UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
 
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the year ended September 30, 2011.
or
For the year ended September 30, 2009.
or
o
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from          to
 
Commission File Number 000-31355
 
BEACON ENTERPRISE SOLUTIONS GROUP, INC.
(Exact name of registrant as specified in its charter)
 
Nevada
 81-0438093
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
   
1311 Herr Lane,9300 Shelbyville Road, Suite 205,1020, Louisville, KY 4021840222
(Address of principal executive offices)
 (Zip Code)
 
Registrant’s telephone number, including area code
(502) 657-3500

Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value.
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o ¨       No þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o ¨       No þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes oþ      No o ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to thisForm 10-K.   ¨o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” inRule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o¨
 
Accelerated filer o¨
 
Non-accelerated filer ¨o
 
Smaller reporting company þ
  (Do not check if a smaller reporting company)          
 
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Act).  Yes o ¨      No þ
 
The aggregate market value of the voting and non-voting common equity held by non-affiliates was $16,206,525$8,728 based on the price of Beacon Enterprise Solutions Group, Inc.’s common stock as of December 10, 2009,5, 2011, as reported on the OTC Bulletin Board.
 
The number of shares outstanding of Beacon Enterprise Solutions Group, Inc.’s common stock as of December 10, 20095, 2011 was 28,383,490.37,631,896.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Documents
 
Form 10-K Reference
None Not Applicable
  


 


 
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PART I
 
Item 1.Business
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.
 
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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.
 
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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
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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:
                     
• 
local political or economic instability;
• changes in governmental regulation;
• changes in import/export duties;
• trade restrictions;
• 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.


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changes in governmental regulation;
changes in import/export duties;
trade restrictions;
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;
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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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Beacon depends on its key employees.
 
Beacon is highly dependent on certain officers and employees. The loss of any of their services or Beacon’s inability to attract and retain other qualified employees or consultants wouldcould have an adverse impact on Beacon’s business and its ability to achieve its objectives. Beacon currently intends to attempt to enter intohas employment and non-compete agreements with all key personnel. These agreements however will permit the employee to resign without cause at any time. There can be no assurance that Beacon willmay not be able to retain existing employees or that it will be able to find, attract and retain other skilled personnel on acceptable terms.
 
Beacon has no patent protection for its products and services.
 
None of Beacon’s products or services is proprietary to Beacon and, as a result, Beacon enjoys no patent protection. As a result, Beacon has a limited ability to protect what it does against infringement by others, including competitors who are larger and better capitalized than Beacon.capitalized.
 
Economic conditions could materially adversely affect us.
 
Our operations and performance depend significantly on national and worldwide economic conditions. Uncertainty about current national and global economic conditions poses a risk as consumers and businesses may postpone spending in response to tighter credit, negative financial newsand/or declines in income or asset values, which could have a material negative effect on the demand for our products and services. Other factors that could influence demand include continuing increases in fuel and other energy costs, conditions in the residential real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence, and other macroeconomic factors affecting consumer spending behavior. These and other economic factors could have a material adverse effect on demand for our products and services and on our financial condition and operating results.
 
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The current financial turmoil affecting the banking system and financial markets and the possibility that financial institutions may consolidate or go out of businesseconomic conditions have resulted in a tightening in the credit markets, a low level of liquidity in many financial markets, and extreme volatility in fixed income, credit, currency and equity markets. There could be a number of follow-on effects from the credit crisis and current economic environment on our business, including insolvency of key customers and suppliers and the inability for us to raise additional working capital to support the growth of our operations.
 
Changes in regulations, the laws or court rulings could adversely affect Beacon.
Our telecommunications and IT products and services are highly regulated and subject to governmental actions at myriad levels. Changes to laws affecting the telecommunications industry or the economic climate for telecommunications businesses could have a material adverse effect on Beacon’s ability to conduct business.
Beacon’s quarterly operating results may fluctuate significantly and will be difficult to predict.
 
Our results of operations willmay fluctuate significantly from quarter to quarter as a result of a number of factors, including our productservices mix, development timeline and the rate at which customers accept our products.service offerings. Accordingly, our future operating results are likely tomay be subject to variability from quarter to quarter and could be adversely affected in any particular quarter. It is possible that our operating results will be below the expectations of investors. As indicated above, Beacon has incurred losses since its inception.
 
Past activities of Suncrest Global Energy Corp. and its affiliates may lead to future liability for Beacon.
Before the Share Exchange, Suncrest Global Energy Corp. engaged in businesses unrelated to that of Beacon’s operations. Any liabilities relating to such prior business may have a material adverse effect on Beacon. Although we have not identified or been notified of any such liabilities as of December 10, 2009, we can give no assurances as to the existence of any such liabilities.


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Catastrophic events or geo-political conditions may disrupt our business.
 
A disruption or failure of our systems or operations in the event of a major earthquake, weather event, cyber-attack, terrorist attack, or other catastrophic event could cause delays in completing sales, providing services or performing other mission-critical functions. A catastrophic event that results in the destruction or disruption of any of our critical business or information technology systems could harm our ability to conduct normal business operations and our operating results. Abrupt political change, terrorist activity, and armed conflict pose a risk of general economic disruption in affected countries, which may increase our operating costs. These conditions also may add uncertainty to the timing and budget for technology investment decisions by our customers.
 
Risks Relating to Ownership of Beacon Common Stock
 
No Assurances of a Public Market; Restrictions on Resale.
 
Although Beaconour Common Stock is eligible for quotationcurrently traded on the NASDOTC Bulletin Board there is not and has never been a(“OTC.BB”), trading may be extremely sporadic. A more active market for the Beacon Common Stock. There can be no assurances that any trading market will ever develop in the Beacon Common Stock at any time in the future.our common stock may not develop. Investors must be prepared to bear the economic risk of holding the securities for an indefinite period of time.
 
Significant numberPotential dilution of outstanding convertible notes, options and warrants could interfere with Beacon’s ability to raise capital.
 
Beacon has outstanding convertible notes, options and warrants that are convertible into or exercisable for shares of our common stock. To the extent that outstanding options or warrants are exercised, dilution to the percentage ownership of Beacon’s shareholders will occur. In addition, the terms on which Beacon will be able to obtain additional equity capital may be adversely affected if the holders of outstanding options and warrants exercise them at a time when Beacon is able to obtain additional capital on terms more favorable to Beacon than those provided in the outstanding options and warrants.
 
The price of Beacon Common Stock may fluctuate significantly.
 
Stock of public companies can experience extreme price and volume fluctuations. These fluctuations often have been unrelated or out of proportion to the operating performance of such companies. Beacon expects its stock price to be similarly volatile. These broad market fluctuations may continue and could harm Beacon’s stock price. Any negative change in the public’s perception of the prospects of Beacon or companies in Beacon’s industry could also depress Beacon’s stock price, regardless of Beacon’s actual results. Factors affecting the trading price of Beacon’s common stock may include:
                      
• variations in operating results;
• announcements of technological innovations, new products or product enhancements, strategic alliances or significant agreements by Beacon or by competitors;
• recruitment or departure of key personnel;
• litigation, legislation, regulation or technological developments that adversely affect Beacon’s business; and
• market conditions in Beacon’s industry, the industries of their customers and the economy as a whole.
variations in operating results;
announcements of technological innovations, new products or product enhancements, strategic alliances or significant agreements by Beacon or by competitors;
recruitment or departure of key personnel;
litigation, legislation, regulation or technological developments that adversely affect Beacon’s business; and
market conditions in Beacon’s industry, the industries of their customers and the economy as a whole.
 
Further, the stock market in general, and securities of microcap companies in particular, can experience extreme price and volume fluctuations. Continued market fluctuations could result in extreme volatility in the price of the Beacon Common Stock, which could cause a decline in the value of Beacon Common Stock. You should also be aware that price volatility might be worse if the trading volume of the Beacon Common Stock is low.


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Although our Common Stock is currently traded on the OTC Bulletin Board (“OTC.BB”), trading may be extremely sporadic. There can be no assurance that a more active market for our common stock will develop.
Page 8

 
The SEC may limit the number of shares of Beacon Common Stock that may be registered for resale at any one time.
 
The Federal securities laws distinguish between a primary offering made by an issuer and a secondary offering made by an issuer on behalf of a selling shareholder. Recently, the SEC has made public statements indicating the SEC’s Division of Corporation Finance will question the ability of issuers to register shares for resale in a secondary offering where the number of shares offered exceed an estimated one-third of the total number of shares held by non-affiliates prior to the underlying private transaction. Although this position is not written or settled law, it is possible the SEC staff will view any resale offering by investors as an offering by Beacon and deem it a primary offering if the number of shares Beacon seeks to register exceeds the estimated one-third threshold. Even if the number of shares Beacon seeks to register is below the estimated one-third threshold, the SEC staff may still take the position that the offering is a primary offering rather than a secondary offering. In that event, Beacon may seek to register only a portion of its Common Stock at any one time and will only be able to register additional Common Stock after the passage of time and the sale of substantially all of the Registrable Securities subject to the previous registration statement.
 
Beacon Common Stock may be subject to Penny Stock Rules, which could affect trading.
 
Broker-dealer practices in connection with transactions in “penny stocks” are regulated by certain rules adopted by the SEC. Penny stocks generally are equity securities with a price of less than $5.00, subject to exceptions. The rules require that a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in connection with the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, the rules generally require that prior to a transaction in a penny stock the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the liquidity of penny stocks. If the Beacon Common Stock becomes subject to the penny stock rules, holders of Beacon Common Stock or other Beacon securities may find it more difficult to sell their securities.
 
Beacon’s operation as a public company subjects it to extensive corporate governance and disclosure regulations that will result in additional operating expenses.
 
As a public company, Beacon incurs significant legal and accounting and other expenses. Beacon incurs costsexpenses associated with its public company reporting requirement and certain requirements under the Sarbanes-Oxley Act of 2002.requirements.  Like many smaller public companies, Beacon faces a significant impact from required compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Section 404 requires management of public companies to evaluate the effectiveness of internal control over financial reporting and the independent auditors to attest to the effectiveness of such internal controls and the evaluation performed by management.reporting. The SEC has adopted rules implementing Section 404 for public companies as well as disclosure requirements. The Public Company Accounting Oversight Board, or PCAOB, has adopted documentation and attestation standards that the independent auditors must follow in conducting its attestation under Section 404. Beacon is currently preparing for compliance with Section 404; however, there can be no assurance that it will be able to effectively meet all of the requirements of Section 404 as currently known to us in the currently mandated timeframe. Any failure to implement effectively neweffective or improved internal controls, or to resolve difficulties encountered in their implementation, could harm Beacon’s operating results, or cause it to faila failure to meet reporting obligations or result in management being required to give a qualified assessment of itsassessing internal control over financial reporting or its independent auditors providing an adverse opinion regarding management’s


12


assessment.as not sufficient. Any such result could cause investors to lose confidence in Beacon’s reported financial information, which could have a material adverse effect on its stock price.
 
If Beacon fails to maintain the adequacy of our internal control, our ability to provide accurate financial statements and comply with the requirements of the Sarbanes-Oxley Act of 2002 could be impaired, which could cause our stock price to decrease substantially.Item 2.  Properties
 
Beacon will need to continue to improve its financialBeacon’s corporate and managerial controls, reporting systems and procedures, and documentation thereof. If Beacon’s financial and managerial controls, reporting systems or procedures fail, it may not be able to provide accurate financial statements on a timely basis or comply with the Sarbanes-Oxley Act of 2002 as it applies to us. Any failure of Beacon’s internal controls or its ability to provide accurate financial statements could cause the trading price of Beacon common stock to decrease substantially.
Item 1B.Unresolved Staff Comments.
Not Applicable
Item 2.Properties
Beacon’s executive offices are located at 1311 Herr Lane,9300 Shelbyville Road, Suite 205,1020, Louisville, KY 40222 in 2,142approximately 4,000 square feet of office space leased through March 30, 2010.2016. Additionally, we have offices in Louisville, KYCincinnati, OH consisting of 8,150approximately 6,500 square feet of office space leased through December 31, 2010, Cincinnati, OH consisting of 3,675 square feet of office space leased through October 31, 2010,May 2016, Columbus, OH consisting of 7,018approximately 3,000 square feet leased through December 31, 2009,February 2012, and Siebnen, SwitzerlandPrague, Czech Republic consisting of approximately 1,1004,700 square feet leased on a month to month basis..through June 2015. We believe our facilities are adequate for the continuing operations of our existing business.
             
Item 3.Legal Proceedings
Item 3. Legal Proceedings
 
We are subjectOn September 7, 2010, Beacon was named a party in a lawsuit filed in Jefferson Circuit Court in the State of Kentucky, seeking $270 plus other costs, attorney’s fees and damages, regarding the Company's alleged conduct during the course of the purchase of the assets and assumption of certain liabilities of Strategic Communications, LLC. As of September 30, 2011, this suit was settled by the primary parties with no payment required by the Company.
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During the year ended September 30, 2011, Beacon was named a party in a lawsuit filed in Swiss court, seeking approximately $232 of unpaid liabilities incurred in connection with the discontinued Datacenter Contractors AG (“DC”, formerly “Beacon Solutions AG”) subsidiary.  Although the outcome of this matter cannot be predicted at this time, a motion to variousdismiss was filed in commercial court and our council has advised that our basis for procedural arguments is strong.  As such no provision has been made in the  consolidated financial statements related to this action as of September 30, 2011, as the Company believes that the ultimate disposition of this matter will not have a material adverse effect on the Company’s financial position or results of operations.
No other legal proceedings in the normal course of business none of which isare required to be disclosed under this Item 3.
 
Item 4.Submission of Matters to a Vote of Security Holders
Item 4. Removed and Reserved
 
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended September 30, 2009.Part II
             
Part II
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases forof Equity Securities
 
Market Information
 
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.”


13


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:

         
Quarter Ended
 High Low
 
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 
       
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 
         
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.
 
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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)
 
  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, 2009
 Warrants and Rights  Warrants and Rights  Securities Reflected in Column (a)) 
 
Plan Category
            
Equity compensation plans approved by security holders  300,000  $1.57   700,000 
             
 
  (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)) 
          
Equity compensation plans approved by security holders  934,696  $1.23   1,065,304 
Issuer Purchases of Equity Securities
 
None.
             
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:

 • ·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;

 • ·liability and other claims asserted against us;

 • ·ability to attract and retain qualified personnel;

 • ·availability and terms of capital;

 • ·loss of significant contracts or reduction in revenuenet sales associated with major customers;

 • ·ability of customers to pay for services;

 • ·business disruption due to natural disasters or terrorist acts;

 • ·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;

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

 • ·changes in estimates and judgments associated with critical accounting policies and estimates.
 
For a detailed discussion of these and other factors that could cause 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.


16


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;
• Accretive to earnings in the first year.
• Strategic locations throughout the US and Europe where we have significant concentrations of demand for our service offerings.
• 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:

 • ·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.

 • ·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.
• The third strategy is to add
Additionally 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.


17


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.
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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)
                     
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 
          
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.
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  For the years ended September 30, 
  2011  2010    
  North America  North America  Change 
          
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)
                     
Net loss before taxes  (961)      (673)      (288)
                     
Income tax expense  18       (14)      32 
                     
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.
Page 14

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


18


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.
Page 15

 
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


19


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.
Page 16

Item 8. Financial Statements and Supplementary Data
Consolidated Financial Statements of Beacon Enterprise Solutions Group, Inc.
 


 
Page 17

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


 
Page 18

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


Page 19

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


Page 20

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


Page 21

 
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


 
Page 22


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.
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


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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.

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.


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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.

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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.

Page 25

 
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.


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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.

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Accounts Receivable

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 valueand/or goodwill impairment.  Upon consideration of our operations, we have determined Beacon operates a single reporting unit.

Page 27

 
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).


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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.

