and Raritan, NJ. The additional branches will be strategically located to provide regional coverage and depth of resources to support global client demand. |
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| • | The third strategy is to addAdditionally we have added regional and major account sales resources in each new branch.business unit. This will facilitate the introduction of Fortune 1000, Global 2000 and qualifying multi-national firms. We refer to these current and future clients as Fortune 10000. |
Results of Operations
For the years ended September 30, 20082011 and 20092010
Revenue for the year ended September 30, 2008 In order to best discuss and 2009 was approximately $6.0 million and $11.1 million. The revenue growth was lead by our Information Transport Systems Managed Services, which was initiated during the year ended September 2009 and accounted for approximately $1.2 million of revenue. The revenue from this new service offering, which is included with the Time and Material Contracts in Note 3, was generated from a signed contract to provide such Services to one of the world’s premier pharmaceutical and consumer health products companies operating over 250 businesses. Under the terms of the contract, we provide, as requested, all moves, adds and changes for low voltage infrastructure, including cabling, at the manufacturer’s companies across North America, Canada and Puerto Rico. Revenue growth was further attributable to the acquisition of Symbiotec, which added approximately $1.0 million of revenue, and sales growth of $1.4 million from a strategic marketing agreement under which we provide procurement and installation services as a subcontractor.
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Due to the sales growth our cost of goods soldcompare operations for the years ended September 30, 20082011 and 2009, which amounted to approximately $3.3 million2010 our North American and $7.5 million, also rose. The increase was primarily due to material costs increaseEuropean operations will be presented and discussed separately.
North American Operations
| | For the year ended September 30 | |
| | 2011 | | | | | | 2010 | | | | | | | |
| | North America | | | | | | North America | | | | | | Change | |
| | | | | | | | | | | | | | | |
Net Sales | | $ | 11,142 | | | | 100 | % | | $ | 10,273 | | | | 100 | % | | $ | 869 | |
Cost of materials sold | | | 1,207 | | | | 11 | % | | | 1,405 | | | | 14 | % | | | (198 | ) |
Cost of services | | | 6,341 | | | | 57 | % | | | 5,035 | | | | 49 | % | | | 1,306 | |
Gross profit | | | 3,594 | | | | 32 | % | | | 3,833 | | | | 37 | % | | | (239 | ) |
Operating expense | | | | | | | | | | | | | | | | | | | | |
Salaries and benefits | | | 5,112 | | | | 46 | % | | | 5,139 | | | | 50 | % | | | (27 | ) |
Selling, general and administrative | | | 3,024 | | | | 27 | % | | | 4,043 | | | | 39 | % | | | (1,019 | ) |
Intercompany services | | | (2,552 | ) | | | -23 | % | | | (328 | ) | | | -3 | % | | | (2,224 | ) |
Non-cash loss from sale of unit | | | 656 | | | | | | | | - | | | | | | | | 656 | |
Loss from operations | | | (2,646 | ) | | NM | | | | (5,021 | ) | | NM | | | | 2,375 | |
Other expense | | | (1,022 | ) | | | | | | | (244 | ) | | | | | | | (778 | ) |
Change if Fair Value of Warrants | | | - | | | | | | | | (4,373 | ) | | | | | | | 4,373 | |
Net Loss before taxes | | | (3,668 | ) | | | | | | | (9,638 | ) | | | | | | | 5,970 | |
| | | | | | | | | | | | | | | | | | | | |
Income tax expense | | | (59 | ) | | | | | | | (49 | ) | | | | | | | (10 | ) |
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Net loss from continuing operations | | | (3,727 | ) | | | | | | | (9,687 | ) | | | | | | | 5,960 | |
Net income from discontinued operations | | | - | | | | | | | | - | | | | | | | | | |
Net loss | | $ | (3,727 | ) | | | | | | $ | (9,687 | ) | | | | | | $ | 5,960 | |
Net sales from the year ended September 30, 2008 of $1.8 million to $4.6 million for the year ended September 30, 2009, thus accounting for approximately $2.8 million of the cost of goods increase. Additionally our subcontractor costs rose from $1.5 million to $2.9 millionNorth American operations for the years ended September 30, 20082011 and 2009,2010 was $11,142 and $10,273. Year to date sales growth of 8% reflects our ability to penetrate the market and increase understanding and acceptance of the value add and cost savings our service offerings provide.
| | For the years ended September 30, | |
| | 2011 | | | 2010 | | | | |
| | North America | | | North America | | | Change | |
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Cost of services | | | | | | | | | |
Direct labor | | | 1,639 | | | | 1,884 | | | | (245 | ) |
Subcontractor | | | 4,231 | | | | 2,745 | | | | 1,486 | |
Project expenses | | | 471 | | | | 406 | | | | 65 | |
Total cost of services | | | 6,341 | | | | 5,035 | | | | 1,306 | |
Cost of services increased for the years ended September 30, 2011 compared to the same period in 2010 as a result of increased volume and a 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 direct labor expenses in 2011 compared to the same period in 2010. In addition, sales in 2011 reflect a sales mix weighted toward our infrastructure management services business versus design and engineering services, which was incurredtend to supportbe higher margin services, accounting for our new Information Transport Systems Managed Services offering.overall margin decline.
Salaries and benefits of approximately $3.2 million$5,112 and $4.5 million$5,139 for the years ended September 30, 20082011 and 2009 respectively,2010 consisted of salaries and wages of approximately $2.3 million$3,326 and $2.9 million, commissions of $119,000$2,913, benefits and $330,000, benefits of $251,000 and $283,000, payroll taxes of $268,000$968 and $376,000,$943. Non-cash share-based compensation of $740 and $1,116 related primarily to granted stock options is included in salaries and wages and commissions and bonuses of $78 and $167. While headcount was reduced, the increase in eachsalaries year to date is attributable to increased headcount fora workforce shift to a higher salaried professional administrative and management workforce, the year ended September 30, 2009. Additionallyincrease in salaries being offset by reduced share based compensation expense due to vesting and option forfeitures through workforce attrition.
| | For the years ended September 30, | |
| | 2011 | | | 2010 | | | | |
| | North America | | | North America | | | Change | |
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Selling, general and administrative | | | | | | | | | |
Professional fees | | | 808 | | | | 1,352 | | | | (544 | ) |
Travel | | | 379 | | | | 473 | | | | (94 | ) |
Business Insurance | | | 316 | | | | 205 | | | | 111 | |
Depreciation and Amortization | | | 311 | | | | 551 | | | | (240 | ) |
Office related | | | 307 | | | | 300 | | | | 7 | |
Telecommunications and data | | | 206 | | | | 345 | | | | (139 | ) |
Bad debt | | | 161 | | | | 146 | | | | 15 | |
Other administrative services | | | 536 | | | | 671 | | | | (135 | ) |
Total selling, general and administrative | | | 3,024 | | | | 4,043 | | | | (1,019 | ) |
The reduction of selling, general and administrative costs reflects an ongoing, concerted effort to streamline operations and control costs, through negotiating fixed fee arrangements and eliminating duplicate or inefficient services, all the while increasing the efficiency and scalability of Beacon’s administrative infrastructure. Management continues to monitor expenses in relation to business volume to achieve optimum results.
Included in the loss from operations is a non-cash charge of $656 related to the sale of a unit in our middle market business. This transaction has allowed the company match of employee contributions to the 401k plan decreasedreduce associated costs while continuing to move our focus to our core business.
European Operations
| | For the year ended September 30 | |
| | 2011 | | | | | | 2010 | | | | | | | |
| | Europe | | | | | | Europe | | | | | | Change | |
| | | | | | | | | | | | | | | |
Net Sales | | $ | 7,752 | | | | 100 | % | | $ | 3,723 | | | | 100 | % | | $ | 4,029 | |
Cost of materials sold | | | 16 | | | | 0 | % | | | 153 | | | | 4 | % | | | (137 | ) |
Cost of services | | | 4,610 | | | | 59 | % | | | 1,487 | | | | 40 | % | | | 3,123 | |
Gross profit | | | 3,126 | | | | 40 | % | | | 2,083 | | | | 56 | % | | | 1,043 | |
Operating expense | | | | | | | | | | | | | | | 0 | % | | | | |
Salaries and benefits | | | 456 | | | | 6 | % | | | 897 | | | | | | | | (441 | ) |
Selling, general and administrative | | | 960 | | | | 12 | % | | | 1,516 | | | | 41 | % | | | (556 | ) |
Intercompany services | | | 2,552 | | | | 33 | % | | | 328 | | | | 9 | % | | | 2,224 | |
Loss from operations | | | (842 | ) | | NM | | | | (658 | ) | | | -18 | % | | | (184 | ) |
Other expense | | | (119 | ) | | | | | | | (15 | ) | | NM | | | | (104 | ) |
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Net loss before taxes | | | (961 | ) | | | | | | | (673 | ) | | | | | | | (288 | ) |
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Income tax expense | | | 18 | | | | | | | | (14 | ) | | | | | | | 32 | |
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Net (loss) from continuing operations | | | (943 | ) | | | | | | | (687 | ) | | | | | | | (256 | ) |
Net income (loss) from discontinued operations | | | 7,892 | | | | | | | | (8,181 | ) | | | | | | | 16,073 | |
Net income (loss) | | $ | 6,949 | | | | | | | $ | (8,868 | ) | | | | | | $ | 15,817 | |
Net sales from $71,000 to $37,000European operations for the years ended September 30, 20082011 and 2009, respectively due2010 was $7,752 and $3,723 and show the growth in this segment as our operations gain traction in Europe. The increase in net sales reflects our success in leveraging our experiences to a changeincrease business from our largest customer and gain access to new markets. We expect our ability to grow net sales in our European segment will continue as we onboard new programs and expand into new markets.
| | For the years ended September 30, | |
| | 2011 | | | 2010 | | | | |
| | Europe | | | Europe | | | Change | |
| | | | | | | | | |
Cost of services | | | | | | | | | |
Direct Labor | | | 260 | | | | - | | | | 260 | |
Subcontractor | | | 4,081 | | | | 1,060 | | | | 3,021 | |
Project expenses | | | 269 | | | | 427 | | | | (158 | ) |
Total cost of services | | | 4,610 | | | | 1,487 | | | | 3,123 | |
The increase in cost of services sold primarily reflects the matching program based on company profitability. Non-cash share-based compensation of $280,000 and $558,000 related primarily to restricted stock and stock options that vested during the period,increased net sales in Europe in 2011. In addition, the increase illustrates the maturing business in Europe and installation of our subcontractor business model. The volume and shift in work being delivered by subcontractors rather than internal resources is primarily responsible for the increase in subcontractor cost incurred in 2011, as a percentage of sales, in comparison with the same periods in 2010.
Additionally, gross profit as a percentage of sales decreased significantly during year ended September 30, 2009 attributable2011 compared to options2010 due to purchase 3,110,000 additional shares granted,the majority of work being completed in European countries with higher cost structures and change in product mix away from higher margin professional services toward our infrastructure management services, which typically are higher cost and lower margin because the work is included in salaries and wages.delivered by subcontractors.
Selling, generalSalaries and administrative expensebenefits of approximately $456 and $897 for the years ended September 30, 20082011 and 20092010 consisted of approximately $3.5 millionsalaries and $4.3 million include approximately $428,000wages of $217 and $462,000$734, and $239 and $163 of accountingrelated benefits. The decrease in salaries resulting from reducing headcount in the European market based on our better understanding of staffing needs.
| | For the years ended September 30, | |
| | 2011 | | | 2010 | | | | |
| | Europe | | | Europe | | | Change | |
| | | | | | | | | |
Selling, general and administrative | | | | | | | | | |
Bad debt | | | 367 | | | | 580 | | | | (213 | ) |
Outside services | | | 233 | | | | 81 | | | | 152 | |
Professional fees | | | 79 | | | | 283 | | | | (204 | ) |
Travel | | | 63 | | | | 266 | | | | (203 | ) |
Office related | | | 167 | | | | 163 | | | | 4 | |
Other administrative services | | | 51 | | | | 143 | | | | (92 | ) |
Total selling, general and administrative | | | 960 | | | | 1,516 | | | | (556 | ) |
The overall decrease reflects our operating experience in Europe which we leveraged to improve the structure and professional fees,operating efficiency of the administrative function.
Liquidity and a charge for bad debt expense of $50,000 and $143,000 the increase of which takes into account sales growth and economic conditions forCapital Resources
For the year ended September 30, 2009. As part2011, we generated net income of our plan to increase visibility with the investing public we increased spending on investor relations accounting$3,222, which includes income from discontinued operations of $7,892 (see Note 4), non-cash expenses for approximately $107,000share based compensation of $1,022, non-cash depreciation and $1.4 million . Due to our expanding business and in order to fully integrate our offices, telecommunications expense increased from approximately $129,000 to $226,000, travel and related expenses increased from $221,000 to $374,000, and business insurance expenses increased from $153,000 to $174,000, year over year. Administrative services expenses decreased from $575,000 to $100,000 due to the cost of the Suncrest acquisition (Note 1) and related integration costs thereof incurred in the year ended September 30, 2008. Finally other selling, general and administrative expenses included, $501,000 and $461,000 of amortization expense relatedof $350 and cash used in continuing operations amounting to intangible assets, $70,000 and $153,000 of depreciation and $132,000 and $134,000 of miscellaneous outside services.
Interest expense of approximately $610,000 and $905,000 for the years ended September 30, 2008 and 2009 includes interest related to our Bridge Notes in addition to the notes payable issued in connection with our Phase I Acquisitions. Non-cash interest expense related to the accretion of the Bridge Notes to face value, warrants issued in exchange for certain financing arrangements, and the vesting of contingent bridge warrants was $227,000 and $302,000 for the years ended September 30, 2008 and 2009, and $158,000 and $289,000 related to warrants earned in connection with certain equity financing arrangements.
Contractual dividends on our Series A andA-1 Preferred Stock amounted to approximately $220,000 and $548,000 for the years ended September 30, 2008 and 2009. Of these amounts, $220,000 and $38,000 was included in accrued expenses as of September 30, 2008 and 2009, respectively. Deemed dividends related to the beneficial conversion feature embedded in our Series A,A-1 and B Preferred Stock of approximately $4.2 million and $266,000 was recognized during the years ended September 30, 2008 and 2009.
Liquidity and Capital Resources
We incurred a net loss of approximately ($6.3) million and used approximately ($4.3) million of cash in our operating activities for the year ended September 30, 2009. At September 30, 2009, our$1,306. Our accumulated deficit amounted to approximately ($16.3) million. We$36,583, while we had cash of $264,000$861 and a working capital deficit of approximately ($1.5) million at$2,169.
Financing transactions we completed during the year ended September 30, 2009.
As widely reported, the financial markets have been experiencing significant disruption in recent months, including, among other things, volatility in securities prices, diminished liquidity and credit availability and declining valuations. Among other risks we face, the current tightening of credit in financial markets may
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adversely affect our ability to obtain financing in the future, including, if necessary, to fund strategic acquisitions,and/or refinance our debt as it comes due.
Our financing transactions to date2011 include the following:
On JulyAugust 17, 2010 we entered into a long term line of credit facility with one of our directors for $4,000, the facility has an annual interest rate of 7.73% on any outstanding balance and a facility fee of the greater of $40 or 1% of the unused balance. Additionally, 15,000 warrants, with a five year term exercisable at $1.00 per share, per month are earned 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 has decided to terminate the long term line of credit facility and associated put right entered into on August 17, 2010 and revised August 12, 2011, with one of our directors. See Note 10 for additional details.
On November 23, 2010, we initiated a private placement (the “Placement”) of up to $3,000 of 12 month Senior Secured Notes (“Notes”) with warrants to purchase 150 shares of Beacon’s common stock at $0.40 per share for every $1 in principal invested, and bear interest at 9% APR. The Placement was made on a "best efforts" basis with a Minimum of $600 and a Maximum of $3,000. Net proceeds have been used to repay and replace an existing Senior Secured Bank Note totaling approximately $300 and for general working capital purposes. The Placement expired on March 30, 2011, the date the Maximum was raised, with net proceeds received of $2,667 (gross proceeds of $3,000 less offering costs of $333).
On March 25, 2008, we engaged a registered broker-dealer (the “Placement Agent”)2011 Beacon offered in a private placement ($.80350 units of preferred stock (the "Series C-1 Units"), to two existing shareholders, at a purchase price of $2 per unit) (the “July Common Offering”)Series C-1 Unit. As of up to 3,750,000 units (the “CommonJune 30, 2011, we completed the sale of 350 Series C-1 Units”), for an aggregate purchase price of $3,000,000, with each Common Unit comprised$526 and issued 350,000 warrants having a fair value, as determined using the Black Scholes pricing model, of (i) one share of Common Stock, and (ii) a five year warrant to purchase one-half share of Common Stock (each, a “Common Offering Warrant”). During the nine months ended June 30, 2009 we sold 367,099 units for net proceeds of $239,290 (gross proceeds of $293,679 less offering costs of $54,389).$112
On October 29, November 17 and November 19, 2008,May 4, 2011 Beacon and Midian Properties, LLC, entered into short term credit facilities in the amounts of $100,000, $120,000 and $70,000 that the Company repaid. On March 27, 2009, Beacon and Midian, entered into a short term credit facility in the amount of $53,000, the principal of which was due and payable to the holder within seven (7) days of issuance along with a 1% origination fee. The credit facility has been fully repaid.
On November 12, 2008, Beacon engaged a registered broker-dealeroffered in a private placement of Common Stock and Warrants to raise $3.0 million of equity financing with an option to raise an additional $450,000 if the offering is oversubscribed. As of May 27, 2009 we sold 4,277,050100 units for net proceeds of $2,642,465 (gross proceeds of $3,421,640 less offering costs of $779,175).
On January 7, 2009, we entered into a note payable with a principal amount of $200,000 payable on or before December 31, 2009, bearing interest at 12% per annum with one of our directors. The director concurrently authorized us to issue 300 shares of preferred stock in exchange for this note and an additional $100,000 note issued prior to December 31, 2008. We completed our administrative issuance of the (the "Series B Preferred Stock on February 16, 2009, at which time we and the director agreed that we shall be permitted, but not required, to redeem these sharesC-2 Units"), at a 1%purchase price of $2 per month premium beginning 30 days fromSeries C-2 Unit, for an aggregate purchase price of $150 and issued 100,000 warrants having a fair value, as determined using the dateBlack Scholes pricing model, of their issuance at our discretion.$32.