Page 28

 
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


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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


43


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


45


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 
     
Page 31

 
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)
NOTE 6 —INVENTORY, NET
 
NOTE 6 —INVENTORY, NET
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 
 
Inventory includes parts
Page 32


    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 endedFiscal 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 
   
 
Page 33

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


BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
following:
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
  As of  As of 
  September 30,  September 30, 
  2011  2010 
       
Service delivery $568  $123 
Compensation related  334   483 
Dividends  247   153 
Interest  39   50 
Other  503   71 
         
  $1,691  $880 
 
NOTE 10 —NOTES PAYABLE, AND LONG TERM DEBT AND LINE OF CREDIT – RELATED PARTY
 
The following is a summary of our notes payable and long term debt:

         As of  As of 
 September 30,
 September 30,
  September 30,  September 30, 
 2008 2009  2011  2010 
      
Lines of Credit and Short-Term Notes $200,000  $550,000 
     
Convertible Notes Payable $  $297,999 
     
Bridge Note $571,160   166,879  $100  $100 
             
Senior secured notes, net of unamortized deferred discount of $48
 $2,952  $- 
        
Integra Bank  548,541   439,367  $-  $323 
Acquistion notes (payable to the sellers of the acquired businesses)        
ADSnetcurve  156,617   80,922 
Bell-Haun  119,000   43,985 
        
Acquistion notes (payable to the sellers of the acquired businesses):
        
        
CETCON  515,627   416,404   162   290 
Strategic Secured Note  472,287   297,005   42   169 
        
       204   782 
  1,812,072   1,277,683         
Less: current portion  (495,595)  (475,348)  (180)  (379)
             
Non-current portion $1,316,477  $802,335  $24  $403 
             
Long term Line of Credit - related party $-  $630 
 
Short –Term Lines of Credit and Notes Payable

On June 11, 2008, BeaconFebruary 8, 2010, we received $40 in loan proceeds and Integra Bank entered intoissued a credit facility, under which we borrowed $200,000 atrelated short-term promissory note with a 6.00% annual4% per annum interest rate with principal due on August 11, 2008.and 1% origination fee.  The proceeds of the note were used as short term working capital collateralized by certain customer accounts receivables balances. The credit facility plus interest of $2,033 was paid in full on August 11, 2008.March 19, 2010.
 
On August 20, 2008, BeaconFebruary 26, 2010, we received $500 in loan proceeds and one of our directors, entered intoissued a credit facility under which we borrowed $100,000 at a 12.00% annual interest rate the principal of which is not due on any specific date. We also paid a 1.00% origination fee upon initiation of the credit facility. The proceeds of the credit facility were used as short term working capital collateralized by our accounts receivable. We have accrued $2,400 of interest expense related to this credit facility during the year ended September 30, 2008 which is included in accrued expenses and other current liabilities in the consolidated financial statements. The principal balance due under thisshort-term, non-interest bearing promissory note, amounted to $100,000 at September 30, 2008. This credit facility was fully repaid during the year ended September 30, 2009.
On September 4, 2008, Beacon and First Savings Bank entered into a credit facility, under which we borrowed $100,000 at a 5.00% annual interest rate the principal of which was payable on September 29, 2008. The term of the credit facility was extendedsecured but subordinate to December 29, 2008. On December 29, 2008 the note was converted into an installment obligation due in two payments of $50,000 each on January 15, 2009 and February 15, 2009 with interest at a rate of 5.00% per annum. On March 31, 2009, we executed a further extension of this note due in two payments of $50,000 each on May 15, 2009 and June 15, 2009. We repaid $50,000all existing senior debt outstanding.  Terms of the note included a principal payment of $250 on May 15, 2009. On July 24, 2009March 31, 2010 with the maturity date of the remaining $50,000 balance of this$250, in addition to a $10 origination fee, to be paid on April 30, 2010.  In agreement with the note holder, the March 31, 2010 payment was extended through August 31, 2009. On October 29, 2009 the maturity date of theand paid on April 1, 2010.  The remaining $50,000 balance$250 plus $10 origination fee was further extended through Decemberpaid on April 30, 2009. We recorded $891 and $2,337 of interest expense related to this credit facility during the years ended September 30, 2008 and 2009, respectively.2010.

Page 34

 
On October 29, November 17 and November 19, 2008, Beacon and Midian Properties, LLC, entered into short term credit facilities in the amounts of $100,000, $120,000 and $70,000, respectively, the principal of which was due and payable to the holder within seven (7) days of issuance along with a 0.5% origination fee.


51


BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
These amounts were paid back in full. 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. This credit facility has been fully repaid.
On August 7, 2009, we entered into a non-interest bearing note with one of our directors in the amount of $500,000 in exchange for a commitment fee of $25,000, recognized as interest expense in the accompanying Statement of Operations for the year ended September 30, 2009, paid on August 10, 2009. Subsequent to September 30, 2009, we exercised a contractual right to convert the note into a demand obligation that would become payable within a 5 day period following written notice of such demand. We paid a fee equal to $87,500 in cash and issued an additional 112,500 common stock purchase warrants exercisable for $1.00 per share to the lender upon the occurrence of this event.
Convertible Notes Payable
 
On January 22, 2009, Beacon entered into convertible notes payable with a group of private investors (the “Notes”) facilitated by a broker/dealer. Proceeds of the Notes were $500,000$500 in the aggregate of which the broker/dealer received a cash commission of $50,000 and a non-accountable expense reimbursement of $25,000. The proceeds were used to repay certain other short term credit obligations and for working capital purposes.aggregate. The Notes have ahad an original maturity date of July 21, 2009 and bearwith interest payable at a fixed annual rate of 12.5% due monthly. The maturity date of the Notes have beenwas extended to January 21, 2010 and as such bearwith interest payable at a fixed annual rate of 15% fromper annum on the original maturity dateunpaid balance due on the note, which amounted to the extended maturity date due monthly along with principal payments of 16.67% of the principal due monthly from the original maturity date through the extended maturity date until paid in full. The Notes can be prepaid$298 at any time on or after March 21, 2009 in whole or in part uponSeptember 30, days prior written notice to the holders without penalty. The holders may convert these notes into shares of Beacon Common Stock, par value $0.001, at the rate of $0.75 per share in minimum increments of $5,000.2009.  Each of the note holders also received a five-year warrant to purchase one share of Beacon Common Stock (the “Note Warrants”) at a purchase price of $1.00 per share per $10 of note principal (50,000 shares in the aggregate).  The Notes contain certain provisions in the event of default that could result in acceleration of payment of the entire balance including accrued and unpaid interest. Acceleration of these note in the event of default would also result in the interest rate increasing by 0.4166% per event. We repaid $202,001 in principal and recognized $42,958 of interest expense and $75,000 of non-cash interest expense for accretion of the discount related to the broker fee and non-accountable expense reimbursement during the year ended September 30, 2009.
The fair value of the Note Warrants which amounted to approximately $20,500, was calculated using the Black-Scholes option pricing model. Assumptions relating to the estimated fair value of the Note Warrants are as follows: fair value of common stock of $.80 on the commitment date of January 22, 2009; risk-free interest rate of 1.61%; expected dividend yield of zero percent; expected life of 1,825 days through January 30, 2014; and current volatility of 66.34%. Accordingly, we recorded aggregate discounts of $74,334$74 to the face value of the Notes based upon the relative fair values of the notes and the warrants and the effects of a beneficial conversion feature. The effective conversion price is $.72 per share calculated in accordance with the guidelines of ASC 470. The discount is being accreted over the life of the Notes of 6 months from the date of issuance on January 22, 2009. Accretionwhich amounted to $74,334$74 through September 30, 2009 and is included as a component of interest expense in the accompanying Statement of Operations.
 
We evaluated the conversion options embedded in the Notes to determine whether they should be bifurcated from their host instruments and accounted for as separate derivative financial instruments. We determined that the debt is conventional debt. Accordingly the conversion feature is being accounted for as an embedded conversion option.


52


BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Bridge Financing Transactions
On July 16, 2007, Beacon entered into a $500,000 Bridge Financing Facility provided by two of our founding stockholders who are also directors of our Company. The terms of the facility provided for the founding stockholders/directors to make up to $500,000 of advances to us on a discretionary basis at any time prior to the closing of an equity offering in which gross proceeds are at least $4,000,000 (the “Qualified Offering”). As of September 30, 2008, the entire facility had been drawn down of which $278,000 of the proceeds were received prior to September 30, 2007 and the remaining $222,000 of proceeds were received during the three months ended December 31, 2007.
Advances under this facility bear interest at the Prime Rate (5.00% as of September 30, 2008) per annum and were to originally mature (i) in the event a Qualified Offering did not occur on or prior to December 31, 2007, on December 31, 2007; or (ii) in the event a Qualified Offering occurred prior to December 31, 2007, on demand at any time following the completion of the offering but not more than twenty-four (24) months after the date of the closing of the Qualified Offering. Certain warrants described below that we issued to the note holders would vest for each month repayment was deferred. In December 2007, we were informed that only a portion of the Private Placement described in Note 14 (which would have satisfied the requirement to complete a Qualified Offering) would be completed by December 31, 2007. Based on this development, the note holders agreed, on December 28, 2007, not to demand repayment of the notes before the completion of the Private Placement or December 31, 2008, whichever came first. On May 15, 2008, the noteholders agreed not to demand repayment of the notes before the completion of an offering in which we raise at least $3 million of additional equity financing or April 1, 2009, whichever comes first. On November 20, 2008, the noteholders agreed unconditionally not to demand repayment of the notes before June 30, 2010. Accordingly, the notes are included in non-current liabilities at September 30, 2008.
The effectiveness of the conversion option in the notes was contingent on the completion of the qualified offering, which occurred February 12, 2008. The notes immediately became convertible into shares of our common stock at a conversion price equal to $.60 per share, or into the number and type of such equity securities into which the shares otherwise issuable upon such conversion are converted or exchanged under the terms of a merger, exchange or reorganization consummated by us prior to or at the time of a Qualified Offering.
We evaluated the conversion option stipulated in the Bridge Financing Facility to determine whether it should be bifurcated from its host instrument and accounted for as a free standing derivative. In performing this analysis, we determined that the conversion option, which is fixed and therefore conventional, provides the founding stockholders/directors with the right to convert any advances outstanding under the Bridge Financing Facility into shares of our common stock at anytime upon or after the completion of a Qualified Offering. The Qualified offering was completed on February 12, 2008. The conversion option wasout-of-the-money, having a fair value of common stock $0.002 per share (as compared to an exercise price of $0.60 per share) as of the commitment date of July 16, 2007 which is not beneficial.
In connection with the issuance of the Bridge Financing Facility, we issued warrants to purchase shares of our common stock (the “Warrants”). The Warrants allow the holders to purchase up to 865,000 shares of our common stock at an exercise price of $1.00 per share, of which 625,000 are immediately exercisable. The remaining 240,000 Warrants (the “Contingent Bridge Facility Warrants”) vest and become exercisable at a rate of 10,000 shares on the 15th of each month from the date of a Qualified Offering until the maturity date of the Bridge Financing Facility for each month that the demand for payment is deferred. Upon full conversion of the advances into shares of Beacon common stock or upon the final maturity date, all remaining unvested Contingent Bridge Facility Warrants will automatically vest and become exercisable. If the founding stockholders/directors require prepayment of the advances after the completion of a Qualified Offering but prior to the final maturity date, all remaining unvested Warrants will be forfeited and canceled. The Warrants


53


BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
expire on June 30, 2012. As of September 30, 2008, 80,000 Warrants had vested under the terms of the Bridge Financing Facility.
The fair value of the Warrants, exercisable into 625,000 share of common stock, which amounted to $0, was calculated using the Black-Scholes option pricing model. Assumptions relating to the estimated fair value of the Warrants are as follows: fair value of common stock of $.002 on the commitment date of July 16, 2007; risk-free interest rate of 4.95%; expected dividend yield of zero percent; life of five years; and current volatility of 66.34%.
The final closing of the Private Placement was completed on February 12, 2008. Accordingly, the founding stockholders/directors have the right to demand repayment of these notes in cash at any time after February 12, 2008. From the date of the final closing of the Private Placement on February 12, 2008, the founding stockholders/directors may also (at their option) convert the outstanding principal into 833,333 shares of our common stock at an exercise price of $0.60 per share and receive cash payment of accrued and unpaid interest. In addition to the above, vesting commenced on the Contingent Bridge Facility Warrants on February 12, 2008. We recorded $55,700 of non-cash interest expense related to the remaining 80,000 Contingent Bridge Facility Warrants that vested and became exercisable during  During the year ended September 30, 2008, All Contingent 2010 we repaid the remaining principal and $1 of interest expense.

Bridge Facility Warrants became fully vested on November 20, 2008,Notes
On March 31, 2010, a non-director Bridge Note holder elected to convert a convertible, demand note and accrued interest of $110 to 183,620 common shares.  A remaining $100 note, held by a Director of the datecompany, is presented as a current liability in which the holders agreed to not demand repayment prior to June 30, 2010. The aggregate charge for Contingent Bridge Facility warrants vested during the year endedour consolidated balance sheet as of September 30, 2009 amounted to $40,600. The fair value of the vested Contingent Bridge Facility Warrants was calculated using the Black-Scholes valuation model as detailed in the following table:
                                     
     Expected
     Fair Value
        Risk-Free
  Value
  Charge to
 
  Quantity
  Life
  Strike
  of Common
  Volatility
  Dividend
  Interese
  per
  Interest
 
Vesting Date
 Vested  (Days)  Price  Stock  Rate  Yield  Rate  Warrant  Expense 
 
2/15/2008  10,000   1,825  $1.00  $1.35   66.34%  0%  2.76% $0.86  $8,600.00 
3/15/2008  10,000   1,796  $1.00  $1.04   66.34%  0%  2.37% $0.60  $6,000.00 
4/15/2008  10,000   1,765  $1.00  $1.15   66.34%  0%  2.68% $0.69  $6,900.00 
5/15/2008  10,000   1,735  $1.00  $0.95   66.34%  0%  3.10% $0.53  $5,300.00 
6/15/2008  10,000   1,704  $1.00  $1.01   66.34%  0%  3.73% $0.58  $5,800.00 
7/15/2008  10,000   1,674  $1.00  $1.25   66.34%  0%  3.12% $0.76  $7,600.00 
8/15/2008  10,000   1,643  $1.00  $1.50   66.34%  0%  3.11% $0.97  $9,700.00 
9/15/2008  10,000   1,612  $1.00  $1.05   66.34%  0%  2.59% $0.58  $5,800.00 
                                     
For the year ended September 30, 2008                                 $55,700.00 
                                     
10/15/2008  10,000   1,582  $1.00  $1.20   66.34%  0%  2.90% $0.70  $7,000.00 
11/15/2008  10,000   1,551  $1.00  $0.85   66.34%  0%  2.33% $0.42  $4,200.00 
11/20/2008  140,000   1,546  $1.00  $0.55   66.34%  0%  1.94% $0.21  $29,400.00 
                                     
For the year ended September 30, 2009                                 $40,600.00 
                                     
2011 and 2010, respectively.
 