On January 9, 2009, we entered into an equity financing arrangement with one of our directors that provided up to $2.2 million of additional funding, the terms of which provide for compensation of a one-time grant of warrants to purchase 100,000 shares of common stock at $1.00 per share and ongoing grants of warrants to purchase 33,333 shares of common stock at $1.00 per share each month that the financing arrangement is in effect. The warrants have a five year term. The commitment was reduced on a dollar for dollar basis as we raised additional equity capital in various private placements On May 13, 2009, the director agreed to renew the commitment and increase the available financing under the arrangement to $1.8 million in exchange for a continuation of the ongoing grants of warrants to purchase 33,333 shares of common stock at $1.00 per share through August 11, 2009. On August 10, 2009 the facility was renewed to increase the available financing to $3.0 million through July 1, 2010 on substantially the same terms but has since been reduced on a dollar for dollar basis to zero availability as additional equity capital has been raised from financing transactions.
On January 22, 2009, Beacon entered into $500,000In light of convertible notes payable with a group of private investors (the “Notes”) facilitated by a broker/dealer. During the period ended September 30, 2009, we repaid $202,000 of the convertible notes.On March 31, 2009, we executed an extension of our $100,000 demand note with First Savings Bank, the terms of which are substantially the same as the original agreement, with payments initially due May 15 and June 15, 2009 in the amount of $50,000 each plus accrued interest. We paid $50,000 of this note. On July 24, 2009 an additional extension was executed through August 31, 2009, and further extended on October 29, 2009 through December 30, 2009.
On June 5, 2009, Beacon engaged a registered broker-dealer in a private placement of Common Stock and Warrants to raise $600,000 of equity financing with an option to raise an additional $400,000 if the offering was oversubscribed. On July 9, 2009, we opted to increase this offering to $2.5 million. As of
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August 31, 2009, we sold 1,846,847 units for net proceeds of $1,212,620 (gross proceeds of $1,479,930 less offering costs of $267,310) when we completed this offering.
On September 28, 2009, we engaged a registered broker-dealer in a private placement of Common Stock and Warrants to raise $3,000,000 of equity financing with an option to raise an additional $1,000,000 if the offering is oversubscribed. As of December 15, 2009, we sold 4,090,000 units for net proceeds of $2,673,480 (gross proceeds of $3,272,000 less offering costs of $598,520) when we completed the offering.
On October 19, 2009, we announced an authorization to proceed with providing global network infrastructure services to one of our Fortune 100 customers under a three year agreement worth approximately $27 million in revenue, of which we have received a customer deposit of approximately $0.4 million related to initiation of the project that began early in the fourth quarter of fiscal 2009.
On November 11, 2009, we announced a $24.8 million data center construction management engagement beginning immediately with the first phase, worth approximately $13.0 million in revenue, due to complete on or before September 30, 2010. As of December 10, 2009, we have received customer deposits of approximately $3.7 million to fund the project.
We completed our acquisition of Symbiotec AG (Note 4), on July 29, 2009, subsequently executing certain commercial agreements that we believe represent significant miletstones in the execution of our business plan. As a result we anticipate being able to generate positive cash flows in our operating activities during the year end September 30, 2010.
Based on the recent progress we made in the execution of our business plan, the funding that occurred during the year, the proceeds from the Senior Secured Notes and C-3 private placement subsequent to year end (See Note 17 – Subsequent Events for information regarding additional financing) , we believe that our currently available cash and the proceeds of our equity financing activities, and funds we expectexpected to generatebe generated from operations will enable us to effectively operate our business and repay our debt obligations as they become due through October 1, 2010. 2012.
However, we willmay require additional capital in order to execute our business plan. If we are unable to raise additional capital, or encounter unforeseen circumstances that place constraints on our capital resources, we will be required to take various measures to conserve liquidity, which could include, but not necessarily be limited to, curtailing our business development activities, suspending the pursuit of our business plan, and controlling overhead expenses. We cannot provide any assurance that we will raise additional capital. We have not secured any commitments for new financing at this time, nor can we provide any assurance that new financing will be available to us on acceptable terms, if at all.
Off-Balance Sheet Arrangements
We have threefour operating lease commitments for real estate used for office space and production facilities.space.
Contractual Obligations as of September 30, 2009:2011:
The following is a summary of our contractual obligations and their respective maturity dates as of September 30, 2009:2011:
| | | | | | | | | | | | | | | | | | | | |
| | | | | Payment Due by Period | |
| | | | | Year
| | | Years
| | | Years
| | | | |
Contractual Obligations | | Total | | | 1 | | | 2-3 | | | 4-5 | | | Thereafter | |
|
Debt obligations | | $ | 2,292,561 | | | $ | 1,490,226 | | | $ | 698,618 | | | $ | 103,717 | | | | | |
Interest obligations(1) | | | 162,109 | | | | 95,875 | | | | 64,525 | | | | 1,709 | | | | | |
Operating lease obligations(2) | | | 142,823 | | | | 123,423 | | | | 19,400 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | $ | 2,597,493 | | | $ | 1,709,524 | | | $ | 782,543 | | | $ | 105,426 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
Contractual Obligations | | Total | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | |
| | | | | | | | | | | | | | | | | | |
Long-term debt obligations | | $ | 3,304 | | | $ | 3,280 | | | $ | 24 | | | $ | - | | | $ | - | | | $ | - | |
Interest obligations (1) | | | 279 | | | | 279 | | | | - | | | | - | | | | - | | | | - | |
Operating lease obligations (2) | | | 1,002 | | | | 243 | | | | 243 | | | | 239 | | | | 198 | | | | 79 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 4,585 | | | $ | 3,802 | | | $ | 267 | | | $ | 239 | | | $ | 198 | | | $ | 79 | |
| | |
(1) | | Interest obligations assume Prime Rate of 3.25% at September 30, 2009.2011. Interest rate obligations are presented through the maturity dates of each component of long-term debt. |
|
(2) | | Operating lease obligations represent payment obligations under non-cancelable lease agreements classified as operating leases and disclosed pursuant to Statement of Financial Accounting Standards No. 13ASC 840 “Accounting for Leases,” as may be modified or supplemented. These amounts are not recorded as liabilities as of the current balance sheet date. |
20
Dividends on Series A andA-1 Preferred Stock are payable quarterly at an annual rate of 10%, Series B, Series C-1 and Series BC-2 Preferred Stock are payable quarterly at an annual rate of 6% in cash or the issuance of additional shares of Series A,A-1 and B Preferred Stock, at our option.Stock. If we were to fund dividends accruing during the year ending September 30, 20102011 in cash, the total obligation would be $370,000$247 based on the number of shares of Series A,A-1, B, C-1 and BC-2 Preferred Stock outstanding as of September 30, 2009.2011.
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 exceed $500,000be significant for the year ended September 30, 20102011 and could be curtailed should we experience a shortfall in expected financing.
Working Capital
As of September 30, 2009,2011, our current liabilities exceed current assets by approximately ($1.5) million.$2,169 with the largest components being accounts payable and senior secured debt. The $100 bridge notesnote recorded in current liabilities areis convertible into common stock and the note agreements provideagreement provides for vesting of additional warrants to purchase shares of common should the holders continue to hold the debt and immediate vesting of the additional warrants upon conversion.
21
| |
Item 8. | Financial Statements and Supplementary Data |
Critical Accounting Policies and Estimates
We consider the following to be critical policies: revenue and cost recognition, share based payments, common stock purchase warrants and other derivative financial instruments and fair value of financial assets and liabilities.
Recent Accounting Pronouncements
The information contained in Note 3 to the accompanying consolidated financial statements included in Item 8 to this annual report is incorporated herewith by reference.
Item 8. Financial Statements and Supplementary Data
Consolidated Financial Statements of Beacon Enterprise Solutions Group, Inc.
| | | | |
| | Page |
| | |
| | | 23 | 18 |
2010 | | | 24 | 19 |
2010 | | | 25 | 20 |
2010 | | | 26 | 21 |
2010 | | | 28 | 22 |
| | | 29 | 23 |
22
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Audit Committee of the
Board of Directors and Stockholders
Beacon Enterprise Solutions Group, Inc
1311 Herr Lane, Suite 205
Louisville, KY 40222Inc.
We have audited the accompanying consolidated balance sheets of Beacon Enterprise Solutions Group, IncInc. and Subsidiaries (the “Company”) as of September 30, 20082011 and 2009,2010, and the related consolidated statements of operations, changes in stockholders’ equity (deficiency) and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our auditaudits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Beacon Enterprise Solutions Group, IncInc. and subsidiaries, as of September 30, 20082011 and 2009,2010, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in Thethe United States of America.
New York, NY
23
December 12, 2011
Beacon Enterprise Solutions Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(all amounts in 000's except share and per share data)
Consolidated Balance Sheets
| | | | | | | | | |
| | September 30,
| | September 30,
| | | September 30, | | | September 30, | |
| | 2008 | | 2009 | | | 2011 | | | 2010 | |
| | | | | | |
ASSETS | ASSETS | | | | | | |
| | | | | | | |
Current assets: | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 127,373 | | | $ | 264,338 | | | $ | 861 | | | $ | 246 | |
Accounts receivable, net | | | 1,505,162 | | | | 3,980,715 | | | | 3,752 | | | | 4,535 | |
Inventory, net | | | 597,794 | | | | 604,622 | | | | - | | | | 557 | |
Prepaid expenses and other current assets | | | 44,745 | | | | 397,319 | | | | 1,345 | | | | 357 | |
Current assets of discontinued operations | | | | - | | | | 133 | |
Total current assets | | | | 5,958 | | | | 5,828 | |
| | | | | | | | | | | | | |
Total current assets | | | 2,275,074 | | | | 5,246,994 | | |
Property and equipment, net | | | 310,703 | | | | 394,571 | | | | 249 | | | | 420 | |
Goodwill | | | 2,791,648 | | | | 3,151,948 | | | | 2,792 | | | | 2,792 | |
Other intangible assets, net | | | 3,802,717 | | | | 3,903,124 | | | | 2,905 | | | | 3,011 | |
Other assets | | | 176,249 | | | | 117,111 | | | | 18 | | | | 20 | |
| | | | | | |
Total assets | | $ | 9,356,391 | | | $ | 12,813,748 | | | $ | 11,922 | | | $ | 12,071 | |
| | | | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) | | | | | | | | | |
| | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
Current liabilities: | | | | | | | | | | | | | | | | |
Short term credit obligations | | $ | 200,000 | | | $ | 550,000 | | |
Convertible Note Payable | | | | | | | 297,999 | | |
Bridge notes (net of $0 and $33,123 aggregate discounts) | | | — | | | | 166,879 | | |
Bridge note - related party | | | $ | 100 | | | $ | 100 | |
Current portion of long-term debt | | | 495,595 | | | | 475,348 | | | | 180 | | | | 379 | |
Senior secured notes payable, net of unamortized deferred debt discount of $48 | | | | 2,952 | | | | - | |
Accounts payable | | | 1,225,509 | | | | 2,176,845 | | | | 3,204 | | | | 2,971 | |
Contingent consideration payable | | | | | | | 145,189 | | |
Income tax payable | | | — | | | | 97,581 | | |
Accrued expenses | | | 1,337,360 | | | | 2,644,280 | | |
Customer Deposits | | | 95,767 | | | | 160,368 | | |
| | | | | | |
Accrued expenses and other current liabilities | | | | 1,691 | | | | 880 | |
Current liabilities of discontinued operations | | | | - | | | | 8,558 | |
Total current liabilities | | | 3,354,231 | | | | 6,714,489 | | | | 8,127 | | | | 12,888 | |
| | | | | | | | | | | | | |
Non-current line of credit - related party | | | | - | | | | 630 | |
Long-term debt, less current portion | | | 1,316,477 | | | | 802,335 | | | | 24 | | | | 403 | |
Bridge notes (net of $128,840 discount at September 30, 2008) | | | 571,160 | | | | | | |
Deferred Tax Liability | | | 45,472 | | | | 103,484 | | |
| | | | | | |
Deferred tax liability | | | | 212 | | | | 153 | |
Total liabilities | | | 5,287,340 | | | | 7,620,308 | | | | 8,363 | | | | 14,074 | |
| | | | | | | | | | | | | |
Stockholders’ equity | | | | | | | | | |
Stockholders’ equity | | | | | | | | | |
Preferred Stock: $0.01 par value, 5,000,000 shares authorized, 5,200 and 3,984 shares outstanding in the following classes: | | | | | | | | | |
Series A convertible preferred stock, $1,000 stated value, 4,500 authorized, 4,000 and 1,984 shares issued and outstanding, (liquidation preference $3,171,999) | | | 4,000,000 | | | $ | 1,984,074 | | |
Series A-1 convertible preferred stock, $1,000 stated value, 1,000 shares authorized, 800 and 752 shares issued and outstanding, (liquidation preference $940,678) | | | 800,000 | | | | 752,347 | | |
Series B convertible preferred stock, $1,000 stated value, 4,000 shares authorized, 400 and 700 shares issued and outstanding, (liquidation preference $914,818) | | | 400,000 | | | | 700,000 | | |
Common stock, $0.001 par value 70,000,000 shares authorized, 12,093,021 and 24,655,990 shares issued and outstanding | | | 12,093 | | | | 24,656 | | |
Stockholders' equity (deficiency) | | | | | | | | | |
Preferred Stock: $0.01 par value, 5,000,000 shares authorized, 1,491 and 1,041 shares issued and outstanding at September 30, 2011 and 2010, respectively, in the following classes: | | | | | | | | | |
Series A convertible preferred stock, $1,000 stated value, 4,500 shares authorized, 30 shares issued and outstanding at September 30, 2011 and 2010, respectively, (liquidation preference $96) | | | | 30 | | | | 30 | |
Series A-1 convertible preferred stock, $1,000 stated value, 1,000 shares authorized, 311 shares issued and outstanding at September 30, 2011 and 2010, respectively, (liquidation preference $471) | | | | 311 | | | | 311 | |
Series B convertible preferred stock, $1,000 stated value, 4,000 shares authorized, 700 shares issued and outstanding at September 30, 2011 and 2010, respectively, (liquidation preference $1,020) | | | | 700 | | | | 700 | |
Series C-1 convertible preferred stock, $1,500 stated value, 400 shares authorized, 350 issued and outstanding at September 30, 2011 (liquidation preference $703) | | | | 525 | | | | - | |
Series C-2 convertible preferred stock, $1,500 stated value, 2,000 shares authorized, 100 issued and outstanding at September 30, 2011 (liquidation preference $198) | | | | 150 | | | | - | |
Common stock, $0.001 par value 70,000,000 shares authorized 37,611,396 and 37,376,396 shares issued and outstanding at September 30, 2011 and 2010, respectively | | | | 38 | | | | 37 | |
Additional paid in capital | | | 8,027,602 | | | $ | 17,977,046 | | | | 38,342 | | | | 37,137 | |
Accumulated deficit | | | (9,170,644 | ) | | | (16,254,545 | ) | | | (36,583 | ) | | | (39,711 | ) |
Accumulated other comprehensive income | | | | | | | 9,862 | | |
| | | | | | |
Total stockholders’ equity | | | 4,069,051 | | | | 5,193,440 | | |
| | | | | | |
Total liabilities and stockholders’ equity | | | 9,356,391 | | | | 12,813,748 | | |
| | | | | | |
Accumulated other comprehensive income (loss) | | | | 46 | | | | (507 | ) |
Total stockholders' equity (deficiency) | | | | 3,559 | | | | (2,003 | ) |
Total liabilities and stockholders' equity (deficiency) | | | $ | 11,922 | | | $ | 12,071 | |
The accompanying notes are an integral part of these consolidated financial statements.
24
Beacon Enterprise Solutions Group, Inc. and Subsidiaries
(all amounts in 000's except share and per share data)
| | | | | | | | |
| | For the
| | | For the
| |
| | Year Ended
| | | Year Ended
| |
| | September 30,
| | | September 30,
| |
| | 2008 | | | 2009 | |
|
Net sales | | $ | 6,012,637 | | | $ | 11,070,496 | |
| | | | | | | | |
Cost of goods sold | | | 1,796,460 | | | | 4,577,261 | |
Cost of services | | | 1,500,390 | | | | 2,915,803 | |
| | | | | | | | |
Gross profit | | | 2,715,787 | | | | 3,577,432 | |
Operating expense | | | | | | | | |
Salaries and Wages | | | 3,199,378 | | | | 4,489,947 | |
Selling, General and Administrative | | | 3,515,840 | | | | 4,297,342 | |
| | | | | | | | |
Total operating expense | | | 6,715,218 | | | | 8,787,289 | |
| | | | | | | | |
Loss from operations | | | (3,999,431 | ) | | | (5,209,857 | ) |
Other (expenses) income | | | | | | | | |
Interest expense | | | (610,051 | ) | | | (905,125 | ) |
Interest income | | | 7,416 | | | | 725 | |
| | | | | | | | |
Total other (expenses) | | | (602,635 | ) | | | (904,400 | ) |
| | | | | | | | |
Net (loss) before income taxes | | | (4,602,066 | ) | | | (6,114,257 | ) |
Income taxes | | | 45,472 | | | | 155,593 | |
| | | | | | | | |
Net (loss) | | | (4,647,538 | ) | | | (6,269,850 | ) |
Series A,A-1 and B Preferred Stock: | | | | | | | | |
Contractual dividends | | | (220,354 | ) | | | (547,676 | ) |
Deemed dividends related to beneficial conversion feature | | | (4,169,372 | ) | | | (266,375 | ) |
| | | | | | | | |
Net (loss) available to common stockholders | | | (9,037,264 | ) | | | (7,083,901 | ) |
| | | | | | | | |
Net loss per share to common stockholders — basic and diluted | | $ | (0.95 | ) | | $ | (0.43 | ) |
| | | | | | | | |
Weighted average shares outstanding — basic and diluted | | | 9,466,764 | | | | 16,482,449 | |
| | | | | | | | |
Other Comprehensive income, net of tax | | | | | | | | |
Net Loss | | $ | (9,037,264 | ) | | $ | (7,083,901 | ) |
Foreign currency translations adjustment | | | * | | | | 9,862 | |
| | | | | | | | |
Comprehensive loss | | $ | (9,037,264 | ) | | $ | (7,074,039 | ) |
| | | | | | | | |
| | For the | | | For the | |
| | Year Ended | | | Year Ended | |
| | September 30, | | | September 30, | |
| | 2011 | | | 2010 | |
Net sales | | $ | 18,894 | | | $ | 13,996 | |
Cost of goods sold | | | 1,223 | | | | 1,558 | |
Cost of services | | | 10,951 | | | | 6,522 | |
Gross profit | | | 6,720 | | | | 5,916 | |
Operating expenses | | | | | | | | |
Salaries and benefits | | | 5,568 | | | | 6,036 | |
Selling, general and administrative | | | 3,984 | | | | 5,559 | |
Loss on sale of unit | | | 656 | | | | - | |
Total operating expenses | | | 10,208 | | | | 11,595 | |
Loss from operations | | | (3,488 | ) | | | (5,679 | ) |
| | | | | | | | |
Other expenses | | | | | | | | |
Interest expense | | | (420 | ) | | | (241 | ) |
Other expenses | | | (721 | ) | | | (18 | ) |
Change in fair value of warrants | | | - | | | | (4,373 | ) |
Total other expenses | | | (1,141 | ) | | | (4,632 | ) |
| | | | | | | | |
Net loss before income taxes | | | (4,629 | ) | | | (10,311 | ) |
| | | | | | | | |
Income tax expense | | | (41 | ) | | | (63 | ) |
| | | | | | | | |
Loss from continuing operations | | | (4,670 | ) | | | (10,374 | ) |
Income (loss) from discontinued operations | | | 7,892 | | | | (8,181 | ) |
| | | | | | | | |
Net income (loss) | | | 3,222 | | | | (18,555 | ) |
| | | | | | | | |
Preferred Stock: | | | | | | | | |
Contractual dividends | | | (94 | ) | | | (175 | ) |
Deemed dividends related to beneficial conversion feature | | | - | | | | (99 | ) |
Net income (loss) available to common stockholders | | $ | 3,128 | | | $ | (18,829 | ) |
| | | | | | | | |
Net loss per share to common stockholders - basic and diluted | | | | | | | | |
Net loss per share from continning operations | | | (0.12 | ) | | | (0.32 | ) |
Net income (loss) per share from discontinued operations | | | 0.21 | | | | (0.25 | ) |
| | $ | 0.09 | | | $ | (0.57 | ) |
| | | | | | | | |
Weighted average shares outstanding basic and diluted | | | 37,417,368 | | | | 32,254,769 | |
| | | | | | | | |
Other comprehensive income, net of tax | | | | | | | | |
Net income (loss) | | $ | 3,128 | | | $ | (18,829 | ) |
Foreign currency translation adjustment | | | 553 | | | | (28 | ) |
Comprehensive income (loss) | | $ | 3,681 | | | $ | (18,857 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
25
Beacon Enterprise Solutions Group, Inc. and Subsidiaries
For the years ended September 30, 2008 and 2009(all amounts in 000's except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Series A Convertible
| | | Series A-1 Convertible
| | | Series B Convertible
| | | | | | | | | | | | | | | | | | | |
| | Preferred Stock | | | Preferred Stock | | | Preferred Stock | | | Common Stock | | | | | | | | | Accumulated
| | | | |
| | | | | $1,000
| | | | | | $1,000
| | | | | | $1,000
| | | | | | $0.001
| | | Additional
| | | | | | Other
| | | | |
| | | | | Stated
| | | | | | Stated
| | | | | | Stated
| | | | | | Par
| | | Paid-In
| | | Accumulated
| | | Comprehensive
| | | | |
| | Shares | | | Value | | | Shares | | | Value | | | Shares | | | Value | | | Shares | | | Value | | | Capital | | | Deficit | | | Income | | | Total | |
|
Balance at October 1, 2007 | | | | | | | | | | | | | | | | | | | | | | | | | | | 5,187,650 | | | $ | 5,188 | | | $ | (812 | ) | | $ | (133,380 | ) | | | | | | $ | (129,004 | ) |
Common stock granted to employee for services | | | | | | | | | | | | | | | | | | | | | | | | | | | 782,250 | | | | 782 | | | | (782 | ) | | | | | | | | | | | — | |
Vested portion of common stock granted to employee for services | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 266,693 | | | | | | | | | | | | 266,693 | |
Shares of Suncrest outstanding at time of share exchange | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,273,121 | | | | 1,273 | | | | (1,273 | ) | | | | | | | | | | | — | |
Common stock issued as purchase consideration in business combinations | | | | | | | | | | | | | | | | | | | | | | | | | | | 3,225,000 | | | | 3,225 | | | | 2,738,025 | | | | | | | | | | | | 2,741,250 | |
Series A Preferred Stock issued in private placement | | | 4,000.0 | | | | 4,000,000 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 4,000,000 | |
Series A-1 Preferred Stock issued in private placement | | | | | | | | | | | 800.0 | | | | 800,000 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 800,000 | |
Series B Preferred Stock issued in private placement | | | | | | | | | | | | | | | | | | | 400 | | | | 400,000 | | | | | | | | | | | | | | | | | | | | | | | | 400,000 | |
Common Stock issued in private placement | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,625,000 | | | | 1,625 | | | | 1,298,375 | | | | | | | | | | | | 1,300,000 | |
Private placement offering costs | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (1,188,324 | ) | | | | | | | | | | | (1,188,324 | ) |
Beneficial conversion feature — deemed preferred stock dividend | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 4,169,372 | | | | (4,169,372 | ) | | | | | | | — | |
Bridge note warrants | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 72,000 | | | | | | | | | | | | 72,000 | |
Beneficial conversion feature — bridge notes | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 128,000 | | | | | | | | | | | | 128,000 | |
Vested contingent bridge warrants | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 77,980 | | | | | | | | | | | | 77,980 | |
Warrants issued for equity financing agreement | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 235,699 | | | | | | | | | | | | 235,699 | |
Compensatory warrants | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 219,000 | | | | | | | | | | | | 219,000 | |
Interest on Put Options | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | — | | | | | | | | | | | | | |
Series A Preferred Stock contractual dividends | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (194,904 | ) | | | | | | | (194,904 | ) |
Series A-1 Preferred Stock contractual dividends | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (25,450 | ) | | | | | | | (25,450 | ) |
Issuance of Stock Options | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 13,649 | | | | | | | | | | | | 13,649 | |
Net loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (4,647,538 | ) | | | | | | | (4,647,538 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at September 30, 2008 | | | 4,000 | | | $ | 4,000,000 | | | | 800 | | | $ | 800,000 | | | | 400 | | | $ | 400,000 | | | | 12,093,021 | | | $ | 12,093 | | | $ | 8,027,602 | | | $ | (9,170,644 | ) | | $ | — | | | $ | 4,069,051 | |
Vested portion of share based payments to employee for services | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 558,235 | | | | | | | | | | | | 558,235 | |
Coversion of debt to Preferred shares | | | | | | | | | | | | | | | | | | | 300 | | | | 300,000 | | | | | | | | | | | | | | | | | | | | | | | | 300,000 | |
Coversion of debt to common shares | | | | | | | | | | | | | | | | | | | | | | | | | | | 833,334 | | | | 833 | | | | 499,167 | | | | | | | | | | | | 500,000 | |
Conversion of Preferred shares to common | | | (2,635 | ) | | | (2,635,049 | ) | | | (159 | ) | | | (158,598 | ) | | | — | | | | — | | | | 3,724,854 | | | | 3,726 | | | | 2,789,921 | | | | — | | | | | | | | — | |
Common Stock issued in private placement | | | | | | | | | | | | | | | | | | | | | | | | | | | 6,853,497 | | | | 6,853 | | | | 5,478,396 | | | | | | | | | | | | 5,485,249 | |
Private placement offering costs | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (1,138,574 | ) | | | | | | | | | | | (1,138,574 | ) |
Warrants exercised for common shares | | | | | | | | | | | | | | | | | | | | | | | | | | | 196,145 | | | | 196 | | | | (196 | ) | | | | | | | | | | | (0 | ) |
Shares issued for Symbio — Tec acquistion | | | | | | | | | | | | | | | | | | | | | | | | | | | 400,000 | | | | 400 | | | | 436,455 | | | | | | | | | | | | 436,855 | |
26
Beacon Enterprise Solutions Group, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders’ Equity — (Continued)
For the years ended September 30, 2008 and 2009
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Series A Convertible
| | | Series A-1 Convertible
| | | Series B Convertible
| | | | | | | | | | | | | | | | | | | |
| | Preferred Stock | | | Preferred Stock | | | Preferred Stock | | | Common Stock | | | | | | | | | Accumulated
| | | | |
| | | | | $1,000
| | | | | | $1,000
| | | | | | $1,000
| | | | | | $0.001
| | | Additional
| | | | | | Other
| | | | |
| | | | | Stated
| | | | | | Stated
| | | | | | Stated
| | | | | | Par
| | | Paid-In
| | | Accumulated
| | | Comprehensive
| | | | |
| | Shares | | | Value | | | Shares | | | Value | | | Shares | | | Value | | | Shares | | | Value | | | Capital | | | Deficit | | | Income | | | Total | |
|
Fair value of contingent shares related to Symbio-Tec acquistion | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 476,000 | | | | | | | | | | | | 476,000 | |
Shares committed to Anti-dilution adjustment | | | | | | | | | | | | | | | | | | | | | | | | | | | 285,139 | | | | 285 | | | | (285 | ) | | | | | | | | | | | 0 | |
Common Stock issued for investor relations agreements | | | | | | | | | | | | | | | | | | | | | | | | | | | 270,000 | | | | 270 | | | | 163,830 | | | | | | | | | | | | 164,100 | |
Beneficial conversion feature — deemed preferred stock dividend | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 200,676 | | | | (200,676 | ) | | | | | | | — | |
Discount on Convertible Notes Payable | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 74,334 | | | | | | | | | | | | 74,334 | |
Vested contingent bridge warrants | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 56,840 | | | | | | | | | | | | 56,840 | |
Warrants issued for equity financing agreement | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 288,946 | | | | | | | | | | | | 288,946 | |
Series A Preferred Stock contractual dividends | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (429,834 | ) | | | | | | | (429,834 | ) |
Series A Preferred Stock contractual dividends paid in kind | | | 619 | | | | 619,123 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 619,123 | |
Series A-1 Preferred Stock contractual dividends | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (85,689 | ) | | | | | | | (85,689 | ) |
Series A-1 Preferred Stock contractual dividends paid in kind | | | | | | | | | | | 111 | | | | 110,945 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 110,945 | |
Series B Preferred Stock contractual dividends | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (32,153 | ) | | | | | | | (32,153 | ) |
Beneficial conversion feature — deemed Investor Warrant dividend | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 65,699 | | | | (65,699 | ) | | | | | | | — | |
Net loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (6,269,850 | ) | | | | | | | (6,269,850 | ) |
Net change in accumulated other comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 9,862 | | | | 9,862 | |
Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at September 30, 2009 | | | 1,984 | | | $ | 1,984,074 | | | | 752 | | | $ | 752,347 | | | | 700 | | | $ | 700,000 | | | | 24,655,990 | | | $ | 24,656 | | | $ | 17,977,046 | | | $ | (16,254,545 | ) | | $ | 9,862 | | | $ | 5,193,440 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Series A Convertible | | | Series A-1 Convertible | | | Series B Convertible | | | Series C-1 Convertible | | | Series C-2 Convertible | | | | | | | | | | | | Accumulated | | | | |
| | 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 | | | | | | $0.001 Par | | | Paid-In | | | Accumulated | | | Comprehensive | | | | |
| | Shares | | | Value | | | Shares | | | Value | | | Shares | | | Value | | | Shares | | | Value | | | Shares | | | Value | | | Shares | | | Value | | | Capital | | | Deficit | | | Income | | | Total | |
Balance at September 30, 2009 | | | 1,984 | | | $ | 1,984 | | | | 752 | | | $ | 752 | | | | 700 | | | $ | 700 | | | | - | | | $ | - | | | | - | | | $ | - | | | | 24,655,990 | | | $ | 25 | | | $ | 17,977 | | | $ | (16,254 | ) | | $ | 10 | | | $ | 5,194 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cumulative effect of change in accounting principle - fair value of warrants with anti dilutive rights | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (4,628 | ) | | | | | | | (4,628 | ) |
Relcassification of derivative financial instruments | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 10,095 | | | | | | | | | | | | 10,095 | |
Vested portion of share based payments to employee for services | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 1,082 | | | | | | | | | | | | 1,082 | |
Common Stock issued in private placement | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 3,795,295 | | | | 4 | | | | 1,884 | | | | | | | | | | | | 1,888 | |
Private placement offering costs | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (584 | ) | | | | | | | | | | | (584 | ) |
Warrants issued for extension of non-interest bearing note | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 64 | | | | | | | | | | | | 64 | |
Warrants issued under consulting agreements | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 199 | | | | | | | | | | | | 199 | |
Common Stock issued for contingent earnout | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 175,000 | | | | | | | | | | | | | | | | | | | | | |
Common Stock issued for investor relations agreements | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 100,000 | | | | | | | | 66 | | | | | | | | | | | | 66 | |
Amortization of non-employee stock options issued for performance of services | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 34 | | | | | | | | | | | | 34 | |
Conversion of preferred shares to common stock | | | (1,993 | ) | | | (1,993 | ) | | | (462 | ) | | | (462 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | 3,286,372 | | | | 3 | | | | 2,452 | | | | | | | | | | | | | |
Common Stock issued upon exercise of warrants | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 4,738,966 | | | | 5 | | | | 3,659 | | | | | | | | | | | | 3,664 | |
Shares issued in conversion of bridge note to common | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 183,620 | | | | | | | | 110 | | | | | | | | | | | | 110 | |
Cashless warrant exercises | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 441,153 | | | | | | | | | | | | | | | | | | | | | |
Preferred Stock contractual dividends | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (175 | ) | | | | | | | (175 | ) |
Preferred Stock contractual dividends paid in kind | | | 39 | | | | 39 | | | | 21 | | | | 21 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 60 | |
Preferred stock deemed dividend | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 99 | | | | (99 | ) | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (517 | ) | | | (517 | ) |
Net loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (18,555 | ) | | | | | | | (18,555 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at September 30, 2010 | | | 30 | | | $ | 30 | | | | 311 | | | $ | 311 | | | | 700 | | | $ | 700 | | | | - | | | $ | - | | | | - | | | $ | - | | | | 37,376,396 | | | $ | 37 | | | $ | 37,137 | | | $ | (39,711 | ) | | $ | (507 | ) | | $ | (2,003 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Vested portion of share based payments to employees for services | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 688 | | | | | | | | | | | | 688 | |
Warrants issued under consulting agreements | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 183 | | | | | | | | | | | | 183 | |
Amortization of market value of common stock vested for investor relations agreement | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 23 | | | | | | | | | | | | 23 | |
Common Stock issued for investor relations agreements | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 160,000 | | | | 1 | | | | 31 | | | | | | | | | | | | 32 | |
Amortization of non-employee stock options issued for performance of services | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 63 | | | | | | | | | | | | 63 | |
Warrant issued for credit facility | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 71 | | | | | | | | | | | | 71 | |
Discount on senior secured notes payable | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 180 | | | | | | | | | | | | 180 | |
Warrants issued for construction bond | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 15 | | | | | | | | | | | | 15 | |
Placement agent warrants | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | - | | | | | | | | | | | | - | |
Restricted stock issued for services | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 75,000 | | | | - | | | | 19 | | | | | | | | | | | | 19 | |
Preferred Stock contractual dividends | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (94 | ) | | | | | | | (94 | ) |
Preferred Stock issued in private placement | | | | | | | | | | | | | | | | | | | | | | | | | | | 350 | | | | 525 | | | | 100 | | | | 150 | | | | | | | | | | | | | | | | | | | | | | | | - 675 | |
Private placement offering costs | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (68 | ) | | | | | | | | | | | (68 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 3,222 | | | | | | | | 3,222 | |
Net change in accumulated comprehensive income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 553 | | | | 553 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | |
Common Stock issued for contingent earnout | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
27
Beacon Enterprise Solutions Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
| | | | | | | | |
| | For the
| | | For the
| |
| | Year Ended
| | | Year Ended
| |
| | September 30,
| | | September 30,
| |
| | 2008 | | | 2009 | |
| | (Unaudited) | |
|
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | |
Net loss | | $ | (4,647,538 | ) | | $ | (6,269,850 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
Change in reserve for obsolete inventory | | | 35,058 | | | | 125,441 | |
Change in reserve for doubtful accounts | | | 50,000 | | | | 107,771 | |
Depreciation and Amortization | | | 571,467 | | | | 613,080 | |
Non-cash interest | | | 384,839 | | | | 590,837 | |
Share based payments | | | 499,342 | | | | 722,336 | |
Deferred income tax liability | | | 45,472 | | | | 58,012 | |
Changes in operating assets and liabilities: | | | | | | | | |
Accounts receivable | | | (866,161 | ) | | | (2,444,628 | ) |
Inventory | | | (174,861 | ) | | | (132,269 | ) |
Prepaid expenses and other current assets | | | 32,691 | | | | (325,092 | ) |
Other assets | | | 131,227 | | | | 59,137 | |
Accounts payable | | | 403,365 | | | | 903,973 | |
Income taxes payable | | | | | | | 97,581 | |
Customer deposits | | | (241,866 | ) | | | 64,601 | |
Accrued expenses | | | 935,132 | | | | 1,501,244 | |
| | | | | | | | |
NET CASH USED IN OPERATING ACTIVITIES | | | (2,841,833 | ) | | | (4,327,826 | ) |
| | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
Capital expenditures | | | (154,070 | ) | | | (220,438 | ) |
Acquisition of businesses, net of acquired cash | | | (2,223,535 | ) | | | 46,202 | |
| | | | | | | | |
NET CASH USED IN INVESTING ACTIVITIES | | | (2,377,605 | ) | | | (174,236 | ) |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
Proceeds from issuances of convertible notes | | | | | | | 500,000 | |
Proceeds from issuances of bridge notes and other short term notes | | | 422,000 | | | | 700,000 | |
Proceeds from sale of preferred stock, net of offering costs | | | 4,276,460 | | | | — | |