We recorded $27,757 and $18,763 of contractual interest expense under this arrangementof approximately $3 and $5 for the years ended September 30, 20082011 and 2009.
On September 9, 2009, the holders2010, respectively.  We recorded aggregate accretion of the Bridge Financing Facility exercised their right to convert the entire amount of the principal due underdiscount on these notes into 833,334 shares of common stock.
On November 15, 2007, we issued $200,000 of convertible notes payable (the “Bridge Notes”) in a separate debt financing. Of this amount, $100,000 of the Bridge Notes was issued to one of the directors of Beacon. These Bridge Notes were issued under terms substantially identical to the terms stipulated under the Bridge Financing Facility described above. The holders of the Bridge Notes also agreed, on December 28, 2007, not to demand repayment of these notes before the completion of the Private Placement described in


54


BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Note 14 or December 31, 2008, whichever came first. On March 15, 2008, the noteholders agreed not to demand repayment of the notes before the completion of an offering in which the Company raises at least $3 million of additional equity financing or April 1, 2009, whichever comes first. On November 20, 2008, the noteholders agreed unconditionally not to demand repayment of the notes before June 30, 2010. Accordingly, the notes are included in non-current liabilities at September 30, 2008. The effect of the change in the maturity dates of these notes was insignificant to our financial results.
We evaluated the conversion option stipulated in the Bridge Notes (which has terms identical to the conversion option featured in the Bridge Financing Facility described above) to determine whether it should be bifurcated from its host instrumentapproximately $0 and accounted$33 for as a free standing derivative . In performing this analysis, we determined that the conversion option, which is fixed and therefore conventional, provided the founding stockholders/directors with the right to convert any advances outstanding under the Bridge Notes into shares of our common stock at anytime upon or after the completion of the Qualified Offering on February 12, 2008.
In connection with the issuance of the Bridge Notes, we also issued warrants to purchase shares of our common stock (the “Bridge Note Warrants”). The Note Warrants allow the holders to purchase up to 346,000 shares of our common stock at an exercise price of $1.00 per share, of which 250,000 are immediately exercisable. The remaining 96,000 Note Warrants (the “Contingent Bridge Note Warrants”) vest and become exercisable at a rate of 4,000 shares per month from the date of a Qualified Offering (if completed) until the maturity date of the Bridge Notes for each month that the demand for repayment of the principal balance is deferred. Upon full conversion of the principal into shares of our common stock or upon the final maturity date, all remaining unvested Note Warrants will automatically vest and become exercisable. If the note holders require prepayment of the principal after the completion of a Qualified Offering but prior to the final maturity date, all remaining unvested Note Warrants will be forfeited and canceled. The Warrants expire on June 30, 2012.
The fair value of the Bridge Note Warrants, exercisable into 250,000 shares of common stock, which amounted to $112,500, was calculated using the Black-Scholes option pricing model. Assumptions relating to the estimated fair value of the Warrants are as follows: fair value of common stock of $.85 on the commitment date of November 15, 2007; risk-free interest rate of 3.71%; expected dividend yield of zero percent; expected life of 1,689 days through June 30, 2012; and current volatility of 66.34%. Accordingly, we recorded a $72,000 discount to the face value of the Bridge Notes and corresponding increase to additional paid in capital based upon the relative fair values of the Bridge Notes and the Note Warrants. The discount is being accreted over the contracted term of the Bridge Notes of 2.27 years from the date of issuance on November 15, 2007.
The effectiveness of the conversion option embedded in the Bridge Notes was contingent upon the completion of a Qualified offering. The final closing of the Private Placement was completed on February 12, 2008. Accordingly, the holders of the Bridge Notes have the right to demand repayment of these notes in cash at any time after February 12, 2008 or convert, at their option, the outstanding principal into 333,333 shares of our common stock and receive cash payment of accrued and unpaid interest. The intrinsic value of the beneficial conversion feature of the Bridge Notes was determined to be $0.47 per share or an aggregate of $156,169 representing more than 100% of the remaining undiscounted face value of the Bridge Notes. Accordingly, an additional discount of $128,000 to the face value of the Bridge Notes was recorded for the beneficial conversion feature of the Bridge Notes. The discount related to the beneficial conversion feature of the Bridge Notes is being accreted over the remaining contractual term of the Notes. In addition, vesting commenced on the Contingent Bridge Note Warrants on February 12, 2008.
We recorded contractual interest expense of $10,156 and $6,900 for the years ended September 30, 20082011 and 2009. We recorded accretion of $30,628 and $95,717 for the years ended September 30, 2008 and 2009,2010, respectively which is classified as a component of interest expense in the accompanying Consolidated Statement of Operations forOperations.  The discount relating to a beneficial conversion feature was recorded upon the years ended September 30, 2008original issuance of these notes and 2009. The carrying value of the notes amounts to


55


BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
is fully amortized.
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$71,160 net of unamortized discounts amounting to $128,840 as of September 30, 2008 and $166,879 net of unamortized discounts amounting to $33,123 as of September 30, 2009. We recorded $22,280 and $16,240 of non-cash interest expense related to the 32,000 and 64,000 Contingent Bridge Note Warrants that vested and became exercisable during the years ended September 30, 2008 and 2009, respectively. The fair value of the vested Contingent Bridge Note Warrants was calculated using the Black-Scholes valuation model as detailed in the following table:
                                     
     Expected
     Fair Value
        Risk-Free
  Value
  Charge to
 
  Quantity
  Life
  Strike
  of Common
  Volatility
  Dividend
  Interese
  per
  Interest
 
Vesting Date
 Vested  (Days)  Price  Stock  Rate  Yield  Rate  Warrant  Expense 
 
2/15/2008  4,000   1,825  $1.00  $1.35   66.34%  0%  2.76% $0.86  $3,440.00 
3/15/2008  4,000   1,796  $1.00  $1.04   66.34%  0%  2.37% $0.60  $2,400.00 
4/15/2008  4,000   1,765  $1.00  $1.15   66.34%  0%  2.68% $0.69  $2,760.00 
5/15/2008  4,000   1,735  $1.00  $0.95   66.34%  0%  3.10% $0.53  $2,120.00 
6/15/2008  4,000   1,704  $1.00  $1.01   66.34%  0%  3.73% $0.58  $2,320.00 
7/15/2008  4,000   1,674  $1.00  $1.25   66.34%  0%  3.12% $0.76  $3,040.00 
8/15/2008  4,000   1,643  $1.00  $1.50   66.34%  0%  3.11% $0.97  $3,880.00 
9/15/2008  4,000   1,612  $1.00  $1.05   66.34%  0%  2.59% $0.58  $2,320.00 
                                     
For the year ended September 30, 2008                                 $22,280.00 
                                     
10/15/2008  4,000   1,582  $1.00  $1.20   66.34%  0%  2.90% $0.70  $2,800.00 
11/15/2008  4,000   1,551  $1.00  $0.85   66.34%  0%  2.33% $0.42  $1,680.00 
11/20/2008  56,000   1,546  $1.00  $0.55   66.34%  0%  1.94% $0.21  $11,760.00 
                                     
For the year ended September 30, 2009                                 $16,240.00 
                                     
Pursuant to the unconditional forbearance to demand payment of the notes, the Contingent Bridge Facility Warrants, the unvested portion fully vested on November 20, 2008, the date the forbearance became effective and a charge for the remaining unvested warrants will be recognized as of that date.
Integra Bank
 
On March 14, 2008, Beacon and Integra Bank entered into a credit facility, under which we borrowed $600,000$600 at a 6.25% annual interest rate with monthly payments of $11,696$12 over a 60 month term that matures on March 12, 2013.2013 and collateralized by all business assets of the Company.  On November 23, 2010 the note was paid in full.  We recorded contractual interest expense of approximately $4 and $24 for the years ended September 30, 2011 and 2010, respectively.
Notes Payable
On November 23, 2010, we initiated a private placement (the “Placement”) of up to $3,000 of 12 month Senior Secured Notes (“Notes”) with warrants to purchase 150 shares of Beacon’s common stock at $0.40 per share for every $1 in principal invested and bear interest at 9% APR due on various dates through March 30, 2012.  The first paymentPlacement was made on April 14, 2008. Thea "best efforts" basis with a Minimum of $600 and a Maximum of $3,000.  Net proceeds of the note werehave been used to repay three previously outstandingand replace an existing Senior Secured Bank Note totaling approximately $300 and will also be used for additional working capital.  The Placement expired on March 30, 2011, when the Maximum was attained.  The notes assumed in the acquisitions, two of which were in default due to change in control provisions. We also used a portionare secured by all business assets of the Company, as defined.  As of September 30, 2011 we have issued $3,000 of notes, 449,999 warrants and have recorded interest expense of $229.  We incurred financing fees of $333 which have been recognized as deferred finance fees as part of prepaid expenses and are be amortized ratably over the life of the debt.
Using the Black-Scholes model we have determined the fair value of the issued warrants to be $205 and allocated the debt proceeds fromin accordance with the new installment obligation to refinance $195,000relative fair value method.  The notes payable have been recorded on the consolidated balance sheet as of previously outstanding indebtedness dueSeptember 30, 2011 at $2,952 which is net of the discount representing the allocation of the $180 relative fair value to the same creditor. The effect of having refinanced the previous indebtedness with this same creditor was insignificant to and therefore was not deemed to be a constructive extinguishment of the previous balance. Accordingly, no gain or loss has been recognized. Duringwarrants. For the year ended September 30, 20082011, we recorded interest of $132 in the consolidated statements of operations as accretion of the note discount.
Long Term Line of Credit – Related Party
On August 17, 2010 we entered into a long term line of credit facility with one of our directors for $4,000, the facility has an annual interest rate of 7.73% on any outstanding balance and 2009 wea facility fee of the greater of $40 or 1% of the unused balance.  Additionally, 15,000 warrants, with a five year term at $1.00 per share, per month will be paid $70,178 and $140,415, respectivelyfor each month the facility is outstanding.  As of which $51,938 and $109,220 represented principal payments and $18,240 and $31,195 represented interest. We recognized $19,930 and $31,216 of interest expense related to this obligation of which $1,690 and $1,811 was in accrued expenses at September 30, 20082011 and 2009, respectively.2010, we have an outstanding balance of $0 and $630, respectively leaving an unused amount of $4,000 and $3,370, which is presented as a non-current liability in our Consolidated Balance Sheet, as terms of the facility call for an 18 month maturity date.  As of September 30, 2011, we have issued 165,000 warrants.  Using the Black Scholes prices model, we determined the fair value of the warrants and recorded as other expense of $71 for the year ended September 30, 2011.
 
Acquisition NotesOn August 12, 2011, the Company modified the 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.  For any outstanding balance at month end under the credit facility, the director will receive warrant coverage of 15% to purchase common shares of the Company at an exercise price of the then current stock price.

Page 35

 
Notes payable withAdditionally under the revised agreement, during the next 24 months the Company may require the director to purchase shares of Common Stock at the then current stock price.   The aggregate purchase price of all shares purchased shall not exceed $2,000.  For the dollar amount of Common Stock purchased, the director will receive warrant coverage of 15% to purchase shares of Common stock of the Company at an aggregate valueexercise price of $1,843,500 were issued asthe then current stock price.  Finally, the Company’s Chief Executive Officer (CEO) agreed that, upon the exercise of the share purchase considerationcommitment in our business combinations as describedwhole or in Note 4. The termspart by the Company, the director shall have the right to purchase up to 1,200,000 shares of these notes, including provisionsCommon Stock from the CEO for partial


56


BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
a purchase price of $0.01 per share.
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)On October 26, 2011, the Company elected to terminate this long term line of credit facility and associated put right.

acceleration in the event we raise additional equity capital in future financing transactions, adjustments related to performance terms within the asset and stock purchase agreements, and optional prepayment provisions, are more fully described in Note 4.Term Debt

During the years ended September 30, 20082011 and 2009,2010, Beacon paid approximately $220,000$578 and $351,000$379 in principal payments on our term debt. We recorded interest expense of approximately $74,000$32 and $88,000 for our term loans and paid approximately $28,000 and $75,000$73 for the years ended September 30, 20082011 and 2009,2010, respectively.

The following table summarizes the remaining debt principal payment obligations by year for the long-term debt other than the Bridge Financing Facility, Bridge Notes, and short term line of credit which are presumed to be paid within the next twelve months:
     
  Fiscal Year
 
  Ended
 
  September 30, 
 
2010
 $475,348 
2011
  377,358 
2012
  321,260 
2013
  103,717 
     
  $1,277,683 
     
debt:
 
Substantially all of our assets are pledged as collateral under our various debt obligations and tax liens pursuant to the Strategic acquisition as described in Notes 4 and 12.
For the Year ended 
September 30, 
    
2012 $3,280 
2013  24 
  $3,304 
 
NOTE 11 —
NOTE 12 —RELATED PARTY TRANSACTIONS
On July 16, 2007, Beacon entered into a $500,000 Bridge Financing Facility provided by two of our founding stockholders who are also directors of our Company. See Note 10 for further details.
On November 15, 2007, we issued $200,000 of convertible notes payable (the “Bridge Notes”) in a separate debt financing. Of this amount, $100,000 of the Bridge Notes was issued to one of the directors of Beacon. See Note 10 for further details.
Beacon has obtained insurance through an agency owned by one of our founding stockholders/directors. Insurance expense paid through the agency for the year ended September 30, 2008 and 2009 was $114,378 and $190,000 and is included in selling, general and administrative expense in the accompanying consolidated statement of operations.
On December 28, 2007, we entered into an equity financing arrangement with two of our directors that provided up to $300,000 of additional funding, the terms of which provided for compensation of 10,000 warrants to purchase common stock at $1.00 per share per month, to each individual for the period the financing arrangement was in effect. The warrants have a five-year term. The financing arrangement was terminated upon the close of theSeries A-1 Placement. Accordingly, we recognized $58,700 of interest expense for the years ended September 30, 2008 based on the fair value of the warrants as they were earned. The fair values were calculated using the Black-Scholes option pricing model with the following assumptions:
                                     
    Expected
   Fair Value
     Risk-Free
 Value
 Charge to
  Quantity
 Life
 Strike
 of Common
 Volatility
 Dividend
 Interese
 per
 Interest
Date Earned
 Earned (Days) Price Stock Rate Yield Rate Warrant Expense
 
1/28/2008  20,000   1,825  $1.00  $1.90   66.34%  0%  2.80% $1.34  $26,800 
2/28/2008  20,000   1,825  $1.00  $1.50   66.34%  0%  2.73% $0.99  $19,800 
3/7/2008  10,000   1,825  $1.00  $1.75   66.34%  0%  2.45% $1.21  $12,100 


57


BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On May 15, 2008, we entered into an equity financing arrangement with one of our directors that provided up to $500,000 of additional funding, the terms of which provided for issuance of warrants to purchase 33,333 shares of common stock at $1.00 per share per month for the period the financing arrangement is in effect. The warrants have a five-year term. The financing arrangement terminates upon the close of a $3,000,000 equity financing event. On August 19, 2008, we modified the agreement to increase the commitment to $3,000,000 of additional funding that decreases on a dollar for dollar basis as we raise capital in subsequent equity financing transactions up to $3,000,000, upon mutual agreement of our director and us, or on December 31, 2008. As of September 30, 2008, $1,700,000 remained available under this equity arrangement. In consideration for this financing arrangement, we agreed to issue a five year warrant to purchase 100,000 shares of common stock at an exercise price of $1.00 per share in addition to the ongoing warrants earned under the original agreement. Accordingly, we recognized $176,999 and $288,945 of interest expense for the years ended September 30, 2008 and 2009 based on the fair value of the warrants as they were earned. The fair values were calculated using the Black-Scholes option pricing model with the following assumptions:
                                     
     Expected
     Fair Value
        Risk-Free
  Value
  Charge to
 
  Quantity
  Life
  Strike
  of Common
  Volatility
  Dividend
  Interese
  per
  Interest
 
Date Earned
 Earned  (Days)  Price  Stock  Rate  Yield  Rate  Warrant  Expense 
 
6/15/2008  33,333   1,825  $1.00  $1.01   66.34%  0%  3.73% $0.58  $19,333 
7/15/2008  33,333   1,825  $1.00  $1.25   66.34%  0%  3.12% $0.78  $26,000 
8/15/2008  33,333   1,825  $1.00  $1.50   66.34%  0%  3.41% $1.00  $33,333 
8/19/2008  100,000   1,825  $1.00  $1.25   66.34%  0%  3.07% $0.78  $78,000 
9/15/2008  33,333   1,825  $1.00  $1.05   66.34%  0%  2.59% $3.61  $20,333 
                                     
For year ended September 30, 2008                         $176,999 
                             
10/15/2008  33,333   1,825  $1.00  $1.20   66.34%  0%  2.90% $0.74  $24,666 
11/15/2008  33,333   1,825  $1.00  $0.85   66.34%  0%  2.33% $0.45  $15,000 
12/15/2008  33,333   1,825  $1.00  $1.52   66.34%  0%  1.50% $0.99  $33,000 
12/31/2008  16,667   1,825  $1.00  $1.01   66.34%  0%  1.55% $0.57  $9,500 
1/9/2009  100,000   1,825  $1.00  $0.80   66.34%  0%  1.51% $0.41  $41,000 
2/9/2009  33,333   1,825  $1.00  $0.80   66.34%  0%  1.99% $0.41  $13,667 
3/9/2009  33,333   1,825  $1.00  $0.54   66.34%  0%  1.90% $0.23  $7,667 
4/9/2009  33,333   1,825  $1.00  $0.75   66.34%  0%  1.90% $0.37  $12,333 
5/9/2009  33,333   1,825  $1.00  $1.19   66.34%  0%  2.09% $0.72  $23,970 
6/9/2009  33,333   1,825  $1.00  $1.35   66.34%  0%  2.73% $0.86  $28,666 
7/9/2009  33,333   1,825  $1.00  $1.61   66.34%  0%  2.31% $1.08  $35,983 
8/9/2009  33,333   1,825  $1.00  $1.20   66.34%  0%  2.75% $0.74  $24,533 
9/9/2009  33,333   1,825  $1.00  $1.00   66.34%  0%  2.38% $0.57  $18,960 
                                     
For year ended September 30, 2009                         $288,945 
                             
In addition, contingent upon the drawdown of any part of the equity financing commitment, the director would earn the right to purchase up to 1,655,425 shares of their stock owned by the investors for a purchase price of $0.01 per share. The equity financing arrangement expired on December 16, 2009 upon closing of a $3,000,000 of equity financing at which time the directors contingent right to acquire the shares of the founding shareholders was terminated.
On July 14, 2008, we issued 400 shares of Series B Preferred Stock and 200,000 (“Series B Offering Warrants”) five year common stock purchase warrants exercisable at $1.20 per share in a Private Placement transaction for proceeds of $400,000 from one of our directors. The Series B Preferred Stock is convertible into common stock at any time, at the option of the holder at a conversion price of $.90 per share. The


58


BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Series B Preferred Stock is also automatically convertible into shares of our common stock, at the then applicable conversion price upon the closing of a firm commitment underwritten public offering of shares of our common stock yielding aggregate proceeds of not less than $20 million or under certain other circumstances when the trading volume and average trading prices of the stock attain certain specified levels.
On August 20, 2008, we entered into a $100,000 debt financing arrangement with one of our directors under which we borrowed $100,000 at a 12.00% annual interest rate the principal of which is not due on any specific date. We also paid a 1.00% origination fee upon initiation of the credit facility. The proceeds of the credit facility were used as short term working capital collateralized by our accounts receivable. We have accrued $2,400 of interest expense related to this credit facility during the year ended September 30, 2008 which is included in accrued expenses and other current liabilities in the consolidated financial statements
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, 2009. We are permitted, but not required, to redeem these shares at a 1% per month premium beginning 30 days from the date of their issuance at our discretion
On January 9, 2009, we entered into an equity financing arrangement with one of our directors that provided a commitment up to $2.2 million of additional funding. This arrangement superseded the existing equity financing arrangement between the same director and the Company that had been entered into on May 15, 2008 and amended August 19, 2008. Under the terms of this equity financing arrangement, under certain circumstances the Company may sell shares of its common stock to this director at the same price per share and other terms as the most recent sale of shares of its Common Stock to a third party in a transaction intended to raise capital. On August 10, 2009, we renewed the existing equity financing arrangement to provide a commitment of up to $3.0 million of additional funding. In the event that the equity financing arrangement is drawn upon by the Company, then the director will have the right to purchase shares of common stock from two of the founding stockholders at a purchase price of $0.001 per share. The financing available under this arrangement will be reduced on a dollar for dollar basis by the amount of the proceeds of the ongoing private placements of the Company’s securities or any additional placements of equity financing. This arrangement Terminated on December 15, 2009 upon close of $3,000,000 financing event.
 
Under a marketing agreement with a company owned by the wife of Beacon’s former president, we provideprovided procurement and installation services as a subcontractor. We earned revenuenet sales of approximately $230,000$0 and $1.7 million$323 for procurement and installation services provided under this marketing agreement, of which $195,000$0 and $465,000$198 is recorded as accounts receivable in the accompanying consolidated balance sheetsheets as of September 30, 2011 and 2010.
The Company has obtained insurance through an agency owned by one of its founding stockholders/directors. Insurance expense of $148 and $150 was paid to the agency for the years ended September 30, 20082011 and 2009.2010, respectively.
For the year ended September 30, 2011, in connection with a construction bond the Company obtained through an agency owned by one of its founding stockholders/directors, 33,120 warrants were issued to the agency.  Using the Black Scholes pricing model, we determined the fair value of the warrants and recorded as an expense of $15.

NOTE 12 —COMMITMENTS AND CONTINGENCIES
Litigation
 
On AugustSeptember 7, 2009, we entered into2010, Beacon was named a non-interest bearing demand note with one of our directorsparty in a lawsuit filed in Jefferson Circuit Court in the amountState of $500,000. See Note 10 for further information.Kentucky, seeking $270 plus other costs, attorney’s fees and damages, regarding the Company's alleged conduct during the course of the purchase of the assets and assumption of certain liabilities of Strategic Communications, LLC.  As of September 30, 2011, this suit was settled by the primary parties with no expense incurred by the Company.
 
NOTE 13 —COMMITMENTS AND CONTINGENCIES
During the year ended September 30, 2011, Beacon was named a party in a lawsuit filed in Swiss court, seeking approximately $232 of unpaid liabilities incurred in connection with the discontinued Datacenter Contractors AG (“DC”, formerly “Beacon Solutions AG”) subsidiary.  Although the outcome of this matter cannot be predicted at this time, a motion to dismiss was filed in commercial court and our council has advised that our basis for procedural arguments is strong.  As such no provision has been made in the consolidated financial statements related to this action as of September 30, 2011, as the Company believes that the ultimate disposition of this matter will not have a material adverse effect on the Company’s financial position or results of operations.

 
Page 36


Employment Agreements
 
The Company has entered into at will employment agreements with sevenfive of its key executives with no specific expiration dates that provide for aggregate annual compensation of $1,170,000$752 and up to $1,263,000$1,232 of severance payments for termination without cause.


59


BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Operating Leases
 
The Company has entered into operating leases for office facilities in Louisville, KY, Columbus, OH, Cincinnati, OH, and Cincinnati, OH.Prague, Czech Republic.  Rent expense for the years ended September 30, 2011 and 2010 is being recorded on a straight line basis and  amounted to $289 and $274, respectively. A summary of the minimum lease payments due on these operating leases exclusive of the Company’s share of operating expenses and other costs is as follows:
     
  Fiscal Year
 
  Ending
 
  September 30, 2009 
 
2010 $123,423 
2011  19,400 
     
  $142,823 
     
costs:
 
For the Year Ended 
September 30, 
    
2012 $243 
2013  243 
2014  239 
2015  198 
2016  79 
  $1,002 
Engagement of Investor Relations FirmFirms
 
On January 20, 2009, we engaged an investor relations firm to aid us in developing a marketing plan directed at informing the investing public as to our business and increasing our visibility to FINRA registered broker/dealers, the investing public and other institutional investors and fund managers. In exchange for providing such services, the firm will receive $10,000 per month for the durationOn June 5, 2009, our Board of the agreement, 10,000 shares of our restricted common stock per month for the first six months and 15,000 shares of our restricted common stock per month for the remaining six months for an aggregate ofDirectors authorized us to issue 150,000 shares of restricted stock.common stock to the same investor relations firm subject to the attainment of certain performance conditions. The performance based arrangement supersedes the previous agreement entered into on January 20, 2009.  For the year ended September 30, 2009 we paid $50,000 and issued2010, a total of 50,000 shares of restricted common stock, with an aggregate fair value of $43,800, under the terms of this agreement.$44 were earned. The common stock issued under this agreement was recorded as professional fees expense using the measurement principles enumerated under ASC 505 “Equity-Based Payment to Non-Employee”Non-Employees”.  The contract has a 12 month term and can bewas terminated upon 30 days notice.before any additional shares were earned.
 
On June 5,December 17, 2009, our Board of Directors authorized us to issue an additional 150,000 shares of common stock to the samewe engaged another investor relations firm subject tofor a twenty four month period, the attainmentcommitment date being November 1, 2009, providing for compensation payable in 50,000 shares of certain performance conditions, to be performed within a six month time period ending November 5, 2009. The performance based share arrangement supercedes the previous agreement. As of September 30, 2009 20,000 sharesfully vested non-forfeitable common stock with an aggregate fair value of $40,300 were deemed$45.  For years ended September 30, 2011 and 2010, we recorded approximately $22 and $23, respectively of investor relations expense related to have been earned as of the date of issuance. The common stock issued was recorded as professional fees expense using the measurement principles enumerated under ASC 505.this agreement.
 
On March 13, 2009,June 3, 2011, we engaged ananother investor relations firm to further aid usproviding for compensation payable in developing a marketing plan directed at informing the investing public as to our business and increasing our visibility to FINRA registered broker/dealers, the investing public and other institutional and fund managers. In exchange for providing such services, the firm will receive $10,000 per month for the duration of the agreement. Concurrent with executing the agreement, we paid $10,000 and issued 200,00075,000 shares of fully vested and non-forfeitable restricted common stock with aan aggregate fair value of $80,000 on date of grant$19 which has been recorded as professional feesinvestor relations expense usingfor the measurement principles enumerated under ASC 505. We recorded $560,850year ended September 30, 2011.
During the year ended September 30, 2011, we engaged additional investor relations firms for various time periods through September 30, 2012, the engagements include termination clauses with proper notice, and issued a combined 160,000 shares of expense including cash in the amount of $480,850 and sharesfully vested restricted common stock with aan aggregate fair value of $80,000.$32 which was terminated Julyhas been recorded as investor relations expense for the year ended September 30, 2009.2011.
 
Engagement for Advisory Services
 
On January 1, 2009, we entered into a three year advisory agreement with an outside partya certain stockholder, whereby the party will providestockholder is providing corporate finance and business strategy advisory services pertaining to Beacon’s business affairs in the areas of business combinations, financing, etc. The agreement provides for compensation of $25,000$25 per month, any part of which can be prepaid.  ForDuring the year endended September 30, 2009 we have recognized $225,0002010 the agreement was extended to a total of 5 years.  We recorded $36 and $167 of professional fees expense under this agreement and have recorded a prepayment of $320,000 for future services which has been classified as prepaid expense in the accompanying Consolidated Balance Sheet as ofyears ended September 30, 2009.


60


BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
2011 and 2010, respectively.
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Consulting Agreement
 
On December 1, 2009, we entered into two 36 month consulting agreements, which were subsequently extended to 60 months in April 2010, issuing an aggregate of 2,500,000 consulting warrants. The warrants, issued on December 1, 2009 were fully vested upon issuance and have a fair value of $915, determined using the Black Scholes model. We are recognizing investor relations expense ratably over a 60 month term. For the years ended September 30, 2011 and 2010, we recorded approximately $183 and $191 of investor relation expense related to these agreements.
NOTE 14 —STOCKHOLDERS’ EQUITY

Page 37

 
On March 2, 2010, we engaged another investor relations firm for a four month period, the commitment date being April 1, 2010, providing for compensation payable in cash plus 10,000 warrants to purchase common stock.  For the year ended September 30, 2010, we recorded $8 of investor relations expense related to this agreement.

NOTE 13 —STOCKHOLDERS’ EQUITY (DEFICIENCY)
Authorized Capital

Beacon is currently authorized to issue up to 70,000,000 shares of common stock, par value $0.001 per share, and 5,000,000 shares of convertible preferred stock, par value $0.01 per share, of which threethe following series have been designated: 4,500 shares of Series A, Convertible Preferred Stock, 1,000 shares ofSeries A-1, Convertible Preferred Stock, and 4,000 shares of Series B, 400 shares of Series C-1 and 2,000 shares of Series C-2.
Preferred Stock
On March 25, 2011 Beacon offered in a private placement 350 units (the "Series C-1 Units"), to two existing shareholders, at a purchase price of $2 per Series C-1 Unit.  Each Series C-1 Unit is comprised of (i) one (1) share of $2 Stated Value Series C-1 Convertible Preferred Stock.Stock (with each share having 130% nonparticipating liquidation preference, bearing dividends at a rate of 6% per annum payable quarterly in cash or additional Preferred Stock at the holder’s option and convertible at the holder’s discretion into 2,000 shares of the Company’s Common Stock, at a conversion price of $0.75, and (ii) a five (5) year warrant to purchase 1,000 shares of its Common Stock (each, an "Investor Warrant") at a purchase price of $0.75 per share (collectively the "Series C-1 Offering").  As of June 30, 2011, we completed the sale of 350 Series C-1 Units for an aggregate purchase price of $525 and issued 350,000 warrants having a fair value, as determined using the Black Scholes pricing model, of $112.
On May 4, 2011 Beacon offered in a private placement 100 units (the "Series C-2 Units"), at a purchase price of $2 per Series C-2 Unit.  A Series C-2 Unit comprised of (i) one (1) share of $2 Stated Value Series C-2 Convertible Preferred Stock (with each share having 125% nonparticipating liquidation preference, bearing dividends at a rate of 6% per annum payable quarterly in cash or additional Preferred Stock at the company’s option and convertible at the holder’s discretion into 2,000 shares of the Company’s Common Stock, at a conversion price of $0.75, and (ii) a five (5) year warrant to purchase 1,000 shares of its Common Stock (each, an "Investor Warrant") at a purchase price of $0.75 per share (collectively the "Series C-2 Offering").  As of June 30, 2011, we completed the sale of 100 Series C-2 Units for an aggregate purchase price of $150 and issued 100,000 warrants having a fair value, as determined using the Black Scholes pricing model, of $32.
For services performed in connection with Series C private placements, Beacon paid a placement agent fee of $68 and issued 90,000 placement agent warrants.  Using the Black Scholes pricing model, we determined the fair value of the warrants and recorded an expense of $29.
 
Each share of Series A,Series A-1 and Series B preferred stock has voting rights equal to anthe equivalent number of common shares into which it is convertible. The holders of the Series A andSeries A-1 are entitled to receive contractual cumulative dividends in preference to any dividend on the common stock at the rate of 10% per annum on the initial investment amount commencing on the date of issue.  The holders of the Series B, C-1 and C-2 are entitled to receive contractual cumulative dividends in preference to any dividend on the common stock (but subject to the rights of the Series A andSeries A-1)previously issued series of preferred stock) at the rate of 6% per annum on the initial investment amount commencing on the date of issue.  Such dividends are payable on January 1, April 1, July 1 and October 1 of each year.  Dividends earned with respect to this feature amounted to $195,000 and $430,000 for the Series A, $25,000 and $86,000 for theSeries A-1 , $0 and $32,000 for the Series Baccrued but unpaid as of September 30, 20082011, are $47, $66, $116, $16 and 2009 respectively, and are presented as an increase in net loss available to the common stockholders of $220,000 and $548,000$2 for the year ended September 30, 2008 and 2009. Unpaid but accrued amounts with respect to this feature amount to $195,000 and $5,600 for the Series A, $25,000A-1, B, C-1 and $0 forSeries A-1 and $0 and $32,000 for Series B. The Company has the option of paying the dividend in either common stock or cash.C-2, respectively
 
The Series A,A-1 and B Preferred Stock designations contains certain restrictive covenants including restrictions against: the declaration of dividend distributions to common stockholders; certain mergers, consolidations and business combinations; the issuance of preferred shares with rights or provisions senior to each of the Series A,A-1, and B Preferred Stock; and restrictions against incurring or assuming unsecured liabilities or indebtedness unless certain minimum performance objectives are satisfied. The Series A, A-1, B, C-2 Preferred Stock is senior to theSeries A-1 Preferred Stock, and the Series A andA-1 are senior to the Series B Preferred Stock.
The Series A,A-1 and B Preferred Stock havealso contains a right of redemption in the event of liquidation or a change in control. The redemption feature provides for payment of a liquidation fee of 125% of the face value and 125% ofplus any accrued unpaid dividends in the event of bankruptcy, change of control, or any actions to take the Company private.  The Series C-1 has similar right but with a liquidation fee of 130%.  The amount of the liquidationredemption preference is $3,171,999$96, $471, $1,020, $703 and $198 for the Series A, $940,678 for theSeries A-1, B, C-1 and $914,818 for the Series B preferred,C-2, respectively, as of September 30, 2009.2011.
 