Proceeds from sale of common stock, net of offering costs | | | 1,035,216 | | | | 4,346,672 | |
Proceeds from lines of credit | | | 400,000 | | | | 343,000 | |
Proceeds from note payable | | | 600,000 | | | | — | |
Payment of note offering costs | | | | | | | (75,000 | ) |
Repayment of line of credit | | | (450,000 | ) | | | (393,000 | ) |
Repayment of convertible notes | | | | | | | (202,001 | ) |
Payments of notes payable | | | (985,514 | ) | | | (534,389 | ) |
Payments of capital lease obligations | | | (13,562 | ) | | | (11,928 | ) |
| | | | | | | | |
NET CASH PROVIDED BY FINANCING ACTIVITIES | | | 5,284,600 | | | | 4,673,354 | |
| | | | | | | | |
NET INCREASE IN CASH AND CASH EQUIVALENTS | | | 65,162 | | | | 171,292 | |
CASH AND CASH EQUIVALENTS — BEGINNING OF YEAR | | | 62,211 | | | | 127,373 | |
Effect of exchange rates on chase and cash equivalents | | | | | | | (34,327 | ) |
| | | | | | | | |
CASH AND CASH EQUIVALENTS — END OF YEAR | | $ | 127,373 | | | $ | 264,338 | |
| | | | | | | | |
Cash paid for: | | | | | | | | |
Interest | | | 115,587 | | | $ | 104,715 | |
| | | | | | | | |
Income taxes | | | — | | | $ | 105,266 | |
| | | | | | | | |
Acquisition of businesses | | | | | | | | |
Accounts receivable | | | 689,001 | | | $ | 133,516 | |
Inventory | | | 618,601 | | | | — | |
Prepaid expenses and other current assets | | | 55,283 | | | | 26,567 | |
Property and equipment | | | 226,743 | | | | 15,000 | |
Goodwill | | | 2,791,649 | | | | 360,300 | |
Customer relationships | | | 3,874,074 | | | | 349,100 | |
Non-compete agreements | | | 430,000 | | | | 212,300 | |
Security deposits | | | 27,591 | | | | — | |
Line of credit | | | (250,000 | ) | | | — | |
Accounts payable and accrued expenses | | | (932,276 | ) | | | (84,941 | ) |
Customer deposits | | | (292,692 | ) | | | — | |
Long-term debt assumed | | | (354,199 | ) | | | — | |
Capital lease obligations | | | (25,490 | ) | | | — | |
Other acquisition liabilities | | | (50,000 | ) | | | (145,189 | ) |
Less: share based purchase consideration | | | (2,741,250 | ) | | | (912,855 | ) |
Less: acquisition notes issued to sellers of acquired businesses | | | (1,843,500 | ) | | | — | |
| | | | | | | | |
Cash used in acquisition of businesses (net of $148,283 and $46,202 of cash acquired) | | | 2,223,535 | | | $ | (46,202 | ) |
| | | | | | | | |
(all amounts in 000's)
| | For the Year | | | For the Year | |
| | Ended | | | Ended | |
| | September 30, | | | September 30, | |
| | 2011 | | | 2010 | |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | |
Net income (loss) | | $ | 3,222 | | | $ | (18,555 | ) |
Net (income) loss from discontinued operations (including gain on deconsolidation of $7,892) | | | (7,892 | ) | | | 8,181 | |
Net loss from continuing operations | | | (4,670 | ) | | | (10,374 | ) |
Adjustments to reconcile net income (loss) to net cash used in continuing operating activities: | | | | | | | | |
Loss on sale of unit | | | 656 | | | | - | |
Change in reserve for obsolete inventory | | | 55 | | | | (10 | ) |
Change in reserve for doubtful accounts | | | 488 | | | | 710 | |
Depreciation and amortization | | | 350 | | | | 589 | |
Non-cash interest | | | 71 | | | | 136 | |
Share based payments | | | 1,022 | | | | 1,381 | |
Amortization of deferred finance fees | | | 250 | | | | - | |
Amortization of debt discount | | | 132 | | | | - | |
Change in fair value of warrants with anti-dilution rights | | | - | | | | 4,373 | |
Change in deferred tax liability | | | 59 | | | | 50 | |
Changes in operating assets and liabilities: | | | | | | | | |
Accounts receivable | | | 281 | | | | (2,176 | ) |
Inventory | | | (41 | ) | | | 58 | |
Prepaid expenses and other assets | | | (768 | ) | | | 128 | |
Accounts payable | | | 234 | | | | 897 | |
Accrued expenses and other current liabilities | | | 575 | | | | (1,900 | ) |
CASH USED IN CONTINUING OPERATING ACTIVITIES | | | (1,306 | ) | | | (6,138 | ) |
CASH PROVIDED BY DISCONTINUED OPERATIONS | | | - | | | | 1,298 | |
| | | | | | | | |
NET CASH USED IN OPERATING ACTIVITIES | | | (1,306 | ) | | | (4,840 | ) |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
Capital expenditures | | | (118 | ) | | | (342 | ) |
Capital expenditures of discontinued operations | | | - | | | | (183 | ) |
NET CASH USED IN INVESTING ACTIVITIES | | | (118 | ) | | | (525 | ) |
CASH FLOWS FROM CONTINUING FINANCING ACTIVITIES | | | | | | | | |
Proceeds from sale of common stock, net of offering costs | | | - | | | | 2,398 | |
Proceeds from warrant exercises, net of offering costs | | | - | | | | 3,631 | |
Proceeds from issuance of notes | | | - | | | | 765 | |
Proceeds from issuance of senior secured notes payable, net of offering co | | | 2,667 | | | | - | |
Proceeds from non-current line of credit - related party | | | 310 | | | | 630 | |
Proceeds from sale of preferred stock, net of offering costs | | | 607 | | | | - | |
Payments on non-current line of credit - related party | | | (940 | ) | | | (50 | ) |
Payments on short term debt | | | - | | | | (1,265 | ) |
Repayment of convertible notes | | | - | | | | (298 | ) |
Payments of notes payable | | | (579 | ) | | | (496 | ) |
NET CASH PROVIDED BY CONTINUING FINANCING ACTIVITIES | | | 2,065 | | | | 5,315 | |
Effect of exchange rate changes on cash and cash equivalents | | | (26 | ) | | | 69 | |
NET INCREASE IN CASH AND CASH EQUIVALENTS | | | 615 | | | | 19 | |
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD | | | 246 | | | | 227 | |
CASH AND CASH EQUIVALENTS - END OF PERIOD | | $ | 861 | | | $ | 246 | |
Supplemental disclosures | | | | | | | | |
Cash paid for: | | | | | | | | |
Interest | | $ | 285 | | | $ | 105 | |
Income taxes | | $ | - | | | $ | - | |
Non-cash investing and financing activites: | | | | | | | | |
Conversion of debt to common stock | | $ | - | | | $ | 110 | |
Settlement of account payable with common stock | | $ | - | | | $ | 235 | |
| | | | | | | | |
Accrued dividends | | $ | 247 | | | $ | 154 | |
The accompanying notes are an integral part of these consolidated financial statements.
28
BEACON ENTERPRISE SOLUTIIONSSOLUTIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(amounts in thousands, except share and per share data)
| |
NOTE 1 — | ORGANIZATION AND DESCRIPTION OF BUSINESS |
Organization
Organization
The consolidated financial statements presented are those of Beacon Enterprise Solutions Group, Inc., which was originally formed in the State of Indiana on June 6, 2007 and combined with Suncrest Global Energy Corp. a Nevada corporation, on December 20, 2007, as described in “Share Exchange Transaction,” below.2007. In these footnotes to the consolidated financial statements, the terms “Company,” “Beacon,” “we,” “us” or “our” mean Beacon Enterprise Solutions Group, Inc. and all subsidiaries included in our consolidated financial statements.
Beacon provides global, international and regional telecommunications and technology systems infrastructure services, encompassing a comprehensive suite of consulting, design, installation, and infrastructure management offerings. Beacon’s portfolio of infrastructure services spans all professional and construction requirements for design, build and management of telecommunications, network and technology systems infrastructure. Professional services offered include consulting, engineering, program management, project management, construction services and infrastructure management services. Beacon offers these services under either a comprehensive contract option or unbundled to some global and regional clients.
We were formed for the purpose of acquiring and consolidating regional telecom businesses and service platforms into an integrated, national provider of high quality voice, data and VOIP communications to small and medium-sized business enterprises (the “MBE Market”). The Company was originally formed to acquire companies that would allow it to serve the SME Market on an integrated, turn-key basis from system design, procurement and installation through all aspects of providing network service and designing and hosting network applications. In response to identification of a significant unserved market, our business strategy has shifted to become a leading provider of global, international and regional telecommunications and technology systems infrastructure services, encompassing a comprehensive suite of consulting, design, installation, and infrastructure management offerings, while continuing to provide managed information technology and telecommunications services in selected local markets.NOTE 2 — | LIQUIDITY AND FINANCIAL CONDITION |
Beacon (IN) was a development stage enterprise with no operating history until completing the Share Exchange Transaction described below and simultaneous business combinations (the “Phase I Acquisitions”) and certain Private Placement financing transactions described in Notes 4 and 14, respectively.
Share Exchange Transaction
Pursuant to a Securities Exchange Agreement, Suncrest acquired all of the outstanding no par value common stock of Beacon (IN) on December 20, 2007. Suncrest, in exchange for such Beacon (IN) common stock issued 1 share of Suncrest $0.001 par value common stock directly to Beacon (IN)’s stockholders for each share of Suncrest common stock (the “Share Exchange Transaction”). Following the Share Exchange Transaction, the existing stockholders of Suncrest retained 1,273,121 shares of Suncrest’s outstanding common stock and Beacon (IN)’s stockholders became the majority owners of Suncrest. Suncrest was incorporated in the State of Nevada on May 22, 2000. Beacon paid a $305,000 fee to the stockholders of Suncrest in connection with completing the Share Exchange Transaction which is included as a component of selling, general and administrative expense in the accompanying consolidated statement of operations forFor the year ended September 30, 2008.
Prior to the Share Exchange Transaction, Suncrest was a publicly-traded corporation with nominal operations. After the Share Exchange Transaction, Suncrest was the surviving legal entity and Beacon (IN) was its wholly-owned subsidiary and Suncrest. Suncrest changed its name to Beacon Enterprise Solutions Group, Inc. on February 15, 2008 and continued to carry on the2011, we generated net income of $3,222, which includes income from discontinued operations of Beacon. The Share Exchange Transaction was accounted$7,892 (see Note 4), non-cash expenses for as a reverse mergershare based compensation of 1,022, non-cash depreciation and recapitalization transaction in which the original
29
BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Beacon (IN) is deemed to be the accounting acquirer. Accordingly, the accompanying consolidated financial statements present the historical financial position, resultsamortization expense of operations$350 and cash flows of Beacon, adjustedused in continuing operations amounting to give retroactive effect to the recapitalization of Beacon (IN) into Suncrest.
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NOTE 2 — | LIQUIDITY AND FINANCIAL CONDITION |
We incurred a net loss of approximately $6.3 million and used approximately $4.3 million of cash in our operating activities for the year ended September 30, 2009. At September 30, 2009, our$1,306. Our accumulated deficit amounted to approximately $16.3 million. We$36,583, while we had cash of $264,000$861 and a working capital deficit of.of $2,169.
Including, among other things, volatilityOn September 30, 2011, we sold a unit of our business that was deemed outside our core business. The resulting transaction consisted of disposing the inventory and related assets of the unit, for which we recognized a loss of $656, in securities prices, diminished liquidity and credit availability and declining valuations. Among other risks we face, the current tightening of credit in financial markets may adversely affect our ability to obtain financingexchange for a three year interest in the future, including, if necessary, to fund strategic acquisitions,and/or refinance our debt as it comes due.sales of the disposed unit.
Financing transactions we completed during the year endingended September 30, 20092011 include the following:
On JulyAugust 17, 2010 we entered into a long term line of credit facility with one of our directors for $4,000, the facility has an annual interest rate of 7.73% on any outstanding balance and a facility fee of the greater of $40 or 1% of the unused balance. Additionally, 15,000 warrants, with a five year term exercisable at $1.00 per share, per month are earned 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 has decided to terminate the long term line of credit facility and associated put right entered into on August 17, 2010 and revised August 12, 2011, with one of our directors. See Note 10 for additional details.
On November 23, 2010, we initiated a private placement (the “Placement”) of up to $3,000 of 12 month Senior Secured Notes (“Notes”) with warrants to purchase 150 shares of Beacon’s common stock at $0.40 per share for every $1 in principal invested, with interest at 9% APR. Net proceeds were used to repay and replace an existing Senior Secured Bank Note totaling approximately $300 and for general working capital purposes. The Placement expired on March 30, 2011, the date the Maximum was raised, with net proceeds received of $2,667 (gross proceeds of $3,000 less offering costs of $333).
On March 25, 2008, we engaged a registered broker-dealer2011 Beacon offered in a private placement ($.80350 units of preferred stock (the "Series C-1 Units"), to two existing stockholders, at a purchase price of $2 per unit) (the “July Common Offering”)Series C-1 Unit. See Note 8 for more details. As of up to 3,750,000 unitsJune 30, 2011, we completed the sale of 350 Series C-1 Units for an aggregate purchase price of $3,000,000, with each Common Unit comprised$525 and issued 350,000 warrants having a fair value, as determined using the Black Scholes pricing model, of (i) one share of Common Stock, and (ii) a five year warrant to purchase one-half share of Common Stock. During the year ended September 30, 2009 we sold 367,099 units for net proceeds of $239,290 (gross proceeds of $293,679 less offering costs of $54,389).$112
On October 29, November 17 and November 19, 2008,May 4, 2011 Beacon and Midian Properties, LLC, entered into short term credit facilities in the amounts of $100,000, $120,000 and $70,000 that the Company repaid. On March 27, 2009, Beacon and Midian, entered into a short term credit facility in the amount of $53,000, the principal of which was due and payable to the holder within seven (7) days of issuance along with a 1% origination fee. The credit facility has been fully repaid.
On November 12, 2008, Beacon engaged a registered broker-dealeroffered in a private placement of Common Stock and Warrants to raise $3.0 million of equity financing with an option to raise an additional $450,000 if the offering is oversubscribed. As of May 27, 2009 we sold 4,277,050100 units for net proceeds of $2,642,465 (gross proceeds of $3,421,640 less offering costs of $779,175).
On January 7, 2009, we entered into a note payable with a principal amount of $200,000 payable on or before December 31, 2009, bearing interest at 12% per annum with one of our directors. The director concurrently authorized us to issue 300 shares of preferred stock in exchange for this note and an additional $100,000 note issued prior to December 31, 2008. We completed our administrative issuance of the (the "Series B Preferred Stock on February 16, 2009, at which time we and the director agreed that we shall be permitted, but not required, to redeem these sharesC-2 Units"), at a 1%purchase price of $2 per month premium beginning 30 days fromSeries C-2 Unit, for an aggregate purchase price of $150 and issued 100,000 warrants having a fair value, as determined using the dateBlack Scholes pricing model, of their issuance at our discretion.$32.
On January 9, 2009, we entered into an equity financing arrangement with one of our directors that provided up to $2.2 million of additional funding, the terms of which provide for compensation of a one-time grant of warrants to purchase 100,000 shares of common stock at $1.00 per share and ongoing grants of warrants to purchase 33,333 shares of common stock at $1.00 per share each month that the financing arrangement is in effect. The warrants have a five year term. The commitment was reduced on a dollar for dollar basis as we raised additional equity capital in various private placements On May 13, 2009, the director agreed to renew the commitment and increase the available financing under the arrangement to $1.8 million available in exchange for a continuation of the ongoing grants of warrants to purchase 33,333 shares of common stock at $1.00 per share through August 11, 2009. On August 10, 2009 the facility was renewed to increase the available financing to $3.0 million through July 1, 2010 on substantially the same terms but has
30
BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
Page 23
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
since been reduced on a dollar for dollar basis to zero availability based on additional equity capital raised in financing transactions.
On January 22, 2009, Beacon entered into $500,000 of convertible notes payable with a group of private investors (the “Notes”) facilitated by a broker/dealer. During the period ended September 30, 2009, we repaid $202,000 of the outstanding principal balance was repaid to the holders of the convertible notes.
On March 31, 2009, we executed an extension of our $100,000 demand note with First Savings Bank, the terms of which are substantially the same as the original agreement, with payments due May 15 and June 15, 2009 in the amount of $50,000 each plus accrued interest. We repaid $50,000 of this note. On July 24, 2009 an additional extension was executed through August 31, 2009, and further extended on October 29, 2009 through December 30, 2009.
On June 5, 2009, Beacon engaged a registered broker-dealer in a private placement of Common Stock and Warrants to raise $600,000 of equity financing with an option to raise an additional $400,000 if the offering was oversubscribed. On July 9, 2009, we opted to increase this offering to $2.5 million. As of September 30, 2009, we sold 1,846,847 units for net proceeds of $1,212,620 (gross proceeds of $1,479,930 less offering costs of $267,310) when we completed this offering.
On September 28, 2009, we engaged a registered broker-dealer in a private placement of Common Stock and Warrant to raise $3,000,000 of equity financing with an option to raise an additional $1,000,000 if the offering is oversubscribed. As of December 15, 2009, we sold 4,090,000 units for net proceeds of $2,673,480 (gross proceeds of $3,272,000 less offering costs of $598,520) when we completed the offering. Of the units sold, 362,500 of these shares were sold as of the year ended September 30, 2009 for net proceeds of $252,300 (gross proceeds of $290,000 less offering costs of $37,700).
We completed our acquisition of Symbiotec AG (Note 4), on July 29, 2009, subsequently executing certain commercial agreements that we believe represent significant miletstones in the execution of our business plan. As a result we anticipate being able to generate positive cash flows in our operating activities during the year end September 30, 2010.
Based on the recent progress we made in the execution of our business plan, the funding that occurred during the year and subsequent funding, we believe that our currently available cash and the proceeds of our equity financing activities, and funds we expectexpected to generatebe generated from operations will enable us to operate our business and repay our debt obligations as they become due through October 1, 2010.2012. However, we willmay require additional capital in order to execute our business plan. If we are unable to raise additional capital, or encounter unforeseen circumstances that place constraints on our capital resources, we will be required to take various measures to conserve liquidity, which could include, but not necessarily be limited to, curtailing our business development activities, suspending the pursuit of our business plan, and controlling overhead expenses. We cannot provide any assurance that we will raise additional capital. We have not secured any commitments for new financing at this time, nor can we provide any assurance that new financing will be available to us on acceptable terms, if at all.
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NOTE 3 — | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Principles of Consolidation
The consolidated financial statements include the accounts of Beacon Enterprise Solutions Group, Inc., a Nevada corporation (formerly Suncrest) and its wholly-owned subsidiaries the original Beacon formed in Indiana in June 2007, BH Acquisition Corp,including BESG Ireland Ltd. and Beacon Solutions AG.S.R.O., which began operations November 1, 2009 and January 1, 2010, respectively. Additionally, Datacenter Contractors AG (formerly Beacon Solutions AG) acquired on July 29, 2009 and discontinued as of June 30, 2010, has been deconsolidated due to the cessation of our controlling financial interest in the subsidiary (see Note 4). All significant inter-companyintercompany accounts and transactions have been eliminated in consolidation.
31
BEACON ENTERPRISE SOLUTIIONS GROUP, INC.Reclassifications
Certain amounts in the prior period financial statement have been reclassified to conform to the current period presentation.