Beacon, by resolution  The Company applies the classification and measurement principles enumerated in ASC 815 with respect to accounting for its issuances of the preferred stock. The Company is required, under Nevada law, to obtain the approval of its Board of Directors may designate additional seriesin order to effectuate a merger, consolidation or similar event resulting in a more than 50% change in control or a sale of Preferred Stock (“blank check preferred stock”) and to fixall or alter the rights, preferences, privileges and restrictions granted to or imposed upon such blank check preferred stock, and the numbersubstantially all of shares constituting any such series of such blank check preferred stock. The rights, privileges and preferences of any such blank check preferred stock shall be subordinate to the rights, privileges and preferences to the existing Series A andSeries A-1 Preferred Stock. The Series B Preferred Stock was issued as “blank check preferred stock” and as such is subordinate to the rights, privileges and preferences of the Series A andSeries A-1 Preferred Stock.
The Board of Directors may also increase or decrease the number of shares of any series (other than the Series A Preferred Stock or theSeries A-1 Preferred Stock), prior or subsequent to the issue of that series, but not below the number of shares of such series then outstanding.
Private Placement of Convertible Preferred Stock
Series A Preferred Stock Placement
During the year ended September 30, 2008, we issued in three Private Placement transactions, an aggregate of 4,000 shares of our Series Aits assets.  We evaluate convertible preferred stock and five year common stock purchase warrants exercisable at $1.00 per shareeach reporting date for net proceeds of $3,276,610 (gross proceeds of $4,000,000 lessappropriate balance sheet classification. 


61


 
BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
Page 38

 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)Preferred Stock Conversions to Common Stock
offering costs of $723,390). Offering costs included fees paid to the placement agent of $650,000 and legal and related expenses of $73,390 in addition to warrants granted to the placement agent to purchase 1,040,000 shares of our common stock at $1.00 per share with a 5 year term. An additional 600,000 warrants to purchase shares of our common stock at $1.00 per share with a 5 year term were earned by and issued to affiliates of the placement agent.

For the year ended September 30, 2009, 2,6352010, 1,993 and shares of Series A with a stated value of $2,635,049 were converted to 3,513,400 of common stock. Additionally 619and 462 shares of Series A, with a stated valueA-1 were converted into 3,286,372 of $619,123 were issued aspaid-in-kind dividends.common stock.
 
The Series A, isA-1, C-1 and C-2 are convertible into common stock at any time, at the option of the holder at a conversion price of $.75 per share.  Series B has a conversion price of $.80. The conversion price is subject to adjustment for stock splits, stock dividends, recapitalizations, dilutive issuances and other anti-dilution provisions, including circumstances in which we, at our discretion, issue equity securities or convertible instruments that feature prices lower than the conversion price specified in the Series A preferred shares. The Series A is also automatically convertible into shares of our common stock, at the then applicable conversion price upon the closing of a firm commitment underwritten public offering of shares of our common stock yielding aggregate proceeds of not less than $20 million or under certain other circumstances when the trading volume and average trading prices of the stock attain certain specified levels.specified.
 
As described in Note 3, we evaluated the conversion options embedded in the Series Apreferred stock securities to determine (in accordance ASC 815) whether they should be bifurcated from their host instruments and accounted for as separate derivative financial instruments. We determined the risks and rewards of the common shares underlying the conversion feature are clearly and closely related to those of the host instrument. Accordingly the conversion features are being accounted for as embedded conversion options. During the years ended September 30, 2008 and 2009, based on an evaluation of the beneficial conversion feature of the Series A Preferred Shares, we recorded deemed dividends of $2,483,715 and $157,655. The table below lists the detailed fair value of the warrants issued in each of the three closings of the Series A Preferred Stock Private Placement. The fair values were calculated using the Black-Scholes option pricing model with the following assumptions:
                                 
           Fair Value of
             
  Quantity of
  Estimated
  Estimated
  Undelying
  Risk-Free
  Expected
       
Date
 Warrants
  Fair Value
  Fair Value of
  Common
  Interest
  Dividend
  Life
  Current
 
Issued
 Issued  per Warrant  Warrants  Stock  Rate  Yield  (Years)  Volatility 
 
12/20/2007
  1,622,600  $0.46  $746,396  $0.85   3.45%  0%  5   66.34%
1/15/2008
  480,333  $0.78  $374,660  $1.25   3.00%  0%  5   66.34%
2/12/2008
  563,733  $0.78  $439,712  $1.25   2.71%  0%  5   66.34%
Accordingly, deemed dividends related to the conversion feature were recorded based on the difference between the effective conversion price of the conversion option and the fair value of the common stock at the commitment date of the transaction detailed in the table below.
                     
  Fair Value of
     Intrinsic
  Common
    
  Common
     Value of
  Shares
    
Date of Issue/
 Stock on
  Effective
  Beneficial
  Issuable
    
Commitment
 Commitment
  Conversion
  Conversion
  upon
  Deemed
 
Date
 Date  Price  Feature  Conversion  Dividend 
 
12/20/2007
 $0.85  $0.57  $0.28   3,245,200  $903,878 
1/15/2008
 $1.25  $0.49  $0.76   960,667  $726,820 
2/12/2008
 $1.25  $0.49  $0.76   1,127,466  $853,017 
We have reserved 2,645,437 shares of our common stock for issuance upon the conversion of its Series A convertible preferred stock and 2,666,666 shares of our common stock for issuance upon exercise of the Investor Warrants.


62


BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As described in Note 3, we apply the classification and measurement principles enumerated in ASC 815 with respect to accounting for our issuances of the Series A preferred stock. We are required, under Nevada law, to obtain the approval of our board of directors in order to effectuate a merger, consolidation or similar event resulting in a more than 50% change in control or a sale of all or substantially all of our assets. The board of directors is then required to submit proposals to enter into these types of transactions to our stockholders for their approval by majority vote. The preferred stockholders do not currently (i) control or have representation on our Board of Directorsand/or (ii) have sufficient voting rights to control a redemption of these shares by either of these events. In addition the effectuation of any transaction or series of transactions resulting in a more than 50% change in control can be made only by us in our sole discretion. Based on these provisions, we classified the Series A preferred shares as permanent equity in the accompanying consolidated balance sheetConsolidated Balance Sheet because the liquidation events are deemed to be within our sole control.
 
We evaluate the Series A convertible preferred stock at each reporting date for appropriate balance sheet classification.
Series A-1 Preferred Stock Placement
On March 7 and 11, 2008, we issued, in two closing of a Private Placement transaction, an aggregate of 800 shares of ourSeries A-1 convertible preferred stock and 533,333 five year common stock purchase warrants exercisable at $1.00 per share for net proceeds of $599,850 (gross proceeds of $800,000 less offering costs of $200,150). Offering costs included fees paid to the placement agent of $104,000, a fee for the successful completion of the placement of $60,000 and $36,150 in legal and related fees in addition to warrants to purchase 208,000 shares of our common stock at $1.00 per share with a 5 year term. TheSeries A-1 Preferred Stock is convertible into common stock at any time, at the option of the holder at a conversion price of $.75 per share. The conversion price is subject to adjustment for stock splits, stock dividends, recapitalizations, dilutive issuances and other anti-dilution provisions, including circumstances in which we, at our discretion, issue equity securities or convertible instruments that feature prices lower than the conversion price specified for shares ofSeries A-1 Preferred Stock. TheSeries A-1 Preferred Stock is also automatically convertible into shares of our common stock, at the then applicable conversion price upon the closing of a firm commitment underwritten public offering of shares of our common stock yielding aggregate proceeds of not less than $20 million or under certain other circumstances when the trading volume and average trading prices of the stock attain certain specified levels.
For the year ended September 30, 2009, 159 shares ofSeries A-1 with a stated value of $158,598 were converted to 211,464 of common stock. Additionally 111 shares ofSeries A-1, with a stated value of $110,945 were issued aspaid-in-kind dividends.
As described in Note 3, we evaluated the conversion options embedded in theSeries A-1 securities to determine (in accordance with ASC 815) whether they should be bifurcated from their host instruments and accounted for as separate derivative financial instruments. We determined the risks and rewards of the common shares underlying the conversion feature are clearly and closely related to those of the host instrument. Accordingly the conversion features are being accounted for as embedded conversion options. During the year ended September 30, 2008 and 2009, based on an evaluation of the beneficial conversion feature of theSeries A-1 Preferred Shares, the Company recorded deemed dividends of $1,411,882 and $32,706. The table below lists the fair value of the warrants issued in each of the two closings of theSeries A-1 Preferred Stock Private Placement. The fair values were calculated using the Black-Scholes option pricing model with the following assumptions:
                                 
           Fair Value of
             
  Quantity of
  Estimated
  Estimated
  Undelying
  Risk-Free
  Expected
       
Date
 Warrants
  Fair Value
  Fair Value of
  Common
  Interest
  Dividend
  Life
  Current
 
Issued
 Issued  per Warrant  Warrants  Stock  Rate  Yield  (Years)  Volatility 
 
3/7/2008
  515,200  $1.20  $618,240  $1.75   2.45%  0%  5   66.34%
3/11/2008
  18,133  $0.99  $17,952  $1.50   2.61%  0%  5   66.34%


63


BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accordingly, deemed dividends related to the conversion feature were recorded based on the difference between the effective conversion price of the conversion option and the fair value of the common stock at the commitment date of the transaction detailed in the table below.
                     
  Fair Value of
     Intrinsic
  Common
    
  Common
     Value of
  Shares
    
Date of Issue/
 Stock on
  Effective
  Beneficial
  Issuable
    
Commitment
 Commitment
  Conversion
  Conversion
  upon
  Deemed
 
Date
 Date  Price  Feature  Conversion  Dividend 
 
3/7/2008
 $1.75  $0.42  $1.33   1,030,400  $1,373,867 
3/11/2008
 $1.50  $0.45  $1.05   36,267  $38,015 
We have reserved 1,003,129 shares of our common stock for issuance upon the conversion of ourSeries A-1 convertible preferred stock and 533,333 shares of our common stock for issuance upon exercise of the Investor Warrants.
As described in Note 3, we apply the classification and measurement principles enumerated in ASC 815 with respect to accounting for our issuances of theSeries A-1 preferred stock. We are required, under Nevada law, to obtain the approval of our board of directors in order to effectuate a merger, consolidation or similar event resulting in a more than 50% change in control or a sale of all or substantially all of our assets. The board of directors is then required to submit proposals to enter into these types of transactions to our stockholders for their approval by majority vote. The preferred stockholders do not currently (i) control or have representation on our Board of Directorsand/or (ii) have sufficient voting rights to control a redemption of these shares by either of these events. In addition the effectuation of any transaction or series of transactions resulting in a more than 50% change in control can be made only by us in our sole discretion. Based on these provisions, we classified theSeries A-1 preferred shares as permanent equity in the accompanying consolidated balance sheet because the liquidation events are deemed to be within our sole control.
We evaluate theSeries A-1 convertible preferred stock at each reporting date for appropriate balance sheet classification.
Series B Preferred Stock Placement
On July 14, 2008, we issued 400 shares of Series B Preferred Stock and 200,000 (“Series B Offering Warrants”) five year common stock purchase warrants exercisable at $1.20 per share in a Private Placement transaction for proceeds of $400,000 from one of our directors. The Series B Preferred Stock is convertible into common stock at any time, at the option of the holder at a conversion price of $.80 per share. The Series B Preferred Stock is also automatically convertible into shares of our common stock, at the then applicable conversion price upon the closing of a firm commitment underwritten public offering of shares of our common stock yielding aggregate proceeds of not less than $20 million or under certain other circumstances when the trading volume and average trading prices of the stock attain certain specified levels.
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, 2009. We completed our administrative issuance of 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 shares at a 1% per month premium beginning 30 days from the date of their issuance at our discretion
The Series B Offering Warrants have a five year exercise period and an exercise price of $1.20 per share of the Company’s common stock, payable in cash on the exercise date. The exercise price is subject to adjustment upon certain occurrences specified in the Series B Offering Warrants. The shares of Series B Preferred Stock have terms similar to those of the shares of Series A Preferred Stock andSeries A-1 Preferred Stock, but are junior to those shares with respect to dividend rights, liquidation preferences and registration


64


BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
rights. The Company has used the proceeds of the closing to pay certain expenses of the Company and for working capital.
As described in Note 3, we evaluated the conversion options embedded in the Series B securities to determine (in accordance with ASC 815) whether they should be bifurcated from their host instruments and accounted for as separate derivative financial instruments. We determined the risks and rewards of the common shares underlying the conversion feature are clearly and closely related to those of the host instrument. Accordingly the conversion features are being accounted for as embedded conversion options. During the year ended September 30, 2008, based on an evaluation of the beneficial conversion feature of the Series B Preferred Shares, the Company recorded deemed dividends of $135,163 and $10,315. The table below lists the fair value of the warrants issued at the closing of the Series B Preferred Stock Private Placement. The fair values were calculated using the Black-Scholes option pricing model with the following assumptions:
                                 
           Fair Value of
             
  Quantity of
  Estimated
  Estimated
  Undelying
  Risk-Free
  Expected
       
Date
 Warrants
  Fair Value
  Fair Value of
  Common
  Interest
  Dividend
  Life
  Current
 
Issued
 Issued  per Warrant  Warrants  Stock  Rate  Yield  (Years)  Volatility 
 
7/10/2008
  200,000  $0.55  $110,000  $1.01   3.10%  0%  5   66.34%
Accordingly, deemed dividends related to the conversion feature were recorded based on the difference between the effective conversion price of the conversion option and the fair value of the common stock at the commitment date of the transaction detailed in the table below.
                     
  Fair Value of
     Intrinsic
  Common
    
  Common
     Value of
  Shares
    
Date of Issue/
 Stock on
  Effective
  Beneficial
  Issuable
    
Commitment
 Commitment
  Conversion
  Conversion
  upon
  Deemed
 
Date
 Date  Price  Feature  Conversion  Dividend 
 
7/10/2008
 $1.01  $0.71  $0.30   444,444  $135,163 
We have reserved 875,000 shares of our common stock for issuance upon the conversion of our Series B convertible preferred stock and 350,000 shares of our common stock for issuance upon exercise of the Investor Warrants.
At our option, we can redeem the Series B Preferred Stock, and any dividends issued there under, for a 1% origination fee and 1% interest per month on the outstanding face value of the Series B preferred stock. As of September 30, 2009,2010, we have not made a determination as to whether we will redeem theredeemed any Series B Preferred Stock.

As described in Note 3, we apply the classification and measurement principles enumerated in ASC 815 with respect to accounting for our issuances of the Series B preferred stock. We are required, under Nevada law, to obtain the approval of our board of directors in order to effectuate a merger, consolidation or similar event resulting in a more than 50% change in control or a sale of all or substantially all of our assets. The board of directors is then required to submit proposals to enter into these types of transactions to our stockholders for their approval by majority vote. The preferred stockholders do not currently (i) control or have representation on our Board of Directorsand/or (ii) have sufficient voting rights to control a redemption of these shares by either of these events. In addition the effectuation of any transaction or series of transactions resulting in a more than 50% change in control can be made only by us in our sole discretion. Based on these provisions, we classified the Series B preferred shares as permanent equity in the accompanying consolidated balance sheet because the liquidation events are deemed to be within our sole control.Preferred Stock Dividends
 
We evaluate the Series B convertible preferred stock at each reporting date for appropriate balance sheet classification.
Preferred Stock Dividends
On March 26, 2008, October 7, 2008, February 12, 2009 and June 5, 2009 we elected to pay the contractual dividends due the Series A,A-1, and B preferred stockholders in additional shares of the related


65


BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
preferred stock. We follow the guidelines of ASC 505 Dividends and Stock Splits when accounting forpay-in-kind dividends that are settled in convertible securities with beneficial conversion features. Therefore, we recorded deemed dividend related to the conversion feature based on the difference between the effective conversion price of the conversion option and the fair value of the common stock on the date of election which is considered the commitment date. For the year ended September 30, 2011, the conversion value was lower that the fair value on each date of election, as such no deemed dividend was recorded.  The following table contains information related to the contractual dividends issued pursuant to our preferred stock:

                                    
                 Deemed
 
               Fair Value of
 Dividend
                     Fair Value of  Dividend 
   Date of
 Contractual
 Conversion
 Common
 Closing
 Fair Value
 Contractual
 Related to
    Date of Contractual  Conversion  Common  Closing  Fair Value  Contractual  Related to 
Preferred
 Date of
 Election
 Preferred
 Price per
 Shares
 Price on
 of Underlying
 Preferred
 Beneficial
  Date of Election Preferred  Price Per  Shares  Price on  of Underlying  Preferred  Beneficial 
Stock
 Contractual
 (Commitment
 Stock
 Common
 Underlying
 Date of
 Common
 Stock
 Conversion
  Contractual (Commitment Stock  Common  Underlying  Date of  Common  Stock  Conversion 
Series
 Dividend Date) Dividend Share Dividend Election Stock Dividend Feature  Dividend Date) Dividend  Share  Dividend  Election  Stock  Dividend  Feature 
A
  1/1/2008   3/26/2008  $7,335  $0.75   9,780  $1.20  $11,736  $7,335  $4,401 
A
  4/1/2008   3/26/2008  $87,569  $0.75   116,759  $1.20  $140,111  $87,569  $52,542 
A
  7/1/2008   10/7/2008  $100,000  $0.75   133,333  $1.24  $165,333  $100,000  $65,333 
A-1
  4/1/2008   3/26/2008  $5,450  $0.75   7,267  $1.20  $8,720  $5,450  $3,270 
A-1
  7/1/2008   10/7/2008  $20,000  $0.75   26,667  $1.24  $33,067  $20,000  $13,067 
         
Total For year end September 30, 2008 $220,354       293,806      $358,967      $138,613 
                                  
A
  10/1/2008   10/7/2008  $100,000  $0.75   133,333  $1.24  $165,333  $100,000  $65,332  10/1/2009 9/9/2009 $19  $0.75   25  $1.00  $66  $19  $17 
A
  1/1/2009   1/9/2009  $100,000  $0.75   133,333  $0.80  $106,666  $100,000  $6,666  1/1/2010 2/4/2010 $50  $0.75   67  $1.07  $71  $50  $32 
A
  4/1/2009   2/17/2009  $126,213  $0.75   168,284  $0.55  $92,556  $126,213  $  4/1/2010 2/4/2010 $7  $0.75   9  $1.38  $15  $7  $7 
A
  7/1/2009   6/5/2009  $103,618  $0.75   138,157  $1.37  $189,275  $103,618  $85,657  7/1/2010 6/3/2010 $1  $0.75   1  $1.03  $1  $1  $- 
A-1
  10/1/2008   10/7/2008  $20,000  $0.75   26,667  $1.24  $33,067  $20,000  $13,067  10/1/2009 9/9/2009 $19  $0.75   25  $1.00  $25  $19  $6 
A-1
  1/1/2009   1/9/2009  $20,000  $0.75   26,667  $0.80  $21,334  $20,000  $1,334  1/1/2010 2/4/2010 $19  $0.75   25  $1.07  $27  $19  $9 
A-1
  4/1/2009   2/17/2009  $23,549  $0.75   31,399  $0.55  $17,269  $23,549  $  4/1/2010 2/4/2010 $10  $0.75   13  $1.38  $19  $10  $9 
A-1
  7/1/2009   6/5/2009  $22,142  $0.75   29,523  $1.37  $40,447  $22,142  $18,305  7/1/2010 6/3/2010 $8  $0.75   11  $1.03  $10  $8  $3 
B
  10/1/2008   10/7/2008  $5,152  $0.80   6,440  $1.24  $7,986  $5,152  $2,834  10/1/2009 9/9/2009 $11  $0.80   14  $1.00  $13  $11  $3 
B
  1/1/2009   1/9/2009  $6,000  $0.80   7,500  $0.80  $6,000  $6,000  $  1/1/2010 2/4/2010 $11  $0.80   14  $1.07  $14  $11  $3 
B
  4/1/2009   2/17/2009  $10,502  $0.80   13,128  $0.55  $7,220  $10,502  $  4/1/2010 2/4/2010 $10  $0.80   13  $1.38  $18  $10  $7 
B
  7/1/2009   6/5/2009  $10,500  $0.80   13,125  $1.37  $17,981  $10,500  $7,481  7/1/2010 6/3/2010 $10  $0.80   13  $1.03  $13  $10  $3 
                                         
Total For year end September 30, 2009 $547,676       727,556      $705,134      $200,676 
          Total For year end September 30, 2010 $175      $230      $292      $99 
 
Registration Rights
Page 39

Restricted Stock Grant
 
PursuantPrior to the termsadoption of the registration rights agreement entered into in connection with the Series A Private Placement,Series A-1 Private Placement and Series B Private Placement, we agreed to file with the SEC as soon as is practicable after completion of the offering a registration statement (the “Registration Statement”) and use our best efforts to have the Registration Statement declared effective not later than June 30, 2008. The Registration Statement would register for resale (i) the shares of our common stock underlying the units sold in the Private Placement (the “Units”) and (ii) the shares of our common stock issuable upon the exercise of the warrants issued to the investors and agents in these Private Placements. We agreed to use commercially reasonable best efforts to have such “resale” Registration Statement declared effective by the SEC as soon as possible and, in any event, not later than June 30, 2008 and to pay penalties for failure to have the Registration Statement declared effective at that date. On April 18, 2008, the Placement Agent waived the registration right and potential penalty subject to consent of 60% of the holders of the Series A,Series A-1 and Series B Preferred Stock which was subsequently obtained.


66


BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company applies FASB ASC 815 “Contracts in Entity’s Own Equity,” with respect to determining whether to record a liability for contingent consideration potentially transferable to security holders covered under registration rights agreements.
Issuances of Common Stock in Business Combinations
For the year ended September 30, 2008 we issued 3,225,000 of common stock in connections with business combinations described in Note 4. The aggregate fair value of these shares amounted to $2,741,250.
We issued 400,000 shares of common stock in connection with business combinations described in Note 4. The aggregate fair value of these shares amounted to $436,855.
Restricted Stock Grant
OnIncentive Plan, on December 5, 2007, we issued 782,250 shares of restricted common stock with an aggregate fair value of $666,873$667 to our then president in exchange for $156. Immediately upon the sale 150,000 shares vested with the remaining shares vesting in quantities of 210,750 shares on each of December 20, 2008, 2009 and 2010. We account for share-based compensation under ASC 718 “Compensation — Stock Compensation,” which requires us to expense the fair value of grants made under the share based compensation programs over the vesting period of each individual agreement. We recognize non-cash share-based compensation expense ratably over the requisite service period which generally equals the vesting period of awards, adjusted for expected forfeitures. Immediately upon the sale, 150,000 shares vested with the remaining shares vesting in quantities of 210,750 shares on each of December 20, 2008, 2009 and 2010. As of May 2010 upon the president’s termination of employment, the remaining non-vested shares immediately vested and the expense recognized. We recognized $266,693$0 and $179,422$221 of non-cash share-based compensation expense during the years ended September 30, 20082011 and 2009,2010, respectively, in connection with such grants. Unamortized compensation under this arrangement amounted to $400,024 and $220,602 as of September 30, 2008 and 2009 and will be amortized over the remaining vesting period. The shares vest immediately upon our termination without cause or the Executive’s resignation if in response to certain defined actions taken by us adverse to Executive’s employment which constitute good reason as defined in the Executive’s employment agreement. In the event of termination for cause, or resignation without good reason, we have the right to repurchase any unvested shares for nominal consideration.grant.
 
CompensatorySales of Common Stock and Warrants Issuance
 
On March 26, 2008, Beacon issued warrants to purchase 300,000 shares of common stock at $1.00 per share with a five-year term to one of our directors. Accordingly, we recognized $219,000 of share-based compensation expense forDuring the year ended September 30, 2010, we sold 3,795,295 Common Units to accredited investors for net proceeds of $2,398 (gross proceeds of $2,982, less offering costs of $584). We issued to certain agents who represented us in sales of the units, warrants to purchase 448,500 shares of our common stock.
Cashless Warrant Conversions
For the year ended September 30, 2010 holders of 1,566,065 Common Stock Warrants elected to exercise the cashless conversion options thereby redeeming 441,153 shares, including 423,336 shares issued upon the exercise of 1,481,965 warrants as described below.
Derivative Financial Instruments
In December 2008, basedthe FASB issued ASC 815-40 “Contracts in Entity’s own Equity”. This issue addresses the determination of whether an instrument (or an embedded feature) is indexed to an entity’s own stock. This issue is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. Under this guidance, instruments which do not have fixed settlement provisions are deemed to be derivative instruments.
As such, we were required to (i) reclassify certain common stock purchase warrants we issued in financing transaction completed prior to October 1, 2009 from stockholders equity to liabilities at fair value as of October 1, 2009, (ii) record all new issuances of derivatives that do not have fixed settlement provisions as liabilities and (iii) mark to market all such derivatives to fair value through March 30, 2010, which immediately precedes the date on which the removal of anti-dilution provisions in our derivative financial instruments became effective.
Effective October 1, 2009, the Company reclassified the fair value of theall common stock purchase warrants on the grant date. Theissued prior to October 1, 2009 from equity to liabilities at their aggregate fair value wasof $4,628. We recorded a corresponding charge to the accumulated deficit to recognize the cumulative effects of having adopted this accounting policy. We calculated the adoption date fair values for these derivatives using the Black-Scholes option pricing model with the following weighted average assumptions:

                                     
     Expected
              Risk-Free
  Value
  Charge to
 
Grant
 Quantity
  Life
  Strike
  Underlying
     Dividend
  Interese
  per
  Interest
 
Date
 Granted  (Days)  Price  Price  Volatility  Yield  Rate  Warrant  Expense 
 
3/26/2008  300,000   1,825  $1.00  $1.20   66.34%  0%  2.55% $0.73  $219,000 
  October 1 
  2009 
Expected Life  3.72 
Risk-free interest rate  2.20%
Dividend Yield  0%
Volatility  66.34%
Warrants issued with private placements  9,979,577 
Fair value of warrants $4,628 
 
SalesWe also performed a classification assessment of Common Stockthe common stock warrants issued to investors and Warrantsagents in the common units completed during the year ended September 30, 2010 on their respective dates of issuance. We determined that such common stock purchase warrants, as originally issued, did not contain fixed settlement provisions because the strike price was subject to adjustment in the event we subsequently issued equity securities or equity linked securities with exercise prices lower than the exercise prices featured in these warrants. Accordingly, we allocated $1,094 of the offering proceeds to the fair value of the warrants on their respective dates of issuance and recorded them as liabilities in our Consolidated Balance Sheet through the date on which the removal of anti-dilution provisions in our derivative financial instruments became effective. We calculated the issuance date fair values of these derivatives using the Black-Scholes option pricing model with the following weighted average assumptions:

Page 40

Expected Life  5 
Risk-free interest rate  2.69%
Dividend Yield  0%
Volatility  66.34%
Weighted average unit fair value $0.47 
Warrants Issued  2,312,250 
Fair Value $1,094 
 
On July 25, 2008, we engagedMarch 8, 2010, the Company announced an offer to the holders of its warrants that contain anti-dilution protection providing them with the option of (i) exercising their warrants for cash at discount of $0.10 off the contractual exercise price, (ii) exercising their warrants pursuant to a registered broker-dealer (the “Placement Agent”)cashless exercise provision at the contractual exercise price (which results in a private placementnet share settlement), or (iii) consent to the elimination of upthe anti-dilution protection clause that caused the warrants not to 3,750,000 units (the “Common Units”),be indexed to the Company’s own stock. As of March 31, 2010, a required majority of warrant holders consented to the removal of anti-dilution provisions which resulted in the elimination of such anti-dilution provisions.
On March 30, 2010, immediately prior to the completion of our offer to the warrant holders, we marked all remaining derivative financial instruments to fair value, including the warrants exercised for an aggregate purchase price of $3,000,000, with each Common Unit comprised of (i) one share of Common Stock, and (ii) a five year warrant to purchase one-half share of Common Stock (each, an “Common Offering Warrant”)cash at a purchase pricediscount of $1.00 per share (collectively$0.10 off the Common Offering”). Incontractual exercise price. The aggregate fair value of all such warrants amounted to $10,095. We calculated the event thatfair values of these derivatives using the Common OfferingBlack-Scholes option pricing model (which management determined is oversubscribed, we may sell and issue up to an additional 562,500 Common Units.


67


not materially different from a binomial valuation model), with the following weighted average assumptions:
BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
  March 30, 
  2010 
Expected Life  3.88 
Risk-free interest rate  2.55%
Dividend Yield  0%
Volatility  65.40%
Warrants issued with private placements (including 3,375,375 with a discounted exercise price of $0.10 per share)  12,291,827 
Fair value of warrants $10,095 
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On March 31, 2010, we reclassified the warrant liability on our balance sheet to stockholders’ equity. The Common Offering Warrants each have a five year exercise period and an exercise price of $1.00 per share of Common Stock, payablechange in cash on the exercise date or cashless conversion if a registration statement or current prospectus covering the resalefair value of the shares underlyingwarrants reclassified to liabilities on October 1, 2009, and additional warrants issued between October 1, 2009 and March 30, 2010 amounted to approximately $4,373 and is reflected as the Common Offering Warrants is not effective or available at any time more than six months after the datechange in fair value of issuance of the Common Offering Warrants. The exercise price is subject to adjustment upon certain occurrences specifiedwarrants in the Common Offering Warrants.accompanying Consolidated Statement of Operations for the year ended September 30, 2010.
 