Use of Estimates
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”)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 revenuesnet sales and expenses during the reporting period. Actual results could differ from those estimates. These estimates and assumptions include valuing equity securities and derivative financial instruments issued as purchase consideration in business combinationsand/orin financing transactions and in share based payment arrangements, accounts receivable reserves, inventory reserves, deferred taxes and related valuation allowances allocating the purchase price to the fair values of assets acquired and liabilities assumed in business combinations (including separately identifiable intangible assets and goodwill) and estimating the fair values of long lived assets to assess whether impairment charges may be necessary. Certain of our estimates, including accounts receivable and inventory reserves and the carrying amounts of intangible assets could be affected by external conditions such as the current nationalincluding those unique to our industry and global economicdownturn.general economic conditions. It is at least reasonably possible that these external factors could have an effect on our estimates that could cause actual results to differ from our estimates. We intend to re-evaluate all of our accounting estimates at least quarterly based on these conditions and record adjustments, when necessary; however, we are currently unable to determine whether adjustments due to changes in our estimates would be material.necessary.
Discontinued Operations
For purposes of determining discontinued operations, the Company has determined Datacenter Contractors AG, included with our European segment, is a component of the Company within the context of ASC 205-20 Discontinued Operations. Transactions that result in the disposal of a component, thereby eliminating the cash flows of that component from our operations, and for which we have no continuing involvement are reported as discontinued operations. Consequently, the Company has classified the results of operations of Datacenter Contractors AG as discontinued operations for all periods presented.
Revenue and Cost Recognition
Beacon applies the revenue recognition principles set forth under the Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) 104 with respect to all of our revenue.net sales. Accordingly, we recognize revenuenet sales when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the vendor’s fee is fixed or determinable, and (iv) collectability is probable.reasonably assured. Accordingly, it is our policy to determine the method of accounting for each of our contracts at the inception of the arrangement and account for similar types of contracts using consistent methodologies of accounting within the GAAP hierarchy. A discussion of our specific net sales recognition policies by category is as follows:
Construction Type Contracts
On November 6, 2009 we entered into an approximately $25,000 fixed price construction type contract, pursuant to which we have been engaged to act as the general contractor in the construction of a data center that we expected to complete in two phases through October 2010. The contract provided for a contingent penalty of 0.3% per month if the contract is not completed by an agreed upon date, not to exceed 10% of the total contract price. We generated approximately $6.0 million and $11.1 millionevaluated this contract at the inception of revenue during the yearsarrangement to determine the proper method of accounting based on the highest level of literature within the GAAP hierarchy. We determined that the nature of our work under this contact falls within the scope of a “construction type” contract for which net sales would most appropriately be recognized using the percentage of completion method of accounting. During the year ended September 30, 2008 and 2009, respectively.2010 we recognized approximately $16,948 of net sales under the aforementioned contract, which is reported in discontinued operations in the accompanying consolidated statement of operations (Note 4). We measured our progress on this contract through September 30, 2010 under the percentage-of-completion method of accounting in which sales value was estimated on the basis of physical completion to date (the total contract amount multiplied by percent of performance to date less revenues recognized in previous periods). We applied this method of measurement because management considered it to be the most objective measurement of progress in the circumstance.
When applicable we also record losses on contracts in progress during the period in which it is determined that a loss would be incurred on a construction type contract.
As of September 30, 2011 we deconsolidated the results of this operation due to a cessation of control and recorded a gain of $7,892 in discontinued operations, which principally consists of the elimination of net liabilities of the operation (Note 4).
Time and Materials Contracts —Revenues from
Our time and materials type contracts which generallyprincipally include product salesbusiness telephone and data system installation services, are billed when services are completed based on fixed labor rates plus materials. A substantial majority of our services in this category arecontracts completed in short periodstime frames of time.several weeks to 60 or 90 days. Under the termsthese types of our time and materials contracts, we generally bifurcatedesign the system using in-house engineering labor, provide non-proprietary materials supplied by an original equipment manufacturer (“OEM”) and install the equipment using in-house or subcontracted labor. We occasionally sell extended warranties on certain OEM supplied equipment; however, the OEM is the primary obligor under such warranty coverage and the amount of net sales we receive from installation services as elementssuch warranties is insignificant to the arrangements. Our contracts clearly specify deliverables, selling prices and scheduled dates of our contracts that have stand alone value.completion. We billalso generally require our customers for material purchasesto provide us with a significant deposit that we initially record as a liability and apply to subsequent billings. Title and risk of loss on materials that we supply to our customers under these contractsarrangements is transferred to the customer at the time of delivery, at which time our customers take title to the goods and assume the risk of loss. We bill our customers for installation services over the termdelivery. Our contracts are cancelable upon 60 days’ notice by either party; however, completion of the project followingwork we perform under these contracts, which occurs in a predictable sequence, is within our control at all times. Amounts we bill for delivered elements are not subject to concession or contingency based upon the completion of contractuallyundelivered elements specified in our contracts.
We account for voice and data installation contracts as multiple—deliverable arrangements. Prior to October 1, 2009 we accounted for multiple-deliverable net sales arrangements using the relative fair value method of accounting, which required companies to have vendor specific objective evidence (“VSOE”) of fair value in order for deliverables to be considered a unit of accounting and to use the residual method of allocating arrangement consideration to undelivered elements. We recognize net sales for delivered milestones. We may,elements under these arrangements based on occasion, enterthe amount of arrangement considered allocated to the delivered element once all of the criteria for net sales recognition have been met.
In October 2009, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2009-13 Revenue Recognition (ASC Topic 605) Multiple-Deliverable Revenue Arrangements — a consensus of the FASB EITF 00-21-1 (“ASU 2009-13”). ASU 2009-13, requires the use of the relative selling price method of allocating arrangement consideration to units of accounting in a multiple-deliverable net sales arrangement and eliminates the residual method. This new accounting principle establishes a hierarchy to determine the selling price to be used for allocating arrangement consideration to deliverables as follows: (i) vendor-specific objective evidence of selling price (“VSOE”), (ii) third-party evidence of selling price (“TPE”), and (iii) best estimate of the selling price (“ESP”). ASU 2009-13 is effective prospectively for net sales arrangements entered into longer-term contractsor materially modified in fiscal years beginning on or after June 15, 2010.
Effective October 1, 2009, we elected to early adopt ASU No. 2009-13 for all multiple-element net sales arrangements entered into on or after October 1, 2009. Using this method, we designate deliverables within the arrangement as units of accounting when they are (a) deemed to have standalone value and (b) if the arrangement includes a general right of return relative to the delivered item, delivery or performance of the undelivered items is considered probable and substantially in our control. ASU No. 2009-13 no longer requires companies to have VSOE of fair value in order for a deliverable to be considered a unit of accounting. The adoption of ASU No. 2009-13 has not had a material effect on the manner in which it would be appropriatewe designate units of accounting or allocate arrangement consideration to recognize revenue using long-term contractsuch units because the selling prices of our deliverables, which is the principal factor that differentiates the two accounting such as the percentage of completion method. standards, generally approximates fair value.
We generated revenues ofrecognized approximately $3,100,000$135 and $6,700,000$614 from short-term time and materials contractsmultiple element arrangements for the years ended September 30, 20082011 and 2009 respectively. Beacon warranties all phone system installations2010, respectively and $13,746 and $7,737 from time and material contacts that did not include multiple-element arrangements for 1 year, for which we have accrued $47,000 and $65,000 as of the years ended September 30, 20082011 and 2009.2010, respectively.
Professional Services Revenue —Sales We generally bill our customers for professional telecommunications and data consulting services based on hours of time spent on any given assignment at our hourly billing rates. As it relates to delivery of these services, we recognize revenuesales under these arrangements as the work is completedperformed and the customer has indicated their acceptance of services by approving a work order milestone or completion order. We may, from time to time, enter into fixed bid contracts, and recognize revenue as phases of the project are completed and accepted by the client. We generated approximately $2,900,000$5,013 and $4,200,000$5,645 of professional services revenuesales during the years ended September 30, 20082011 and 20092010, respectively.
32
BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
We account The Company accounts for sales taxes collected on behalf of government authorities using the net method. Pursuant to this method, sales taxes are included in the amounts receivable and a payable is recorded for the amounts due to the government agencies.
Fair Value of Financial Assets and Liabilities
The carrying amounts of cash and cash equivalents, accounts payable and accrued liabilities approximate fair value due to the short-term nature of these instruments. The carrying amounts of our short term credit obligations approximate fair value because the effective yields on these obligations, which include contractual interest rates taken together with other features such as concurrent issuance of warrants and/or embedded conversion options, are comparable to rates of returns for instruments of similar credit risk.
The Company measures the fair value of financial assets and liabilities based on the guidance of ASC 820 “Fair Value Measurements and Disclosures” which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
Level 1 — quoted prices in active markets for identical assets or liabilities
Level 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level 3 — inputs that are unobservable (for example cash flow modeling inputs based on assumptions)
No such items existed as of September 30, 2011 or 2010.
Foreign Currency Reporting
The consolidated financial statements are presented in United States Dollars in accordance with ASC 830, “Foreign Currency Matters”. Accordingly, the Company’s subsidiary,subsidiaries, BESG Ireland Ltd, Datacenter Contractors AG and Beacon AG usesSolutions S.R.O. use the local currency (Swiss Francs)(Euros, Swiss Francs and Czech Crowns, respectively) as itstheir functional currency.currencies. Assets and liabilities are translated at exchange rates in effect at the balance sheet date, and revenuenet sales and expense accounts are translated at average exchange rates during the period. Resulting translation adjustments of $0$46 and $9,862($507) were recorded in accumulated other comprehensive (loss) income in the accompanying consolidated balance sheets atfor the years ended September 30, 20082011 and 2009.2010.
Customer Concentration
For the years ended September 30, 20082011 and 2009,2010, our largest customer accounted for approximately 19%78% and 25%64% of sales, respectively. As of September 30, 2011 and 2010 the accounts receivable balance for this customer was $2,995 and $3,941, respectively. Although we expect we will continue to have a high degree of customer concentration our customer engagements are typically covered by multi-year contracts or master service agreements under which we and our predecessor companies have been operating for a number of years. In addition, current economic conditions could harm the liquidity andof and/or financial conditionposition of our customers or suppliers, which could in turn cause such parties to fail to meet their contractual or other obligations to us.
Advertising Expense
Advertising costs are expensed as incurred. Advertising expense amounted to approximately $42,000$6 and $50,000$38 for the years ended September 30, 20082011 and 2009.2010.
Cash and Cash Equivalents
Beacon considers all highly liquid investments purchased with an original maturity date of three months or less to be cash equivalents. Due to their short-term nature, cash equivalents, when they are carried, are carried at cost, which approximates fair value.
Accounts receivable include customer billings on invoices issued by us after the service is rendered or the revenuesale earned. Credit is extended based on an evaluation of our customer’s financial condition and advance payment for services is generally required for many of our services. Credit losses have been provided for in the financial statements and are within management’s expectations.
We have established an allowance for doubtful accounts as an estimate of potential credit risk due to current market conditions. We perform ongoing credit evaluation of our customers’ financial condition when we deem appropriate and we typically require a deposit of 50% of the value of the contract for long term time and material agreements. Many of our contracts allow for the filing of a mechanics lien on equipment delivered and installed should the customer become delinquent in payment.appropriate. Beacon has a policy of reserving for uncollectible accounts based on its best estimate of the amount of probable credit losses based on, among other things, historical collection experience, a review of the current aging status of customer receivables, a review of specific information for those customers deemed to be higher risk and other external factors including the current economic environment and conditions in the credit markets could affect the ability of our customers to make payments. We evaluate the adequacy of the allowance for doubtful accountaccounts at least quarterly.
Unfavorable changes in economic conditions might impact the amounts ultimately collected from our customers and therefore could result in changes to the estimated allowance and future results of operations
33
BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
could be materially affected. Account balances deemed to be uncollectible or otherwise settled with a customer are charged to the allowance for doubtful accounts after all means of collection have been exhausted and the potential for recovery is considered remote. We currently believe the majority of our receivables are collectible due to the nature of the industry and the substantial customer deposits initially received at contract inception.industry. The allowance for doubtful accounts amounted to $50,000$1,365 and $173,000$866 as of September 30, 20082011 and 2009.2010, respectively.
Inventory
Inventory, which consists of business telephone systems and associated equipment and parts, is stated at the lower of cost(first-in, (first-in, first-out method) or market. In the case of slow moving items, we may write down or calculate a reserve to reflect a reduced marketability for the item. The actual percentage reserved will depend on the total quantity on hand, its sales history, and expected near term sales prospects. When we discontinue sales of a product, we will write down the value of inventory to an amount equal to its estimated net realizable value less all applicable disposition costs. Slow moving items include spare parts for older phone systems that we use to repair or upgrade customer phone systems. A portionAs of these items, which are stated at their net realizable value, are likely to be used after the next year and are therefore presented as non-current inventory in the accompanying consolidated balance sheet. A portion of the inventory on hand at September 30, 2008 and 2009 includes goods acquired in the business combinations completed on December 20, 2007. These goods are stated at the net realizable value established using the purchase method2011, we have disposed of accountingour inventory (Note 4) less a reserve for obsolete inventory as phone systems for which we carry spare parts are discontinued and diminish in the marketplace.6).
Property and Equipment
Property and equipment is stated at cost, including any cost to place the property into service, less accumulated depreciation. Depreciation is recorded on a straight-line basis over the estimated useful lives of the assets which currently range from 3 to 5 years. Leasehold improvements are amortized over the shorter of their estimated useful lives or the term of the lease. Maintenance, repairs and minor replacements are charged to operations as incurred; major replacements and betterments are capitalized. The cost of any assets sold or retired and related accumulated depreciation are removed from the accounts at the time of disposition, and any resulting profit or loss is reflected in income or expense for the period.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentrations of credit risk consist principally of cash and cash equivalents. We maintain our cash accounts at high quality financial institutions with balances, at times, in excess of federally insured limits. As of September 30, 2009,2011 and 2010, we had no deposits in excess of federally insured limits. Management believes that the financial institutions that hold our deposits are financially sound and therefore pose minimal credit risk.
Goodwill and Intangible Assets
We account for goodwill and intangible assets in accordance with ASC 350 Intangibles - Goodwill and Other.Other, ASU 2011-08 Intangibles – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment. ASC 350 requires that goodwill and other intangibles with indefinite lives should be tested for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset has decreased below its carrying value.
Goodwill represents the excess of the purchase price over the fair value of net assets acquired in business combinations (Note 4).combinations. GAAP requires that goodwill be tested for impairment at the reporting unit level (operating segment or one level below an operating segment) on an annual basis and between annual tests when circumstances indicate that the recoverability of the carrying amount of goodwill may be in doubt. Application of the goodwill impairment test requires judgment, including the identification of reporting units,
34
BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
assigning assets and liabilities to reporting units, assigning goodwill to reporting units, and determining the fair value.
Beacon operates a single reporting unit. Significant
judgmentsjudgment is required to estimate the fair value of reporting units include estimating future cash flows, determining appropriate discount rates and other assumptions. Changes in these estimates and assumptions could materially affect the determination of fair value
and/or goodwill impairment.
Upon consideration of our operations, we have determined Beacon operates a single reporting unit.
We reviewed ourreview goodwill for each of our two reporting units, which are the same as our segments for possible goodwill impairment by comparing the fair value of the reporting unit to the carrying value of their respectivethe assets. If the fair value exceeds the carrying value of the net assets,asset, no goodwill impairment is deemed to exist.exist, except in circumstances in which the carrying value is less than zero. If the fair values of eachcarrying value of the reporting unitsunit is less than zero or the fair value does not exceed the carrying values of their respective assets,value, goodwill is tested for impairment and written down to its implied value if it is determined to be impaired. Based on a review of the fair value of our reporting units,unit, no impairment is deemed to exist as of September 30, 20082011 or 2009. 2010.
Given the current economic environment and the uncertainties regarding the potential impact on the Company’s business, if forecasted revenuenet sales and margin growth rates of our reporting units are not achieved, it is at least reasonably possible that triggering events could arise that would require us to evaluate the carrying amount of our goodwill for possible impairment prior to the next annual review that we would perform as of September 30, 2010.2012. If a triggering event causes an impairment review to be required before the next annual review, it is not possible at this time to determine if an impairment charge would result or if such charge would be material.
Our amortizable intangible assets includeconsist of customer relationships and covenants not to compete. These costs are being amortized using the straight-line method over their estimated useful lives. We are amortizingamortize customer relationships on a straight line basis over a 15 year estimated useful life. The covenants not to compete have beenare amortized on a straight line basis over a twenty four month estimated useful life. Amortization expense for the year ended September 30, 20082011 and 20092010 was approximately $500,000$106 and $461,000. $331.
We review the carrying value of intangibles and other long-lived assets for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by comparing the carrying amount of the asset or asset group to the undiscounted cash flows that the asset or asset group is expected to generate. If the undiscounted cash flows of such assets are less than the carrying amount, the impairment to be recognized is measured by the amount by which the carrying amount of the property, if any, exceeds its fair market value. No impairment was deemed to exist as of September 30, 20082011 and 2009.2010. We intend to re-evaluate the carrying amounts of our amortizable intangibles at leaseleast quarterly to identify any triggering events, including those that could arise from the current national and global economic downturn that would require us to conduct an impairment review.events. As described above, if triggering events require us to undertake an impairment review, it is not possible at this time to determine whether it would be necessary to record a charge or if such charge would be material.
Preferred Stock
We apply the guidance enumerated in ASC 480 “Distinguishing Liabilities from Equity” when determining the classification and measurement of preferred stock. Preferred shares subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value. We classify conditionally redeemable preferred shares (if any), which includes preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within our control, as temporary equity. At all other times, we classify our preferred shares in stockholders’ equity. Our preferred shares do not feature any redemption rights within the holdersholders’ control or conditional redemption features not within our control as of September 30, 20082011 and 2009.2010. Accordingly all issuances of preferred stock are presented as a component of consolidated stockholders’ equity (deficit)(deficiency).
35
BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Convertible Instruments
We evaluate and account for conversion options embedded in convertible instruments in accordance with ASC 815 “Derivatives and Hedging Activities”.
Applicable GAAPgenerally acceptable accounting practices (“GAAP”) requires companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments according to certain criteria. The criteria includes circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. An exception to this rule when the host instrument is deemed to be conventional as that term is described under applicable GAAP.
We account for convertible instruments (when we have determined that the embedded conversion options should not be bifurcated from their host instruments) as follows. We record, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized over the term of the related debt to their stated date of redemption. We also record, when necessary, deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the transaction and the effective conversion price embedded in the preferred shares.
We evaluated the conversion option featured in the Bridge Financing Facility and Bridge Notes that are more fully described in Note 10. These conversion options provided the note-holders, of whom three are also founding stockholdersand/or directors of Beacon, with the right to convert any advances outstanding under the facility, into shares of our common stock at anytime upon or after the completion of the entire Series A Private Placement described in Note 14. The conversion options embedded in these notes would not have been exercisable unless and until we raised the full $4,000,000 of proceeds stipulated in the Series A Private Placement that was completed during the year ended September 30, 2008.
As described in Note 10, we completed our Private Placement on February 12, 2008 at which time the conversion options embedded in the Notes became exercisable at the option of the holders. Accordingly, we recorded a $72,000 discount to the face value of the Bridge Notes based on the relative fair values of the Bridge Warrants and the Notes measured as of the commitment date on November 15, 2007 and an additional $128,000 discount related to the beneficial conversion feature that is being accreted to interest expense over the contractual term of the Notes.
Common Stock Purchase Warrants and Other Derivative Financial Instruments
We classify as equity any contracts that (i) require physical settlement or net-share settlement or (ii)gives provides us a choice of net-cash settlement or settlement in our own shares (physical settlement or net-share settlement) providing that such contracts are indexed to the Company’s own stock as defined in ASC 815-40 (“Contracts in Entity’s Own Equity”). We classify as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside our control) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). We assess classification of our common stock purchase warrants and other free standing derivatives at each reporting date to determine whether a change in classification between assets and liabilities is required.
Our free standing derivatives consist of warrants to purchase common stock that we issued to three founding stockholders/directors and one independent qualified investor in connection with the Bridge
36
BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Financing Facility and Bridge Notes described in Note 10, warrants issued pursuant to equity financing arrangements furnished by one of our directors as described in Note 12, warrants issued to the Series A, A-1, C-1 andA-1 C-2 Preferred Stock stockholders, and warrants issued to the placement agent and its affiliates in connection with various Private Placements described in Note 14.13. We evaluated the common stock purchase warrants to assess their proper classification in the balance sheet as of September 30, 20082011 and 20092010 using the applicable classification criteria enumerated under GAAP. We determined that the common stock purchase warrants do not feature any characteristics permitting net cash settlement at the option of the holders. Accordingly, these instruments have been classified in stockholders’ equity in the accompanying consolidated balance sheet as of September 30, 20082011 and 2009.2010.
Share-Based Payments
We account for share based payments in accordance with ASC 718 Compensation — Stock Payments which results in the recognition of expense under applicable GAAP and requires measurement of compensation cost for all share based payment awards at fair value on the date of grant and recognition of compensation expense over the service period for awards expected to vest. We calculate the fair value of stock options using the Black-Scholes option pricing model. The fair value of restricted stock is determined based on the number of shares granted and the fair value of our common stock on date of grant. The recognized expense is net of expected forfeitures.
Income Taxes
We account for income taxes in accordance with ASC 740 “Income Taxes”. ASC 740 requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and tax basis of assets and liabilities and for the expected future tax benefit to be derived from tax loss and tax credit carry forwards. We also record a valuation allowance when we determine that it is more likely than not that all or a portion of deferred tax assets will not be realized. Under applicable GAAP it is difficult to conclude that a valuation allowance is not needed when there is negative evidence such as cumulative losses in recent years. Therefore, cumulative losses weigh heavily in the overall assessment. Accordingly, we have recorded a full valuation allowance against our net deferred tax assets. In addition, we expect to provide a full valuation allowance on future tax benefits until we can sustain a level of profitability that demonstrates our ability to utilize the assets, or other significant positive evidence arises that suggests our ability to utilize such assets. We will continue to re-assess our reserves on deferred income tax assets in future periods on a quarterly basis.
We also periodically evaluate whether we have any uncertain tax positions requiring accounting recognition in our financial statements. Under applicable GAAP, companies may recognize a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Applicable GAAP also provides guidance on the de-recognition of income tax liabilities, classification of interest and penalties on income taxes, and accounting for uncertain tax positions in interim period financial statements. Our policy is to record interest and penalties on uncertain tax provisions as a component of our income tax expense.
As described in Note 15,14, we completed our assessment of uncertain tax positions for the years ended September 30, 20082011 and 2009,2010, including the effects of the Share Exchange Transaction described in Note 1 and business combinations completed as described in Note 4. Based on this assessment, we have determined that we have no material uncertain income tax positions requiring recognition or disclosure for the years ended September 30, 20082011 and 2009.2010.
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BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
Page 29
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)In many cases, our tax positions are related to tax years that remain subject to examination by relevant tax authorities. We file income tax returns in the United States (federal), Ireland and the Czech Republic as well as various state and local jurisdictions. In most instances, we are no longer subject to federal, state and local income tax examinations by taxing authorities for years prior to 2009.
Net Loss Per Share
Basic net lossincome (loss) per share is computed by dividing net lossincome (loss) per share available to common stockholders by the weighted average shares of common stock outstanding for the period and excludes any potentially dilutive securities. Diluted earnings per share reflect the potential dilution that would occur upon the exercise or conversion of all dilutive securities into common stock. The computation of lossincome (loss) per share for the years ended September 30, 20082011 and 20092010 excludes potentially dilutive securities because their inclusion would be anti-dilutive.
Shares of common stock issuable upon conversion or exercise of potentially dilutive securities at September 30, 20092011 are as follows:
| | | | | | | | | | | | |
| | | | | | | | Total
| |
| | Stock
| | | Common
| | | Common
| |
| | Options and
| | | Stock
| | | Stock
| |
| | Warrants | | | Equivalents | | | Equivalents | |
|
Series A Convertible Preferred Stock | | | 2,666,666 | | | | 2,645,437 | | | | 5,312,103 | |
Series A-1 Convertible Preferred Stock | | | 533,333 | | | | 1,003,129 | | | | 1,536,462 | |
Series B Convertible Preferred Stock | | | 350,000 | | | | 875,000 | | | | 1,225,000 | |
Common Stock Offering Warrants | | | 4,237,214 | | | | | | | | 4,237,214 | |
Placement Agent Warrants | | | 2,519,156 | | | | | | | | 2,519,156 | |
Affiliate Warrants | | | 55,583 | | | | | | | | 55,583 | |
Bridge Financings | | | 1,236,000 | | | | 333,333 | | | | 1,569,333 | |
Convertible Notes Payable | | | 50,000 | | | | 397,332 | | | | 447,332 | |
Compensatory Warrants | | | 300,000 | | | | | | | | 300,000 | |
Equity Financing Arrangements | | | 766,662 | | | | | | | | 766,662 | |
Employee Stock Options | | | 3,200,900 | | | | | | | | 3,200,900 | |
| | | | | | | | | | | | |
| | | 15,915,514 | | | | 5,254,231 | | | | 21,169,745 | |
| | | | | | | | | | | | |
| | | | | | | | Total | |
| | Stock | | | Common | | | Common | |
| | Options and | | | Stock | | | Stock | |
| | Warrants | | | Equivalents | | | Equivalents | |
| | | | | | | | | |
Series A Convertible Preferred Stock with Warrants | | | 20,131 | | | | 40,263 | | | | 60,394 | |
Series A-1 Convertible Preferred Stock with Warrants | | | 207,260 | | | | 414,518 | | | | 621,778 | |
Series B Convertible Preferred Stock with Warrants | | | 350,000 | | | | 875,000 | | | | 1,225,000 | |
Series C Convertible Preferred Stock with Warrants | | | 450,000 | | | | 900,000 | | | | 1,350,000 | |
Common Stock Offering Warrants | | | 2,807,322 | | | | - | | | | 2,807,322 | |
Placement Agent Warrants | | | 2,937,497 | | | | - | | | | 2,937,497 | |
Affiliate Warrants | | | 55,583 | | | | - | | | | 55,583 | |
Bridge Financing | | | 285,500 | | | | 166,667 | | | | 452,167 | |
Convertible Notes Payable Warrants | | | 50,000 | | | | - | | | | 50,000 | |
Senior Secured Notes Payable Warrants | | | 449,999 | | | | - | | | | 449,999 | |
Compensatory Warrants | | | 300,000 | | | | - | | | | 300,000 | |
Bonding Warrants | | | 33,120 | | | | - | | | | 33,120 | |
Equity Financing Arrangements Warrants | | | 881,662 | | | | - | | | | 881,662 | |
Consulting Warrants | | | 2,500,000 | | | | | | | | 2,500,000 | |
Employee Stock Options | | | 3,434,696 | | | | - | | | | 3,434,696 | |
Non-Employee Stock Options | | | 250,000 | | | | - | | | | 250,000 | |
| | | | | | | | | | | | |
| | | 15,012,770 | | | | 2,396,448 | | | | 17,409,218 | |
Subsequent to September 30, 2009, we issued shares to purchase 3,727,500 shares of common stock, warrants to purchase an aggregate of 1,863,750 shares of our common stock referred to as Common Stock Offering Warrants, warrants to purchase an aggregate of 559,125 shares of our common stock referred to as Placement Agent Warrants and granted options to purchase 100,000 shares of our common stock.
Fair Value of Financial Instruments
The carrying amounts reported in the consolidated financial statements for cash, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued expenses and other current liabilities approximate fair value based on the short-term maturity of these instruments. The carrying amounts of the bridge notes, long-term debt and capital lease obligations approximate fair value because the contractual interest rates or the effective yields of such instruments, which includes the effects of contractual interest rates taken together with the concurrent issuance of common stock purchase warrants, are consistent with current market rates of interest for instruments of comparable credit risk.
Recently AdoptedRecent Accounting Pronouncements
The FASB, inIn June 2009, issued new accounting guidance that established2011, the FASBFinancial Accounting Standards Codification, (“Codification” or “ASC”) as the single source of authoritative GAAP to be applied by nongovernmental entities, except for the rules and interpretive releases of the SEC under authority of federal securities laws, which are sources of authoritative GAAP for SEC registrants. The FASB will no longer issue new standards in the form of Statements, FASB Staff Positions, or Emerging Issues Task Force Abstracts; instead the FASB will issueBoard (FASB) issued Accounting Standards Updates. Accounting Standards Updates will not be
38
BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
authoritative in their own right as they will only serve to update the Codification. These changes and the Codification itself do not change GAAP. This new guidance became effective for interim and annual periods ending after September 15, 2009. Other than the manner inUpdate (ASU) 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income”, which new accounting guidance is referenced, the adoption of these changes did not have a material effect on the Company’s consolidated financial statements.
In December 2007, the FASB issued new accounting guidance, under ASC Topic 805 on business combinations, which established principles and requirements as to how acquirers recognize and measure in these financial statements the identifiable assets acquired, the liabilities assumed, noncontrolling interests and goodwill acquired in the business combination or a gain from a bargain purchase. This guidance is effective for business combinations with an acquisition date on or after the beginning of the first annual reporting periodperiods beginning on or after December 15, 2008.2011. ASU 2011-05 will become effective for the Company on January 1, 2012. This guidance will have an impact oneliminates the Company’s accounting for any future business acquisitions.
option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. In December 2007, the FASB issued new accounting guidance, under ASC Topic 810 on consolidations, which establishes the accounting for non-controlling interests in a subsidiary and the deconsolidationaddition, items of a subsidiary. This guidance requires (a) the ownership interest in the subsidiary held by parties other than the parentcomprehensive income that are reclassified to profit or loss are required to be clearly identified and presented in the consolidated balance sheet within equity, but separate from the parent’s equity, (b) the amount of consolidated net income attributable to the parent and to the non-controlling interest to be clearly identified and presentedseparately on the face of the consolidated statement of operations and (c) changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary to be accounted for consistently. Entities must provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners.statements. This guidance is effective for financial statements issued for fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years. This guidance will have an impact on the Company’s accounting for any future business acquisitions involving non-controlling interest and deconsolidation of subsidiaries.
In April 2008, the FASB issued new accounting guidance, under ASC Topic 350 on intangibles, which outlines the requirements for determining the useful life of an intangible asset. The new guidance is intended to improveincrease the consistency betweenprominence of other comprehensive income in financial statements by requiring that such amounts be presented either in a single continuous statement of income and comprehensive income or separately in consecutive statements of income and comprehensive income. The adoption of ASU 2011-05 is not expected to have a material impact on our consolidated financial position or results of operations.
In September 2011, the useful life of a recognized intangible assetFASB issued Accounting Standards Update No. 2011-08, Intangibles—Goodwill and the period of expected cash flows usedOther (Topic 350)—Testing Goodwill for Impairment (ASU 2011-08), to measuresimplify how entities test goodwill for impairment. ASU 2011-08 allows entities 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. If a greater than 50 percent likelihood exists that the asset whenfair value is less than the underlying arrangement includes renewal or extension of terms that would require substantial costs or resultcarrying amount then a two-step goodwill impairment test as described in a material modification to the asset upon renewal or extension. Companies estimating the useful life of a recognized intangible assetTopic 350 must now consider their historical experience in renewing or extending similar arrangements or, in the absence of historical experience, must consider assumptions that market participants would use about renewal or extension as adjusted for entity-specific factors. Thisbe performed. The guidance isprovided by this update becomes effective for financial statements issued for fiscal years beginning on or after December 15, 2008,annual and interim periods within those fiscal years. The Company expects the new guidance to have an impact on the accounting for any future business acquisitions and intangible assets.
In June 2008, the FASB issued new accounting guidance, under ASC Topic 260 on earnings per share, related to the determination of whether instruments granted in share-based payment transactions are participating securities. This guidance clarifies that all outstanding unvested share-based payment awards that contain rights to non-forfeitable dividends participate in undistributed earnings with common shareholders. Awards of this nature are considered participating securities and the two-class method of computing basic and diluted earnings per share must be applied. This guidance is effective for financial statements issued for fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.
In June 2008, the FASB issued new accounting guidance, under ASC Topic 815 on derivatives and hedging, as to how an entity should determine whether an instrument (or an embedded feature) is indexed to an entity’s own stock. This guidance provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions. This guidance is effective for
39
BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
financial statements issuedgoodwill impairment tests performed for fiscal years beginning after December 15,
2008. Early application2011, but early adoption is
not permitted. The adoption of this
guidance willstandard is not expected to have
an affecta material impact on the Company’s consolidated financial
statements. Pursuant to this pronouncement, we expect to reclassify approximately $3.9 million from Accumulated deficit to a liability asposition and results of
October 1, 2009. However, this liability will have neither an effect on cash flow nor tangible net worth of the company.operations.In November 2008, the FASB issued new accounting guidance, under ASC Topic 323 on investments— equity method and joint ventures, relating to the accounting for equity method investments. This guidance addresses how the initial carrying value of an equity method investment should be determined, how it should be tested for impairment, and how changes in classification from equity method to cost method should be treated. This guidance is effective on a prospective basis in fiscal years beginning on or after December 15, 2008, and interim periods within those fiscal years. The Company expects this guidance to have an impact on its accounting for any future business acquisitions.Page 30
In May 2009,2011, the FASB issued new accounting guidance, under ASCAccounting Standards Update (“ASU”) No. 2011-04, “Fair Value Measurement (Topic 820) - Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs." This ASU addresses fair value measurement and disclosure requirements within Accounting Standards Codification ("ASC") Topic 855 on subsequent events, which sets forth: 1)820 for the period afterpurpose of providing consistency and common meaning between U.S. GAAP and IFRSs. Generally, this ASU is not intended to change the balance sheet date during which managementapplication of a reporting entity should evaluate eventsthe requirements in Topic 820. Rather, this ASU primarily changes the wording to describe many of the requirements in U.S. GAAP for measuring fair value or transactions that may occur for potential recognition or disclosure in the financial statements; 2) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and 3) the disclosures that an entity should makedisclosing information about events or transactions that occurred after the balance sheet date.fair value measurements. This guidance wasASU is effective for interim and annual periods endingbeginning after JuneDecember 15, 2009. The adoption of this guidance did2011. It is not expected to have a material effectany impact on the Company’s consolidated financial statements.statements or disclosures.
In December 2010 the FASB issued ASU 2010-28, “Intangibles — Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts”. ASU 2010-28 modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts by requiring an entity to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. This update will be effective for fiscal years beginning after December 15, 2010. The adoption of this pronouncement is not anticipated to have a material impact on the Company’s consolidated financial position and results of operations.
Other accounting standards that have been issued or proposed by the FASB and SEC and/or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
| |
NOTE 4 — | BUSINESS COMBINATIONSDISCONTINUED OPERATIONS |
Advance Data Systems, Inc.
On December 20, 2007, pursuant to an Asset Purchase Agreement (the “ADSnetcurve Agreement”)November 12, 2009, Datacenter Contractors AG (“DC”, our acquisition of Advance Data Systems, Inc. (“ADSnetcurve”) became effective. The ADSnetcurve Agreement was entered into between us, ADSnetcurve and the shareholders of ADSnetcurve, whereby Beacon acquired substantially all of the assets and assumed certain of the liabilities of ADSnetcurve. Contemporaneously with the acquisition of ADSnetcurve, certain employees of ADSnetcurve entered into employment agreements with us, effective upon the closing of the acquisition.
ADSnetcurve is a global information technology company that provides technology solutions. Specifically, these services include web application development, IT management and hosting services (for scalable infrastructure solutions); and support services. We acquired ADSnetcurve because the business provides the software development and support infrastructure that is needed to develop custom applications for clients’ information technology systems, and to provide management, hosting and technical support services with respect to those systems.
The aggregate purchase price paid by Beacon, inclusive of direct transaction expenses, in connection with the ADSnetcurve acquisition amounted to $1,647,548, including 700,000 shares of common stock valued at $.85 per share, $666,079 of cash, a $220,000 secured promissory note (“ADS Note”), and estimated direct transaction expenses of $172,345 net of $5,876 of cash acquired.
The ADS Note (Note 10) has a term of 48 months, bearing interest at the prime rate, and is secured by the assets acquired by Beacon from ADSnetcurve. The ADS Note provides for monthly principal and interest payments of $7,219. The ADS Note also contains a pre-payment provision such that, following our initial Private Placement, we are required to make additional principal payments equal to 3.2% of the net amount received by us from any equity capital raised, in excess of $1,000,000, after the closing date until such timeformerly known as the ADS Note has been paid in full. As of September 30, 2009 no additional payments have been made. During the years ended September 30, 2008 and 2009, we made payments of $74,568 and $80,302 on this
40
BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
note representing $63,383 and $75,695 of principal and $11,185 and 4, 607 of interest, including principal payments made pursuant to our equity capital raises.
The ADSnetcurve agreement stipulated that if from the closing date to the first anniversary of the closing of this transaction, the annual revenue generated by ADSnetcurve amounts to less than $1,800,000, the balance due under the ADS Note would be reduced by up to 60% of its principal amount but would not be less than $120,000. Based on information available at the time of the acquisition, we recorded the ADS Note at its full principal amount of $300,000 since attainment of the performance target was deemed to be probable; however, the performance target was not achieved. Accordingly, we have reduced the ADS Note balance and goodwill by $80,000 during the year ended September 30, 2008. We are currently in negotiations to settle a portion of the remaining balance of the note for a share-based payment to be determined, however, no agreement has been reached as of September 30, 2009.