As of September 30, 2008,2010, pursuant to this offer, the Company issued 4,738,966 shares of common stock.  Those warrant holders who elected to exercise these instruments for cash at a $0.10 discount from the contractual exercise price. Net proceeds from these exercises amounted $3,664 (gross proceeds of $4,369 less costs of $705).  The Company also issued 423,336 net shares of common stock to warrant holders electing to exercise 1,481,965 warrants pursuant to the cashless exercise alternative.
Issuance of non-employee compensatory options
During the fiscal year ended September 30, 2010, in consideration for services, we have sold 1,625,000 Common Units to accredited investors for net proceeds of $1,063,726 (an aggregate purchase price of $1,300,000 less direct offering costs of $236,784). Direct offering costs included placement agent commissions of $130,000, non-accountable placement agent expenses of $36,500, legal expenses of $47,965, success fees of $39,000 payable to one of our founders, and printing and blue sky fees of $11,319, We have used the proceeds of the Common Offering to provide working capital. In addition, the Placement Agent has earned warrantsgranted options to purchase an aggregate of 243,750250,000 shares of Common Stock.
On November 12, 2008, we engagedStock vesting ratably over a 36 month period.  We calculated the Placement Agentfair value of the options using the Black-Scholes option pricing model with the following assumptions: Stock price — $.54, Volatility — 66.34%, Risk —free interest rate — 2.09%, Expected life — 120 months and Dividend yield — 0.00%, resulting in a private placement (the “November Common Offering”)fair value determination of up$188, to 3,750,000 Common Unitsbe recognized over a 36 month period.  No such options were granted for an aggregate purchase price of $3,000,000, with each Common Unit comprised of (i) one share of Common Stock, and (ii) a five year warrant to purchase one-half share of $ .80 per unit Common Stock (each, an “Common Offering Warrant “). For the year ended September 30, 2009 an anti-dilution provision of2011. For the stock offering resulted in a requirement to issue an additional 285,139 shares of common stock at par value $0.001 or $285.14.
On June 10, 2009 Beacon commenced a Private Placement of up to $600,000 of common units at a price of $.80 per unit. Each Unit consists of (i) one share of Common Stock, and (ii) a five year warrant to purchase one-half share of Common Stock (each, an “Common Offering Warrant”) at a purchase price of $1.00 per share (collectively the “Common Offering”).
On September 18, 2009 Beacon commenced a Private Placement of up to $3,000,000 of common units at a price of $.80 per unit. Each Unit consists of (i) one share of Common Stock, and (ii) a five year warrant to purchase one-half share of Common Stock (each, an “Common Offering Warrant”) at a purchase price of $1.00 per share (collectively the “Common Offering”).
The Common Offering Warrants each have a five year exercise period and an exercise price of $1.00 per share of Common Stock, payable in cash on the exercise date or cashless conversion if a registration statement or current prospectus covering the resale of the shares underlying the Common Offering Warrants is not effective or available at any time more than six months after the date of issuance of the Common Offering Warrants. All of the warrants issued in the June 2008, November 2008 and June 2009 private placements feature standard anti dilution provisions for stock splits, stock dividends and similar types of recapitalization events. These warrants also feature weighted average price protection for subsequent issuances of equity securities at prices more favorable than the exercise price stipulated in these warrants. In addition, the Company has agreed to use its best efforts to file a registration statement for the resale of any all shares issued and shares underlying common stock purchase warrants issued in these private placements. These registration rights do not provide for the Company to incur any penalties for its failure to file, cause or maintain the effectiveness of such registration statements; however, the Company is subject to a penalty in the amount of 2% of the gross proceeds per month in the event it fails to maintain compliance with the Exchange Act reporting requirements. The Company believes it is probable that it will not incur any such penalties.
During the yearyears ended September 30, 2009,2011 and 2010 we sold an aggregaterecognized share based compensation of 6,853,497 Common Units, under all of$63 and $34 related to these offerings, to accredited investors for net proceeds of $4,346,675 (gross proceeds of $5,485,249 less offering costs of $1,138,574). Offering costs included fees paid to the placement agent of $859,146, a fee for the successful completion of the placement of $156,987 paid to a consultant and $122,441 legal and related


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BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
options.
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Page 41

 
fees in addition to warrants to purchase 3,422,103 shares of our common stock at $1.00 per share with a 5 year term. We used the proceeds of the Common Offering to provide working capital.
During the year ended September 30, 2009 549,918 warrants were exercised into 196,145 shares of common stock.
NOTE 14 —
NOTE 15 —INCOME TAXES
 
The income taxetax (provision) benefits consistsconsist of the following:

         
  2008  2009 
 
Federal:        
Current        
Deferred  1,451,792   2,216,449 
         
Total federal  1,451,792   2,216,449 
State:        
Current        
Deferred  166,530   254,240 
         
Total state  166,530   254,240 
         
Foreign:        
Current      (97,581)
Deferred        
      (97,581)
         
   1,618,322   2,373,108 
Change in valuation allowance  (1,663,794)  (2,528,701)
         
Total provision $(45,472) $(155,593)
         
  2011  2010 
       
Federal:      
Current $-  $- 
Deferred  1,162   1,780 
         
Total federal  1,162   1,780 
         
State:        
Current  -   - 
Deferred  215   204 
         
Total state  215   204 
         
Foreign:        
Current  18   (18)
Deferred  87   171 
         
   105   153 
         
   1,481   2,137 
Change in valuation allowance  (1,522)  (2,200)
         
Total provision $(41) $(63)
 
A reconciliation of the statutory federal income tax rate to our effective tax rate follows:
 
         
  For the Twlelve
  For the Twlelve
 
  Months Ended
  Months Ended
 
  September 30,
  September 30,
 
  2008  2009 
 
Tax benefit at statutory rate  34.0%  34.0%
State income taxes, net of federal benefit  3.9   3.9 
Foreign income taxes      1.6 
Non-deductible expenses  (2.8)  (.6)
Increase in valuation allowance  (36.1)  (41.4)
         
Effective income tax rate  (1.0)  (2.5)
         


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BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
  For the  For the 
  year ended  year ended 
  September 30,  September 30, 
  2011  2010 
       
Tax benefit at statutory rate  34.0%  34.0%
State income taxes, net of federal benefit  3.9   3.9 
Foreign income taxes  (0.8)  (0.1)
Non-deductible meals & entertainment  (5.8)  (17.1)
Increase in valuation allowance  (32.2)  (21.3)
         
Effective income tax rate  (0.9) %  (0.6) %
  
The components of deferred tax assets and liabilities are as follows:

 
         
  As of
  As of
 
  September 30,
  September 30,
 
  2008  2009 
 
Deferred tax assets        
Capitalized start up and organization costs $46,257  $42,953 
Depreciation and amortization  81,265   135,039 
Accrued expenses  36,557   79,875 
Bad debt reserve  18,950   59,125 
Inventory obsolescence reserve  13,287   67,758 
Share based payments  189,624   400,891 
Net operating loss carryforwards  1,872,812   4,001,813 
         
Total deferred tax assets  2,258,752   4,787,454 
Less valuation allowance  (2,258,752)  (4,787,454)
         
Net deferred tax assets      
         
Deferred tax liabilities        
Tax deductible goodwill  (45,472)  (103,484)
         
Total deferred tax liabilities $(45,472) $(103,484)
         
Page 42


  As of  As of 
  September 30,  September 30, 
  2011  2010 
       
Deferred tax assets      
Capitalized start up and organization costs $37  $41 
Other intangibles amortization  186   176 
Accrued expenses  90   67 
Bad debt reserve  156   99 
Inventory obsolescence reserve  27   57 
Share based payments  1,205   824 
Sale of business unit  248   - 
Net operating loss carryforwards  6,560   5,723 
         
Total deferred tax assets  8,509   6,987 
Less valuation allowance  (8,509)  (6,987)
         
Net deferred tax assets  -   - 
         
Deferred tax liabilities        
Tax-deductible goodwill  (212)  (153)
         
Total deferred tax liabilities  (212)  (153)
         
Total net deferred tax liability $(212) $(153)
 
As of September 30, 2009,2011, we have approximately $10.6 million$16,637 of federalFederal and state net operating loss carryforwards respectively, available to offset future taxable income, if any. These carryforwards expire in 20232016 through 2029. 2031. As of September 30, 2011, we have $944 of foreign net operating loss carryforwards available to offset future taxable income, which relates to our operations in Ireland. These losses may be carried forward indefinitely. As of September 30, 2011, we have $113 of foreign net operating loss carryforwards available to offset future taxable income, which relates to our operations in Czech Republic. These losses may be carried forward 5 years. This carryforward expires in 2016.
No provision was made for U.S. or foreign taxes on undistributed earnings of foreign subsidiaries, as the foreign subsidiaries have cumulative losses. Any future cumulative earnings will be permanently reinvested but could become subject to additional tax if they are remitted as dividends, or are loaned to the Company or a U.S. affiliate, or if the Company should sell is stock in the foreign subsidiaries.
After considering all available evidence, we established a 100% valuation allowance for our net deferred tax asset since it is currently more likely than not that the benefits of such deferred tax assets will not be realized in future periods, deferredperiods. Deferred tax liabilities represent the difference between the financial reporting and income tax bases of the tax deductible goodwill, which is an asset with an indefinite life and therefore cannot be used to offset net deferred tax assets for purposes of establishing a valuation allowance.
No provision was made for U.S. or foreign taxes on undistributed earnings of foreign subsidiaries, as the foreign subsidiaries have cumulative losses. Any future cumulative earnings will be permanently reinvested but could become subject to additional tax if they are remitted as dividends, or are loaned to the Company or a U.S. affiliate, or if the Company should sell is stock in the foreign subsidiaries.

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We periodically evaluate whether or not we have undergone any ownership changes for income tax purposes that could trigger annual limitations on the use of our net operating losses under section 382 of the Internal Revenue Code and similar state income tax regulations. As of September 30, 20092011 we had not triggered any significant limitations on the use of our Net Operating Losses. We adopted ASC 740 “Income Taxes” effective June 6, 2007 (date of inception). ASC 740 requires companies to recognize the impact of a tax position in their financial statements if that position is more likely than not of not being sustained on audit based on the technical merits of the position. ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 provides guidance on derecognition,de-recognition, classification, interest, and penalties, accounting in interim periods, and disclosure. The company is subject to audits by federal and state income tax authorities for reporting periods ending in 2007, 2008 and 2009through 2011 and by foreign tax authorities for 2008 and 2009.2009 through 2011. For the years ended September 30, 20082011 and 2009,2010, we had no material unrecognized tax positions. Significant tax jurisdictions that we file income tax returns in include the Commonwealth of Kentucky and the stateState of Ohio. We record penalties and interest if it is more likely than not that a tax position will not be sustained on audit based on the technical merits of the position. We record penalties in selling, general and administrative expenses and interest as interest expense when such expenses are incurred.


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BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
NOTE 15 — EMPLOYEE BENEFIT PLANS
 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 16 —EMPLOYEE BENEFITS PLANS
Stock Options and Other Equity Compensation Plans
 
In March 2008, our Board of Directors adopted the 2008 Long Term Incentive Plan, subject to stockholder approval, referred to as the 2008 Incentive Plan. The 2008 Incentive Plan was approved by the stockholders on April 16, 2009. We reserved 1,000,000 shares of our common stock under the 2008 Incentive Plan and for other compensatory equity grants for the issuance of stock options, restricted stock awards, stock appreciation rights and performance awards, pursuant to which certain options will be granted. The terms and conditions of such awards are determined at the sole discretion of our board of directors or a committee designated by the Board to administer the plan. Previously unissued shares of our common stock are provided to a participant upon a participant’s exercise of vested options. Of the
On May 26, 2011, a majority of our stockholders approved a resolution to reserve and authorize an additional 1,000,000 shares of the Company’s Common Stock under the 2008 Long-Term Incentive Compensation Plan for Beacon’s non-executive employees, thereby bringing the total reserved and authorized 700,000 are available for future grants as of September 30, 2009.shares to 2,000,000.
 
A summary of stock options that we granted during the years endended September 30, 20082011 and 20092010, respectively, is as follows:

                                 
     Expected
           Risk-Free
  Value
  Share Based
 
Date
 Quantity
  Life
  Strike
     Dividend
  Interese
  per
  Compensation
 
Earned
 Issued  (Days)  Price  Volatility  Yield  Rate  Option  Expense 
 
3/26/2008  90,000   2,373  $1.20   66.34%  0%  2.55% $0.72  $64,980 
5/8/2008  30,900   2,373  $1.00   66.34%  0%  2.99% $0.64  $19,776 
10/7/2008  25,000   2,373  $1.24   66.34%  0%  2.45% $0.79  $19,750 
1/9/2009  285,000   2,373  $0.80   66.34%  0%  1.99% $0.50  $142,500 
5/8/2009  2,500,000   2,373  $1.19   66.34%  0%  2.09% $0.75  $1,875,000 
6/5/2009  50,000   2,373  $1.37   66.34%  0%  2.85% $0.87  $43,500 
7/9/2009  250,000   2,373  $1.61   66.34%  0%  2.33% $1.02  $254,400 
Shares granted vest 33% annually as of the anniversary of the grant through 2012 and carry a ten year contractual term.
       Expected           Risk-Free  Value    
Date Quantity  Life  Strike     Dividend  Interest  Per  Aggregate 
Earned Issued  (days)  Price  Volatility  Yield  Rate  Option  Fair Value 
                         
11/12/2009  100,000   3,650  $0.90   66.34%  0%  2.28% $0.30  $30 
1/22/2010  60,000   2,373  $1.07   65.40%  0%  2.23% $0.67  $40 
2/5/2010  200,000   2,373  $1.07   65.40%  0%  2.65% $0.67  $134 
3/8/2010  25,000   2,373  $1.38   65.40%  0%  2.36% $0.86  $22 
5/27/2010  450,000   2,628  $1.40   65.40%  0%  2.18% $0.91  $410 
6/1/2010  400,000   2,738  $1.36   65.40%  0%  2.09% $0.90  $360 
6/6/2010  100,000   2,008  $1.60   65.40%  0%  1.95% $0.75  $75 
                                 
10/4/2010  140,000   2,008  $0.63   78.35%  0%  1.17% $0.60  $84 
10/31/2010  585,115   2,738  $1.00   75.87%  0%  1.17% $0.62  $363 
3/3/2011  18,333   2,373  $0.51   70.76%  0%  2.30% $0.49  $9 
6/14/2011  100,000   2,008  $0.34   65.60%  0%  1.68% $0.31  $31 
7/25/2011  2,392   2,738  $1.00   75.87%  0%  1.17% $0.62  $1 
 
We calculate the fair value of stock options using the Black-Scholes option-pricing model. In determining the expected term, we separate groups of employees that have historically exhibited similar behavior with regard to option exercises and post-vesting cancellations. The option-pricing model requires the input of subjective assumptions, such as those included in the table above. The volatility rates are based on historical stock prices of similarly situated companies and expectations of the future volatility of our common stock. The expected life of options granted is based upon the average of the vesting and contractual term. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The total expense to be recorded in future periods will depend on several variables, including the number of share-based awards.
 
The weighted average grant date fair value of options we granted during the years ended September 30, 20082011 and 20092010 amounted to $0.70$.58 and $0.75$0.81 per share respectively.


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BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
Page 44

 
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)We recognized non-cash share-based employee compensation expenses as follows:
  For the  For the 
  year ended  year ended 
  September 30,  September 30, 
  2011  2010 
Non-Cash Share-Based Compensation Expense      
       
Restricted Stock $19  $221 
Stock Options  669   861 
         
Total Stock Compensation Expense $688  $1,082 
 
A summary of the status of our stock option plan and the changes during the years ended September 30, 20082011 and 2009,2010 respectively, is presented in the table below:

                     
           Weighted
    
           Average
    
     Weighted
     Remaining
    
  Number
  Average
  Intrinsic
  Contractual
    
  of Options  Exercise Price  Value  Term    
 
Options Outstanding at October 1, 2007    $             
Granted  120,900  $1.15             
Forfeited  (30,000) $1.20             
                     
Options Outstanding at September 30, 2008  90,900  $1.13             
Granted  3,110,000  $1.19             
Forfeited                   
                     
Options Outstanding at September 30, 2009  3,200,900  $1.19   0.10   9.56     
                     
Exercisable, September 30, 2009  105,300  $1.13   0.39   8.53     
                     
        Weighted    
        Average    
     Weighted  Remaining  Aggregate 
  Number  Average  Contractual  Intrinsic 
  Of Options  Exercise Price  Life  Value 
             
Options Outstanding at October 1, 2009  3,200,900  $1.19       
Granted  1,335,000  $1.31       
Forfeited  (817,367) $(1.03)      
Options Outstanding at October 1, 2010  3,718,533  $1.47       
Granted  845,840  $0.93       
Forfeited  (879,677) $(0.98)      
Options Outstanding at September 30, 2011  3,684,696  $1.42   8.21  $- 
                 
Options Exercisable, September 30, 2011  1,841,865  $1.23   7.92  $- 
 
As of September 30, 2009,2011, there was $2,332,357$923 in unamortized share-based compensation cost. This cost is expected to be recognized over the remaining weighted average vesting period of 2.634 years.

NOTE 16 — Segment Reporting
 
Beacon Solutions 401(k) Plan
We maintain a defined contribution plan, referred to as the Beacon Solutions 401(k) Plan, intended to meet the requirements of section 401(k) of the Internal Revenue Code of 1986. Under the Beacon Solutions 401(k) Plan, employees may contribute up to the maximum allowable under federal law, and the Company will match up to 100% of the first 1% contributed by the employee and up to 50% of the next 5% contributed by the employee, in cash subject to a vesting schedule based on years of service. All employees are eligible to enroll on date of hire. Employees are automatically enrolled at 3% employer contribution but can change their election at any time.
Total contributions under the Beacon Solutions 401(k) Plan, recorded as salaries and benefits expense, totaled approximately $71,156 and $17,367 for the year ended September 30, 2008 and 2009, respectively.
Segment Reporting
In accordance with ASC 280 “Segment Reporting,” our operating segments are those components of our business for which separate and discreetdiscrete financial information is available and is used by our chief operating decision makers, or decision-making group, in making decisions on how we allocate resources and assess performance.
 