The agreement was subject to a net working capital adjustment that was initially measured and later adjusted as of December 20, 2007. Based on the initial net working capital measurement, $116,049 of the purchase price was placed in escrow on December 20, 2007. On January 15, 2008, based on the final determination of net working capital, $66,079 was released to the sellers (included in cash consideration above) and the remaining balance was returned to us from escrow.
Beginning December 21, 2007, the day immediately following the effective date of the transaction, the financial results of ADSnetcurve were consolidated with those of our business. The acquisition was accounted for using the purchase method of accounting. A preliminary valuation of the fair values of the acquired assets and liabilities assumed of the acquired business was performed as of December 20, 2007. As of September 30, 2008, the valuation of the purchase price allocation has been finalized. The excess of the purchase price over net assets acquired amounted to $524,396 and was recorded as goodwill. Other separately identifiable intangibles consisting of customer relationships and non-compete agreements amounted to an aggregate of $962,027. Based on final valuations and the resolution of the performance targets related to the ADS Note, the purchase consideration has been adjusted to $1,647,548.
Bell-Haun Systems Inc.
On December 20, 2007, pursuant to an Agreement and Plan of Merger (the “Bell-Haun Agreement”), our acquisition of Bell-Haun Systems, Inc. (“Bell-Haun”) became effective. The Bell-Haun Agreement was entered into between Beacon, BH Acquisition Sub, Inc. (the “Acquisition Sub”), Bell-Haun and Thomas Bell and Michael Haun, whereby, Bell-Haun merged with and into the Acquisition Sub, with the Acquisition Sub surviving the merger.
Bell-Haun specializes in the installation, maintenance and ongoing support of business telephone systems, wireless services, voice messaging platforms and conference calling services to businesses throughout its region. The Company acquired Bell-Haun because it believes the business provides it with (i) a customer base and presence in the greater Columbus, Ohio region and (ii) an established presence in the market for products and services needed to design telecommunications infrastructures and implement such design plans and systems.
The aggregate purchase price paid by Beacon, inclusive of direct transaction expenses, in connection with the Bell-Haun acquisition amounted to $794,100, including 500,000 shares of common stock valued at $.85 per share, $155,048 of cash, notes payable (the “Bell-Haun Notes”) in the amount $119,000, and future payments in the amount of $50,000 related to non-compete agreements that are included in the direct transaction costs of $95,052.
The Bell-Haun Notes are payable over 60 months in installments of $2,413 including interest at 8% per annum with the first payment due and payable on January 19, 2009 (Note 10). During the year ended
41
BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
September 30, 2009, we made payments $81,554 on this note representing $75,015 of principal and $6,539 of interest, including principal payments made pursuant to our equity capital raises.
The Bell-Haun Agreement also provides for the payment of up to $480,374 of additional purchase consideration upon the attainment of certain earnings milestones based on gross profit earned over the twelve months following the anniversary of the closing. These payments are being accounted for as contingent consideration that would be recorded as an increase to goodwill at December 20, 2008, the measurement date of the milestone if such milestones are attained. We currently do not expect to pay any additional purchase consideration to the sellers of Bell-Haun since it is not probable that the performance targets stipulated under the acquisition agreement will be met.
Beginning December 21, 2007, the day immediately following the effective date of the transaction, the financial results of Bell-Haun Systems Inc. were consolidated with those of our business. The acquisition was accounted for under the purchase method of accounting, whereby a preliminary valuation of the fair values of the assets acquired and liabilities assumed was performed as of December 20, 2007. The aggregate amount of the purchase price which amounted to $794,100 plus the amount of the net liabilities assumed which amounted to $599,520 (grand total of $1,393,620), was allocated to goodwill and other intangible assets. Goodwill initially amounted to approximately $520,000, but was subsequently adjusted to approximately $451,000 as of September 30, 2008, upon the completion of our valuation. Separately identifiable intangibles consisting of customer relationships and non-compete agreements amounted to an aggregate of $873,760.
As described in Notes 2 and 10, we assumed approximately $405,000 of debt obligations in this transaction that were in default as of the closing due to certain change of control restrictions that the sellers breached upon the transfer or their shares to us. These debt obligations were refinanced on March 14, 2008.
CETCON, Inc.
On December 20, 2007, pursuant to an Asset Purchase Agreement (the “CETCON Agreement”), our acquisition of CETCON, Inc. (“CETCON”) became effective. The CETCON Agreement was entered into between Beacon, CETCON and the shareholders of CETCON, whereby we acquired substantially all of the assets and assumed certain of the liabilities of CETCON. Contemporaneously with the acquisition of CETCON, certain employees of CETCON entered into employment agreements with us, effective upon the closing of the acquisition.
CETCON provides engineering consulting services to commercial and government entities with respect to the design and implementation of their voice, data, video, and security infrastructures and systems. Beacon acquired CETCON because the business provides systems design and engineering services that include evaluating information technology needs (including voice, data, video, and security needs) and also designs and engineers systems (i.e., hardware) and infrastructure (i.e., cabling and connectivity) to meet those needs at the enterprise level.
The aggregate purchase price paid by Beacon, inclusive of direct transaction expenses, in connection with the CETCON acquisition amounted to $2,158,111, including 900,000 shares of common stock valued at $.85 per share, $700,000 of cash, a $600,000 secured promissory note (the “CETCON Note”) and direct transaction costs of $235,519 net of cash acquired of $142,407.
The CETCON Note (Note 10) has a term of 60 months, bearing interest at 8% per annum. The CETCON Note provides for monthly principal and interest payments in the amount of $12,166 and is secured by the assets acquired by us in this transaction (subordinate only to existing senior debt of $194,947 assumed in the acquisition which was repaid from proceeds of a new credit facility entered into on March 14, 2008 (Note 10)). If, from the closing date to October 31, 2008, the revenue generated from CETCON is less than $2,000,000, the principal amount of the CETCON Note will be reduced by the percentage of the actual revenue divided by $2,000,000. The minimum revenue of $2,000,000 provided for in the CETCON Note for which there would be
42
BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
consideration payable was achieved. Accordingly, the full principal amount of the CETCON Note was included in the purchase consideration paid to the seller as of the closing date of the acquisition. During the years ended September 30, 2008 and 2009, we made payments of $118,493 and $133,823 on this note representing $84,373 and $99,222 of principal and $34,120 and $34,601 of interest.
We may prepay all or a portion of the outstanding principal amount and accrued interest under the CETCON Note. The CETCON Note contains a pre-payment provision such that, following the initial Private Placement, we are required to make additional principal payments equal to 3% of the net amount received by us from any equity capital raised, in excess of $1,000,000, after the closing date until such time as the CETCON Note is paid in full. Such amounts are included in the principal payments referred to in the previous paragraph.
Beginning December 21, 2007, the financial results of CETCON, Inc. were consolidated with those of our business. The acquisition was accounted for under the purchase method of accounting in accordance with SFAS 141, whereby a preliminary valuation of the fair values of the assets acquired and liabilities assumed of the acquired business was performed as of December 20, 2007. Pursuant to our final valuation, the excess of the purchase price over net tangible and separately identifiable intangible assets acquired amounted to $994,007 and was recorded as goodwill. Other separately identifiable intangibles consisting of customer relationships and non-compete agreements amounted to an estimated aggregate fair value of $1,127,887.
Strategic Communications, LLC
On December 20, 2007, pursuant to an Asset Purchase Agreement (the “Strategic Agreement”), our acquisition of selected assets of Strategic Communications, LLC (“Strategic”) became effective. The Strategic Agreement was entered into between Beacon, Strategic and the members of Strategic, whereby we acquired substantially all of the assets and assumed certain of the liabilities of Strategic. Contemporaneously with the Strategic Agreement, Beacon, RFK Communications, LLC (“RFK”) (co- owner of Strategic Communications, Inc.) and the members of RFK entered into an Asset Purchase Agreement, whereby we acquired substantially all of the assets and assumed certain of the liabilities of RFK.
Strategic was a voice, video and data communication systems solutions provider. Strategic specifically provided procurement for carrier services (including voice, video, data, Internet, local and long distance telephone applications), infrastructure services (including cabling and equipment); routers, servers and hubs; telephone systems, voicemail, general technology products and maintenance support. The Company acquired certain Strategic assets because it believes the business provides it with a customer base and presence in the greater Louisville, Kentucky region and an established presence in the market for products and services needed to design and implement these types of systems.
The aggregate purchase price paid by Beacon, inclusive of direct transaction expenses, in connection with the Strategic acquisition amounted to $2,208,526, including 1,125,000 shares of common stock valued at $.85 per share, $220,500 of cash, a $562,500 secured promissory note (the “Strategic Secured Note”), a $342,000 promissory note (the “Strategic Escrow Note”) and direct transaction expenses of $127,276.
We delivered the $342,000 Strategic Escrow Note (Note 10) and a stock certificate for 200,000 shares of the common stock conveyed to the members of Strategic as purchase consideration to be held in escrow (the “Strategic Escrow Shares”) for the purpose of securing the indemnification obligations of members of Strategic. The specific indemnity secured a commitment on the part of the sellers in this transaction to hold Beacon harmless from its previously existing liabilities, including a $313,000 tax delinquency, since Beacon agreed to assume only $500,000 of liabilities in the transaction. The escrow agreement was to terminate and the Strategic Escrow Note and Strategic Escrow Shares were to be released to the sellers upon confirmation and to the extent that Strategic has settled the liabilities specified under such indemnification. If necessary, the amounts escrowed can be used to settle such liabilities. As discussed below, since we entered into an
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BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
arrangement with the Internal Revenue Service to pay the tax obligations of Strategic, the obligations under the Strategic Escrow Note shall be deemed discharged by such payments.
The Strategic Secured Note (Note 10) has a term of 60 months, bearing interest at 8% per annum. The Strategic Secured Note provides for monthly principal and interest payments of $11,405. We may prepay all or a portion of the outstanding principal amount and accrued interest under the Strategic Secured Note. During the years ended September 30, 2008 and 2009, we made payments of $102,649 and $131,404 on this note representing $73,883 and $102,611 of principal and $28,766 and $28,793 of interest.
The Strategic Escrow Note bears interest at the Federal short term rate (5% as of September 30, 2008) and matures on the earlier of the final round of equity financing (as that term is defined in the Strategic Escrow Note) or December 31, 2008 (the “Maturity Date”), at which time the entire principal and accrued interest will be due and payable. We may prepay all or a portion of the outstanding principal amount and accrued interest under the Strategic Escrow Note. In addition, we have agreed to pay interest and penalties that Strategic incurs related to a tax liability it incurred prior to the acquisition. At the time the acquisition was executed, the acquired assets were believed to be encumbered by an aggregate of $313,000 of tax liens as of the time of the closing of this transaction; however Strategic, as the seller in this transaction, is still the primary obligor of this liability and is still therefore primarily liable for payment of the entire balance, including penalties and interest. As described in Note 17, the remaining amount of the liens of approximately $281,000 was settled on July 1, 2008 pursuant to an agreement by and among Strategic Communications LLC, Beacon, and the Internal Revenue Service.
On July 1, 2008, we entered into an installment payment plan (“Installment Agreement”) by and among the former owners of Strategic and the Internal Revenue Service to settle the Strategic tax liens. The agreement requires us to pay $50,000 upon signing and $50,000 the 15th of each month beginning in July until the approximate $281,000 balance is paid in full along with any further interest and penalties that accrue during the term of the agreement. Based on estimates provided by the Internal Revenue Service, the remaining interest and penalties that have not been accrued to date will amount to approximately $12,000. The Company does not deem this amount to be significant to the original acquisition transaction and is therefore expensing such penalties and interest over the remaining term of the agreement as incurred. During the year ended September 30, 2008, we paid and settled $412,449 of obligations to taxing authorities on behalf of Strategic Communications, its former owners and principals to settle state and local tax liens, as well as payments to settle portions of the outstanding federal tax obligations payable at the time of the acquisition. Amounts paid in settlement include $54,119 paid directly from closing proceeds and $358,330 as a reduction of Notes. The remaining balance due under the Installment Agreement, including interest and penalties accrued to date, was $85,960 and $0 as of September 30, 2008 and 2009. Since the aggregate tax liens were in excess of the $313,000 originally estimated, concurrently with the execution of the Installment Agreement, pursuant to our right of offset between the Strategic Escrow Note and Strategic Secured Note, we entered into an amendment to the Strategic Secured Note reducing the balance by $89,000 and increasing the balance of the Strategic Escrow Note to compensate for the difference between the remaining balance of tax liens due the Internal Revenue Service. The Company will continue to pay the Strategic Secured Note payments of $11,405 per month, the effect of which will result in the note being repaid ahead of its scheduled maturity.
Beginning December 21, 2007, the day immediately following the effective date of the transaction, the financial results of Strategic were consolidated with those of our business. The acquisition was accounted for under the purchase method of accounting in accordance with SFAS 141, whereby a preliminary valuation of the fair values of the assets acquired and liabilities assumed was performed as of December 20, 2007. Based on the final valuation, the excess of the purchase price over the net tangible and separately identifiable intangible assets acquired amounted to $723,509 and was recorded as goodwill, subsequently adjusted to $821,994 as of September 30, 2008, upon final review of the estimated fair values of the assets purchased and
44
BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
liabilities assumed in the transaction. Other separately identifiable intangibles consisting of customer relationships and non-compete agreements amounted to an estimated aggregate fair value of $1,340,400.
Business Combination Accounting — Phase 1 Acquisitions
Beacon accounted for the acquisitions of ADSnetcurve, Bell-Haun, CETCON and Strategic using the purchase method of accounting prescribed under SFAS 141, which was then the effective standard of accounting for business combinations completed prior to January 1. 2009. Under the purchase method, the acquiring enterprise records any purchase consideration issued to the sellers of the acquired business at their fair values. The aggregate of the fair value of the purchase consideration plus any direct transaction expenses incurred by the acquiring enterprise is allocated to the assets acquired (including any separately identifiable intangibles) and liabilities assumed based on their fair values at the date of acquisition. The excess of cost of the acquired entities over the fair values of assets acquired and liabilities assumed was recorded as goodwill. The results of operations for each of the acquired companies following the dates of each of the business combination (which was December 20, 2007) are included in our consolidated results of operations for the years ended September 30, 2008 and 2009. We evaluated each of the aforementioned transactions to identify the acquiring entity as required under SFAS 141 for business combinations effected through an exchange of equity interests. Based on such evaluation we determined that we were the acquiring entity in each transaction (and cumulatively for all transactions) as (1) the larger portion of the relative voting rights in each of the acquired business and in the combined business as a whole was retained by the existing Beacon stockholders, (2) there are no significant minority interests or organized groups of interests carried over from the acquired entities that could exercise significant influence over the operating policies or management decisions of the combined entity, (3) the sellers in each of these transactions have no participation on the board of directors nor are they involved in any corporate governance functions of the combined entity and (4) a majority of the Senior Management positions in the combined entity, including those of the Chairman and Chief Executive Officer and the Chief Accounting Officer, were retained by officers of Beacon both prior and subsequent to the business combination .The following table provides a breakdown of the purchase prices of each of the acquired businesses including the fair value of purchase consideration issued to the sellers of the acquired business and direct transaction expenses incurred by us in connection with consummating these transactions:
| | | | | | | | | | | | | | | | | | | | |
| | | | | Bell-Haun
| | | | | | Strategic
| | | Total
| |
| | ADSnetcurve | | | Systems | | | CETCON | | | Communications | | | Consideration | |
|
Cash paid | | $ | 666,079 | | | $ | 155,048 | | | $ | 700,000 | | | $ | 220,500 | | | $ | 1,741,627 | |
Direct acquisition costs | | | 172,345 | | | | 95,052 | | | | 235,518 | | | | 127,276 | | | | 630,191 | |
Net of cash acquired | | | (5,876 | ) | | | — | | | | (142,407 | ) | | | — | | | | (148,283 | ) |
| | | | | | | | | | | | | | | | | | | | |
Cash used in acquisitions | | $ | 832,548 | | | $ | 250,100 | | | $ | 793,111 | | | $ | 347,776 | | | $ | 2,223,535 | |
Notes payable | | | 220,000 | | | | 119,000 | | | | 600,000 | | | | 904,500 | | | | 1,843,500 | |
Common stock issued | | | 595,000 | | | | 425,000 | | | | 765,000 | | | | 956,250 | | | | 2,741,250 | |
| | | | | | | | | | | | | | | | | | | | |
| | $ | 1,647,548 | | | $ | 794,100 | | | $ | 2,158,111 | | | $ | 2,208,526 | | | $ | 6,808,285 | |
| | | | | | | | | | | | | | | | | | | | |
The fair value of common stock issued to the sellers as purchase consideration was determined to be $.85 per share based on the selling prices of equity securities issued by Beacon in the Private Placement Transaction described in Note 14. The fair value of note obligations issued to the sellers as purchase consideration is considered to be equal to their principal amounts because such notes feature interest rates that are deemed to be comparable for instruments of similar credit risk. Transaction expenses, which include legal fees and transaction advisory services directly related to the acquisitions, amounted to approximately $630,000. Such fees included legal, accounting and business broker fees paid in cash.
Beacon also evaluated all post combination payments payable or potentially payable to the sellers of the acquired business as either contingent consideration or compensation under applicable employment agreements
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BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
to determine their proper characterization. We determined that potential contingent consideration payable to certain sellers of the acquired businesses upon the attainment of certain pre-defined financial milestones should be accounted for as additional purchase consideration because there are no future services required on the part of such sellers in order for them to be entitled to those payments. In addition, we deem these payments to be a component of the implied value of the acquired businesses for which payment would be made based on financial performance. Conversely, any payments to be made to certain sellers of the acquired businesses under their respective employment agreements are deemed to be compensation for post combination services because such payments, which management believes are comparable to amounts for similar employment services, require the continuation of post-combination employment services.
Purchase Price Allocation — Phase 1 Acquisitions
Under the purchase method of accounting, the total preliminary purchase price was allocated to each of the acquired entities, net tangible and identifiable intangible assets based on their estimated fair values as of December 20, 2007. The final allocation of the purchase price for these four acquisitions is set forth below. The excess of the purchase price over the net tangible and identifiable intangible assets was recorded as goodwill.
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Bell-Haun
| | | | | | Strategic
| | | Total
| | | | |
| | ADSnetcurve | | | Systems | | | CETCON | | | Communications | | | Consideration | | | | |
|
Accounts receivable | | $ | 151,208 | | | $ | 71,335 | | | $ | 466,458 | | | $ | — | | | $ | 689,001 | | | | | |
Inventory | | | — | | | | 168,065 | | | | — | | | | 450,536 | | | | 618,601 | | | | | |
Prepaid expenses and other current assets | | | 13,430 | | | | 34,522 | | | | 5,516 | | | | 1,815 | | | | 55,283 | | | | | |
Property and equipment | | | 47,500 | | | | 19,243 | | | | 20,000 | | | | 140,000 | | | | 226,743 | | | | | |
Goodwill | | | 524,396 | | | | 451,252 | | | | 994,007 | | | | 821,994 | | | | 2,791,649 | | | | | |
Customer relationships | | | 862,027 | | | | 843,760 | | | | 927,887 | | | | 1,240,400 | | | | 3,874,074 | | | | | |
Covenants not to compete | | | 100,000 | | | | 30,000 | | | | 200,000 | | | | 100,000 | | | | 430,000 | | | | | |
Security deposits | | | 21,541 | | | | — | | | | — | | | | 6,050 | | | | 27,591 | | | | | |
Line of credit obligation | | | — | | | | (250,000 | ) | | | — | | | | — | | | | (250,000 | ) | | | | |
Accounts payable and accrued liabilities | | | (40,103 | ) | | | (319,911 | ) | | | (55,278 | ) | | | (516,984 | ) | | | (932,276 | ) | | | | |
Customer deposits | | | (32,451 | ) | | | (44,914 | ) | | | (205,532 | ) | | | (9,795 | ) | | | (292,692 | ) | | | | |
Capital lease obligations | | | — | | | | — | | | | — | | | | (25,490 | ) | | | (25,490 | ) | | | | |
Long-term debt | | | — | | | | (159,252 | ) | | | (194,947 | ) | | | — | | | | (354,199 | ) | | | | |
Other acquisition liability | | | — | | | | (50,000 | ) | | | — | | | | — | | | | (50,000 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 1,647,548 | | | $ | 794,100 | | | $ | 2,158,111 | | | $ | 2,208,526 | | | $ | 6,808,285 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net tangible asset acquired (liabilities assumed) | | $ | 161,125 | | | $ | (530,912 | ) | | $ | 36,217 | | | $ | 46,132 | | | $ | (287,438 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
We considered our intention for future use of the acquired assets, analyses of the historical financial performance of each of the acquired businesses and estimates of future performance of each acquired businesses’ products and services in deriving the fair values of the assets acquired and liabilities assumed. Our final determination of the purchase price allocation resulted in changes to the amounts reflected in our preliminary estimate and estimated useful lives of acquired assets. However, none of the adjustments were significant.
46
BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Symbiotec“Beacon Solutions AG
On July 29, 2009, BESG Ireland Ltd.AG”), a wholly owned subsidiary of Beacon, acquired 100%BESG Ireland Ltd., entered into a two-phase project management services agreement for the design and construction of a data center in Zurich, Switzerland. DC’s operations principally consisted of services provided to one significant customer under a specific contract and were previously reported in the Company’s European operating segment. Phase 1 of the outstanding shares of Symbiotec Solution AG (Symbiotec)agreement was completed in exchange for 400,000 shares of Beacon common stock issued asJune 2010. Phase 2 of the dateagreement relates to the completion of the acquistion, plus contingent consideration consisting of an additional 400,000 shares of Beacon common stockdata center and up to $145,189 of cash subjectwas valued to the attainment of certain contractually defined earnings targets. We recordedCompany at approximately $10,000 in net sales.
In June 2010, the contingent consideration as partcustomer notified the Company that it was terminating the agreement and cancelling Phase 2 due to a claimed breach. The Company and customer entered into negotiations regarding the possible continuation of the purchase price onagreement which did not materialize. On December 14, 2010, Beacon announced that, as a result of DC’s inability to reach a settlement of unpaid invoices by its largest debtor, the dateDC Board has filed the relevant statutory notices with the local judge in Switzerland in accordance with its fiduciary obligations under Swiss law. As a result of this action, Beacon ceases to have a controlling financial interest in DC and therefore, in accordance with ASC 810-10-65, must deconsolidate the acquisition since it is probable thatsubsidiary from the acquired businesss will meet its earnings targets over the one year measurement period. Beacon acquired Symbiotec as an integral part of our plan to establish a presence in Europe where we are currently serving a significant customer. For the period July 29, 2009 to September 30, 2009, we recognized revenue of approximately $1.0 million and net income of approximately $0.4 million, which is included in our consolidated statement of operationsfinancial statements for the year ended September 30, 2009.2011. The resultant deconsolidation generated a net income of $7,892, for the ended September 30, 2011 which is mainly composed of the elimination of the net liabilities of the discontinued DC operations from Beacon’s operations.
The assets and liabilities of DC have been classified on the consolidated balance sheets as current assets and liabilities of discontinued operations. The assets and liabilities comprising the balances, as classified in our consolidated balance sheets, consist of:
| | As of | |
| | September 30, | |
| | 2010 | |
ASSETS | | | |
Cash | | $ | 46 | |
Accounts receviable | | | 87 | |
Total assets | | $ | 133 | |
LIABILITIES | | | | |
Accounts payable | | $ | 7,554 | |
Accrued expenses | | | 1,004 | |
Total liabilities | | $ | 8,558 | |
The following table presents a summarythe results of the purchase price consideration for the purchase of Symbiotec:discontinued operations.
| | | | |
| | Amount | |
|
Shares issued at acquistion | | $ | 436,855 | |
Contingent shares pursuant to earnout | | | 476,000 | |
Profit sharing earnout | | | 145,189 | |
| | | | |
| | $ | 1,058,044 | |
Less cash acquired | | | (46,202 | ) |
| | | | |
Total purchase price consideration, net of cash received | | $ | 1,011,842 | |
| | | | |
The purchase price has been allocated as follows:
| | | | |
| | Amount | |
|
Accounts receivable | | $ | 133,516 | |
Prepaid expenses and other current assets | | | 26,567 | |
Property and equipment | | | 15,000 | |
Goodwill | | | 360,300 | |
Customer relationships | | | 349,100 | |
Covenants not to compete | | | 212,300 | |
Accounts payable and accrued liabilities | | | (84,941 | ) |
| | | | |
| | $ | 1,011,842 | |
| | | | |
Net tangible asset acquired | | $ | 136,344 | |
| | | | |
| | For the Year | |
| | Ended | |
| | September 30, | |
| | 2010 | |
| | | |
Net Sales | | $ | 16,948 | |
| | | | |
Net loss before taxes | | | (8,181 | ) |
Income taxes | | | - | |
Net loss from discontinued operations | | $ | (8,181 | ) |
Beacon also evaluated all post combination payments payable or potentially payable to the sellers of the acquired business as either contingent consideration or compensation under applicable employment agreements to determine their proper characterization. We determined that potential contingent consideration payable to sellers of the acquired businesses upon the attainment of certain contractually defined earnings targets should be accounted for as additional purchase consideration because there are no future services required on theAs part of the sellers in order for them to be entitled to those payments. In addition, we deem these payments to bediscontinued operations, goodwill and intangible assets recorded as a componentresult of the implied value of the acquired businesses for which payment would be made based on financial performance. Conversely, any payments to be made to the sellers of the acquired businesses under their respective employment agreements which are at will with no fixed term, are deemed to be compensation for post combination services because such payments, which management believes are comparable to amounts for similar employment services, require the continuation of post-combination employment services.
47
BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Pro-Forma Financial Information
The unaudited financial information in the table below summarizes our combined results of operations on a pro-forma basis, as if the companies we acquired during the year ended September 30, 2008 and 2009 had been combined as of the beginning of each of the periods presented.
The acquisitions of ADSnetcurve, Bell-Haun, CETCON and Strategic were completed on December 20, 2007. Our acquisition of Symbiotec was completed on July 29, 2009. The unaudited pro-forma financial resultsSolutions AG were deemed impaired and therefore written off as of September 30, 2010 in the amount of $254 and $396, respectively
We accounted for the year ended September 30, 2008 combinesfiling under the historical resultsguidance of ADSnetcurve, Bell-Haun, CETCON, StrategicASU No. 2010-02, “Accounting and Symbiotec with thoseReporting for Decreases in Ownership of a Subsidiary - a Scope Clarification” which requires an entity to deconsolidate a subsidiary when the Company as if these acquisitions had been completed as of October 1, 2007. The pro-forma weighted average number of shares outstanding also assumes thatentity ceases to have a controlling financial interest in the Share Exchange Transaction and Series A Private Placement described in Note 1 was completed as of October 1, 2008.subsidiary.
The unaudited pro-forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisitions of these businesses had taken place at the beginning of each of the periods presented
| | | | | | | | |
| | For the
| | For the
|
| | Year Ended
| | Year Ended
|
| | September 30,
| | September 30,
|
| | 2008 | | 2009 |
| | (Unaudited) | | (Unaudited) |
|
Net sales | | $ | 8,390,073 | | | $ | 11,231,496 | |
Loss from operations | | | (4,713,761 | ) | | | (5,154,657 | ) |
Net loss available to common stockholders — (including the effects of contractual and deemd dividends) | | | (10,673,847 | ) | | | (7,045,261 | ) |
Net loss per share — basic and diluted | | $ | (0.98 | ) | | $ | (0.42 | ) |
Pro-forma weighted average shares outstanding | | | 10,865,250 | | | | 16,882,449 | |
The unaudited proforma financial results for the year ended September 30, 2009 combine the historical results of Symbiotec with those of the company as if that acquisition was completed on October 1, 2002.
| |
NOTE 5 — | ACCOUNTS RECEIVABLE |
Accounts receivable consists of the following:
| | | | | | | | | | As of | | | As of | |
| | September 30,
| | September 30,
| | | September 30, | | | September 30, | |
| | 2008 | | 2009 | | | 2011 | | | 2010 | |
| | | | | | |
Accounts receivable | | $ | 1,555,162 | | | $ | 4,138,486 | | | $ | 5,117 | | | $ | 5,401 | |
Less: Allowance for doubtful accounts | | | (50,000 | ) | | | (157,771 | ) | | | (1,365 | ) | | | (866 | ) |
| | | | | | | | | | | | | |
Accounts receivable, net | | $ | 1,505,162 | | | $ | 3,980,715 | | | $ | 3,752 | | | $ | 4,535 | |
| | | | | | |
Additions and charges to the allowance for doubtful accounts consistsconsist of the following:
| | | | | | | | |
| | September 30,
| | | September 30,
| |
| | 2008 | | | 2009 | |
|
Opening balance | | $ | — | | | $ | (50,000 | ) |
Add: Additions to reserve | | $ | (50,000 | ) | | $ | (151,888 | ) |
Less: charges | | | | | | | 44,117 | |
| | | | | | | | |
Ending balance | | $ | (50,000 | ) | | $ | (157,771 | ) |
| | | | | | | | |
48
BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
| | As of | | | As of | |
| | September 30, | | | September 30, | |
| | 2011 | | | 2010 | |
| | | | | | |
Opening balance | | | (866 | ) | | $ | (156 | ) |
Add: additions to reserve | | | (520 | ) | | | (752 | ) |
Less: charges | | | 21 | | | | 42 | |
| | | | | | | | |
Ending balance | | $ | (1,365 | ) | | $ | (866 | ) |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Inventory consists of the following as of September 30, 2008 and 2009:
| | | | | | | | |
| | September 30,
| | | September 30,
| |
| | 2008 | | | 2009 | |
|
Inventory | | $ | 632,852 | | | $ | 765,121 | |
Less: reserve for obsolete inventory | | | (35,058 | ) | | | (160,499 | ) |
| | | | | | | | |
Inventory | | $ | 597,794 | | | $ | 604,622 | |
| | | | | | | | |
2010 consisted of the following:
Additions and charges to the reserve for obsolete inventory:
| | | | | | | | |
| | As of
| | | As of
| |
| | September 30,
| | | September 30,
| |
| | 2008 | | | 2009 | |
|
Opening balance | | $ | — | | | $ | (35,058 | ) |
Add: additions to reserve | | | (35,058 | ) | | | (144,659 | ) |
Less: charges | | | | | | | 19,218 | |
| | | | | | | | |
Ending balance | | $ | (35,058 | ) | | $ | (160,499 | ) |
| | | | | | | | |
| | As of | |
| | September 30, | |
| | 2010 | |
| | | |
Inventory (principally parts and system components) | | $ | 707 | |
Less: reserve for obsolete inventory | | | (150 | ) |
| | | | |
Inventory | | $ | 557 | |
On September 30, 2011 the Company sold all of its remaining inventory to a purchaser that acquired certain assets and system components that we utilize in time and materials contracts and to fulfill repair and maintenance servicesand/or upgrade requirements. These items are stated at their net realizable value. We have established a $35,058 and $160,499 reserve for obsolete inventory, principally relating to spare parts that we may useassumed certain contractual obligations to service phone systemsspecific contracts. Any consideration that are discontinued.the Company may receive is contingent upon the purchaser's ability to generate revenue in future periods. Accordingly, the Company recorded $656 as a component of its operating loss for the year ended September 30, 2011.
| |
NOTE 7 — | PROPERTY AND EQUIPMENT, NET |
Property and equipment consist of the following as of September 30, 20082011 and 2009:2010:
| | | | | | | | | |
| | September 30,
| | September 30,
| | | September 30, | | | September 30, | |
| | 2008 | | 2009 | | | 2011 | | | 2010 | |
| | | | | | |
Equipment | | $ | 213,315 | | | $ | 290,386 | | | $ | 530 | | | $ | 500 | |
Software | | | | 263 | | | | 240 | |
Furniture and Fixtures | | | | 60 | | | | 58 | |
Vehicles | | | 80,934 | | | | 80,934 | | | | 19 | | | | 82 | |
Furniture and Fixtures | | | 45,000 | | | | 118,358 | | |
Software | | | 27,225 | | | | 110,992 | | |
Leasehold Improvements | | | 14,339 | | | | 16,852 | | | | 12 | | | | 19 | |
| | | | | | | | | | | | | |
| | $ | 380,813 | | | $ | 617,522 | | | $ | 884 | | | $ | 899 | |
Less: Accumulated Depreciation | | | (70,110 | ) | | | (222,951 | ) | | | (635 | ) | | | (479 | ) |
| | | | | | | | | | | | | |
Net Book Vaule Fixed Assets | | $ | 310,703 | | | $ | 394,571 | | |
| | | | | | |
Fixed Assets, net | | | $ | 249 | | | $ | 420 | |
Depreciation amounted to approximately $70,000$245 and $153,000$258 for the years ended September 30, 20082011 and 2009.
49
2010, respectively.
BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| |
NOTE 8 — | INTANGIBLE ASSETS, NET |
The following table is a summary of the intangible assets acquired in business combinations as described in Note 4:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Bell-Haun
| | | | | | Strategic
| | | | | | Total
| |
| | ADSnetcurve | | | Systems | | | CETCON | | | Communications | | | Symbio Tec | | | Consideration | |
|
Goodwill | | $ | 524,396 | | | $ | 451,252 | | | $ | 994,007 | | | $ | 821,993 | | | $ | 360,300 | | | $ | 3,151,948 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Customer relationships | | | 862,027 | | | | 843,760 | | | | 927,887 | | | | 1,240,400 | | | | 349,100 | | | | 4,223,174 | |
Contracts not to compete | | | 100,000 | | | | 30,000 | | | | 200,000 | | | | 100,000 | | | | 212,300 | | | | 642,300 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 962,027 | | | | 873,760 | | | | 1,127,887 | | | | 1,340,400 | | | | 561,400 | | | | 4,865,474 | |
Less: Accumulated amortization | | | (213,584 | ) | | | (193,308 | ) | | | (271,727 | ) | | | (283,731 | ) | | | — | | | | (962,350 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Intangibles, net | | | 748,443 | | | | 680,452 | | | | 856,160 | | | | 1,056,669 | | | | 561,400 | | | | 3,903,124 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
assets:
| | As of | | | As of | |
| | September 30, | | | September 30, | |
| | 2011 | | | 2010 | |
| | | | | | |
Goodwill | | $ | 2,792 | | | $ | 2,792 | |
Customer relationships | | $ | 3,804 | | | $ | 3,804 | |
Covenants not to compete | | | 500 | | | | 500 | |
| | | | | | | | |
| | | 4,304 | | | | 4,304 | |
| | | | | | | | |
Less: Accumulated amortization | | | (1,399 | ) | | | (1,293 | ) |
Intangibles, net | | $ | 2,905 | | | $ | 3,011 | |
The above noted intangible assets are being amortized on a straight-line basis. Customer relationships are being amortized over a 15 year useful life,life; contracts not to compete had been amortized over a 2 year useful life based on the estimated economic benefit. Amortization expense for the years ended September 30, 20082011 and 20092010 was $501,357$106 and $460,993.
Given the current economic environment and uncertainties regarding the potential impact of these conditions on our business, if forecasted revenue and margin growth rates of the reporting unit are not achieved, it is reasonably possible that an impairment review may be triggered for goodwill and amortizable intangible assets prior to the next annual review.$331.
The following is a summary of amortization expense for the next five fiscal years and thereafter:
Fiscal Year ended | | Fiscal Year ended | |
September 30, | | September 30, | |
| | | | | | | |
| | Fiscal Year
| | |
| | Ended
| | |
| | September 30, | | |
| |
2010 | | $ | 462,246 | | |
2011 | | | 462,246 | | |
2012 | | | 462,246 | | | $ | 254 | |
2013 | | | 462,246 | | | | 254 | |
2014 | | | 462,246 | | | | 254 | |
2015 | | | | 254 | |
2016 | | | | 254 | |
Thereafter | | | 1,591,894 | | | | 1,635 | |
| | | | | | | |
| | $ | 3,903,124 | | | $ | 2,905 | |
| | | | |
| |
NOTE 9 — | ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES |
Accrued expenses consist of the following at September 30, 2007 and 2008:
| | | | | | | | |
| | September 30,
| | | September 30,
| |
| | 2008 | | | 2009 | |
|
Goods received not invoiced | | $ | 121,517 | | | $ | 1,092,042 | |
Compensation related | | | 371,511 | | | | 559,782 | |
Severance and related | | | 133,161 | | | | 156,248 | |
Interest | | | 76,852 | | | | 122,660 | |
Sales taxes payable | | | 80,147 | | | | 66,798 | |
Warranty reserve | | | 58,178 | | | | 65,072 | |
Preferred stock dividends | | | 220,354 | | | | 37,962 | |
Other | | | 275,640 | | | | 543,716 | |
| | | | | | | | |
| | $ | 1,337,360 | | | $ | 2,644,280 | |
| | | | | | | | |
50