Prior to our acquisition of Symbiotec (Note 4) we operated as a single segment. In accordance with ASC 280, the Company reports two operating segments, as a result of having complete the Symbiotec acquisition on July 29, 2009.North America and Europe. The Company’s chief decision-makers review financial information presented on a consolidated basis, accompanied by disaggregated information about revenuenet sales and operating profit each year by operating segment. This information is used for purposes of allocating resources and evaluating financial performance.
 
The accounting policies of the segments are the same as those described in the “Summary of Significant Accounting Policies.” Segment data includes segment revenue, segmentnet sales, operating profitability, and total assets by segment. Shared corporate operating expenses are reported in the U.S.North American segment.


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BEACON ENTERPRISE SOLUTIIONS GROUP, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
 
The Company is organized primarily on the basis of operating units which are segregated by geography in North America and Europe. For the United States (“U.S.”) and Europeyears ended September 30, 2011 our segment results, net of Discontinued Operations (see Note 4 for more details) are as follows effective July 29, 2009.follows:
 
             
  United States  Europe  Total 
 
Revenue $10,112,912  $957,584  $11,070,496 
(Loss) income from operations  (5,704,605)  494,748   (5,209,857)
Interest expense  (905,125)      (905,125)
Interest income  686   39   725 
Depreciation and amortization  (613,171)  (950)  (614,121)
Assets  10,874,908   1,938,840   12,813,748 
Goodwill  2,791,648   360,300   3,151,948 
Intangible assets  3,341,724   561,400   3,903,124 
Page 45

For the year ended September 30, 2010: North America  Europe  Total 
          
Net sales $10,273  $3,723  $13,996 
Loss from operations  (5,021)  (658)  (5,679)
Other expense  (244)  (15)  (259)
Change in fair value of warrants  (4,373)  -   (4,373)
Depreciation and amortization  (551)  (73)  (624)
Net loss from continuing operations  (9,687)  (687)  (10,374)
Net loss from discontinued operations  -   (8,181)  (8,181)
             
Assets  9,374   2,697   12,071 
Capital expenditures  223   119   342 
Capital expenditures of discontinued operations  -   183   183 
Goodwill  2,792   -   2,792 
Intangible Assets  3,011   -   3,011 
For the year ended September 30, 2011: North America  Europe  Total 
          
Net sales $11,142  $7,752  $18,894 
Loss from operations  (2,646)  (842)  (3,488)
Other expense  (1,678)  (119)  (1,797)
Depreciation and amortization  (311)  (39)  (350)
Net loss from continuing operations  (3,727)  (943)  (4,670)
Net income from discontinued operations  -   7,892   7,892 
             
Assets  8,762   3,160   11,922 
Capital expenditures  118   -   118 
Goodwill  2,792   -   2,792 
Intangible Assets  2,905   -   2,905 
 
In our European operations 74%96% of the revenue wasnet sales were generated by one customer for the yearyears ended September 30, 2009.2011 and 2010.
 
NOTE 17 —SUBSEQUENT EVENTS
Sale of Common Stock and Warrants
 
On September 28, 2009, we engagedOctober 6, 2011, the Company initiated a registered broker/dealerprivate placement (the “Placement”) of up to $4,500 of 12 month Senior Secured Notes (“Notes”). The Notes bear interest at 13% APR. The Placement will be made on a "best efforts" basis with a Minimum of $500 and a Maximum of $4,500 . Net proceeds will be used to repay and replace existing Senior Secured Bank Notes totaling approximately $3,000 and for additional working capital. The Placement will expire on the sooner of (a) March 1, 2012 if the Minimum has not been met or (b) the date that the Maximum has been raised. As of December 12, 2011, a total of $3,892 has been raised.
On October 12, 2011, the Company issued 20,500 shares in a severance agreement with a former employee.
On October 14, the Company has offered in a private placement (the “September 2009 Common Offering”) of up to 3,750,000107 units (the “Common Units”) for an aggregate"Series C-3 Units) at a purchase price of $3,000,000, with each Common$1,500 per Series C-3 Unit. A Series C-3 Unit comprisedconsists of (i) one (1) share of $1,500 Stated Value Series C-3 Convertible Preferred Stock with each share having 125% nonparticipating liquidation preference, bearing dividends at a rate of 6% per annum payable quarterly in cash or additional Preferred Stock at the Company’s option and convertible at the holder’s discretion into 2,000 shares of the Company’s Common Stock, and (ii) a five (5) year warrant to purchase on half share1,000 shares of its Common Stock (each, an "Investor Warrant") at a “Commonpurchase price of $0.45 per share (collectively the "Series C-3 Offering Warrant”"). In the event that the September 2009 Common Offering is oversubscribed, we may sell and issue up to an additional 1,250,000 Common Units.As of December 12, 2011, a total of $160 has been raised.
 
SubsequentManagement has evaluated all subsequent events or transactions occurring through December 12, 2011, the date of the financial statements are available to September 30, 2009. We sold 3,727,500 units for net proceeds of $2,421,180 (gross proceeds of $2,982,000 less offering costs of $560,820).be issued.
 
Contractual Dividends
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On October 1, 2009, additional contractual dividends related to our Series A,A-1Item 9. Changes in and B Preferred Stock became dueDisagreements with Accountants on Accounting and payable in the aggregate amount of $102,000.
Grant of Stock OptionsFinancial Disclosure
On November 12, 2009, our Board granted options to purchase 100,000 shares of our common stock at a strike price of $0.90 per share, the closing price on the day of grant.
The Company has evaluated subsequent events through December 29, 2009, the issuance date of this Form10-K.


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Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
None.
 
Item 9A.
Item 9A(T).Controls and Procedures

Evaluation of Disclosure Controls and Procedures
 
We maintainThe Company’s management is responsible for establishing and maintaining a system of disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) that areis designed to ensure that information required to be disclosed by the Company in our filingsthe reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms offorms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the SEC. This informationreports that it files or submits under the Exchange Act is accumulated and communicated to ourthe issuer’s management, including its principal executive officer or officers and principal financial officer or officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. As
In accordance with Exchange Act Rules 13a-15 and 15d-15, an evaluation was completed under the supervision and with the participation of September 30, 2009, our Chiefthe Company��s management, including the Company’s Principal Executive Officer who acts in the capacityand Principal Financial Officer, of principal executive officer and our Chief Accounting Officer who acts in the capacity of principal financial officer, have evaluated the effectiveness of ourthe design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this annual report. Based uponon that evaluation, the Company’s Chiefmanagement including the Principal Executive Officer and the Chief AccountingPrincipal Financial Officer, have concluded that the Company’s disclosure controls and procedures were not effective as of September 30, 2009, based on their evaluation of these controlsin providing reasonable assurance that information required to be disclosed in the Company’s reports filed or submitted under the Exchange Act was recorded, processed, summarized, and procedures required by paragraph (b) of Exchange ActRules 13a-15 or15d-15.reported within the time periods specified in the SEC’s rules and forms.
 
Management’s Report onEvaluation of Internal Control over Financial ReportingControls and Procedures
 
Our management is also responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of internal control over financial reporting.  As defined by the Securities and Exchange Commission,The Company’s internal control over financial reporting is a process designed by, or under the supervision of our principal executive and principal financial officers and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
 
Our internal control over financial reporting includes those policies and procedures that (1) pertainthat:
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect ourthe transactions and dispositions of our assets; (2) providethe assets of the Company;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of the consolidated financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of ourthe Company’s management and directors; and (3) provide
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.
 
BecauseAs of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In connection with the preparation of our annual consolidated financial statements, management has undertakenSeptember 30, 2011, we carried out an assessment of the effectiveness of our internal control over financial reporting as of September 30, 2009 based on criteria establishedthe framework in Internal Control — Integrated Framework“Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission, or the COSO Framework. Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of those controls.
Commission. Based on thisour evaluation, our management has concluded that our internal control over financial reporting was ineffectivenot effective as of September 30, 2009.2011.
 
Beacon is the successor to Suncrest Global Energy Corp.’s obligation to provide management’s report on internal controls in accordance with Section 404a of the Sarbanes-Oxley Act of 2002. We were a privately owned company with no operations when we merged with Suncrest Global Energy Corp. on December 20, 2007 in a transaction that was accounted for as a reverse merger and recapitalization. We simultaneously


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completed the acquisition of four privately owned businesses that comprised 100% of our operations, and are therefore included in management’s assessment of internal control over financial reporting.
Disclosure Controls and Internal Controls
Disclosure controls are designed with the objective of ensuring that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Accounting Officer, as appropriate, to allow timely decisions regarding required disclosure. Internal controls are procedures which are designed with the objective of providing reasonable assurance that our transactions are properly authorized, recorded and reported and our assets are safeguarded against unauthorized or improper use, to permit the preparation of our financial statements in conformity with generally accepted accounting principles, including all applicable SEC regulations.
As of September 30, 2008,2011 we had identified certain matters that constituted material weaknesses in our internal controls over financial reporting, specific material weaknesses includeprimarily the fact that we have limited segregation of duties andduties.  We have also previously reported that we have experienced difficulty in applying complex accounting principles as a material weakness.  We have taken steps to address this matter, including those related to stock based compensation, stockholders equity accounting, income taxeshiring internal staff with GAAP and business combinations.. SinceSEC reporting experience.  We believe that we have made significant progress towards remediating this weakness; however, we must still complete the process of design-specific control procedures and testing them for effectiveness before we can report that these weaknesses have been fully remediated.  During the year ended September 30, 2008,2011, we have taken certain steps in implemented an effortERP application to correct these material weaknesses which include undertaking a reviewfully integrate our operations and implement more complete segregation of our systems and engaging a consultant to assist in the upgrade of our accounting systems and implementation of additional controls. We have hired an additional accounting resource to assist in completion of our internal control matrix and further strengthen our controls. duties.
Although we believe that these steps have enabled us to improve our internal controls, additional time is still required to fully document our systems, implement control procedures and test their operating effectiveness before we can definitively conclude that we have remediated our more significant deficiencies.

 
We have migrated our accounting systems to Microsoft Dynamics GP including the modules that assist with Sarbanes-Oxley compliance. Additionally, we have implemented a control matrix and software to identify our critical internal accounting controls and measure compliance on a month to month basis to ensure our controls are effective. In addition, we have implemented further controls to aid and improve our inventory systems to ensure they are operating effectively and added controls over revenue recognition to ensure appropriate compliance with current accounting standards. Finally, we have hired an additional accounting resource, bringing the number of Certified Public Accountants on our staff to three, to assist in the day to day accounting functions. We believe that our internal control risks are partially mitigated by the fact that our Chief Executive Officer and Chief Accounting Officer review and approve substantially all of our major transactions and we have, when needed, hired outside experts to assist us with implementing complex accounting principles such as income tax accounting, stock holders equity and business combinations. We believe that our weaknesses in internal control over financial reporting and our disclosure controls relate primarily to the fact that we are an emerging business with limited personnel. Finally, we have implemented disclosure controls and an internal control framework including software assisted compliance controls as of the date of this Annual Report onForm 10-K.
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This annual report onForm 10-K does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’sManagement's report was not subject to attestation by ourthe Company's registered public accounting firm pursuant to temporary rules of the Securitiesexemption provided to issuers that are neither “large accelerated filers” nor “accelerated filers” under the Dodd-Frank Wall Street Reform and Exchange Commission that permits us to provide only management’s report in this annual report.Consumer Protection Act.
 
Changes in Internal Control Over Financial Reporting
 
Except as discussed above, there were no changes in our internal controlcontrols over financial reporting during our last fiscal quarter that materially affectedaffect or are reasonably likely to materially affect our internal control over financial reporting.
 
Item 9B.Other Information
Item 9B. Other Information
 
None.


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Item 10.Directors, Executive Officers, and Corporate Governance
 
Item 10.Directors, Executive Officers, and Corporate Governance

Directors and Officers of Beacon Enterprise Solutions Group, Inc.
 
Information concerning each of our directors and executive officers as of September 30, 2009,2011, is as follows:

Name AgeTitle
     
Name
Age
Title
Bruce Widener 4850 Director, Chairman, Chief Executive Officer
J. Sherman Henderson III 6669 Director
John D. Rhodes III 5557 Director
Richard C. Mills53President
Robert Mohr43Chief Accounting Officer, Secretary, Treasurer
Gerald Bowman 5153 Chief Operating Officer
Victor AgrusoSenior Vice President of Global Services52Chief Human Resource Officer
Michael Grendi45Chief Financial Officer, Treasurer and Secretary
Bruce Widener, Director, Chairman and Chief Executive Officer.  Mr. Widener possesses over 19 years of industry experience. Prior to developing and forming Beacon, Mr. Widener served as Chief Operating Officer of US Wireless Online, a provider of wireless internet access and related applications during 2006. From 2004 to 2006 Mr. Widener served as Senior Vice President of Corporate Development of UniDial Communications / Lightyear Network Solutions. Mr. Widener was an independent contractor with PTEK in 2002 and became Senior Vice President of Indirect Channel Sales in 2003 through 2004.
 
J. Sherman “Sherm” Henderson III, Director.  Mr. Henderson has more than 35 years of business experience, including company ownership, sales, marketing and management. He has served as president and CEO of Lightyear Network Solutions LLC sincefrom its inception in 2003.2003 until 2011. Lightyear Network Solutions LLC is the successor to Lightyear Communications, Inc. following its reorganization in April 2004 under Chapter 11 of the U.S. Bankruptcy Code. Mr. Henderson served as President and CEO of Lightyear Communications, Inc. since its formation in 1993. In 2004, he was voted chairman of COMPTEL, the leading communications trade association, made up of more than 300 member companies. Mr. Henderson is a graduate of Florida State University, with a B.A. degree in Business Administration. Mr. Henderson serves as a director of Lightyear Network Solutions, Inc.
 
John D. Rhodes, III, M.D., Director.  Dr. Rhodes practiced as a physician and has been Board Certified in Internal Medicine and Cardiovascular Diseases serving as Chief Fellow in Cardiology at the University of Louisville School of Medicine from 1984- 19851984-1985 and was elected a Fellow of the American College of Cardiology. Dr. Rhodes retired from his private practice in 2005. In his retirement, Dr. Rhodes has been an active investor in the telecom, restaurant and real estate industries. Dr. Rhodes was a founding investor in Texas Roadhouse and served as a member of its advisory board until its initial public offering in 2004.
 
Richard C. Mills, President.  Mr. Mills possesses over 26 years of industry experience. Prior to joining Beacon, he joined publicly traded Pomeroy Computer Resources, Inc. in 1993 and served asGerald Bowman, Chief Operating Officer and a member of the Board of Directors from 1995 until 1999. Mr. Mills previously served as CEO of Cyberswap, Inc. where he grew sales from $2 million per month to over $10 million per month in less than one year. He was a founder of Strategic Communications LLC.
Robert R. Mohr, CPA, Chief Accounting Officer.  Prior to joining Beacon, Mr. Mohr served as Director of Financial Reporting of Triple Crown Media, Inc. (NASDAQ: TCMI), a $130 million sports marketing, association management and newspaper concern, where he was in charge of SEC compliance, financial reporting and analysis from 2005 to 2007. From 2002 to 2005 Mr. Mohr was Chief Financial Officer of Culinary Standards Corp. Over the past 18 years Mr. Mohr has served in senior financial roles in both public and private companies in varying stages of development includingstart-ups, mergers and acquisitions, restructurings, leveraged buy-outs and turnarounds. Pursuant to financial roles, Mr. Mohr has also served as the leader of human resources, information technology, distribution and customer service.
Gerald Bowman, Senior Vice President of Global Services.  On November 18, 2009, the Company appointed Gerald Bowman to the officer position of Senior Vice President of Global Services.Services and subsequently promoted him to the position of Chief Operating Officer on April 20, 2010. Mr. Bowman brings over 20 years of experience in the IT industry serving in roles which included: Managing Director/Vice President of Enterprise Global Services for CommScope, a $4 billion manufacturer of connectivity solutions


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for communications networks; Chief Operating Officer for Superior Systems Technologies; Vice President of Engineering at Riser Management Systems, and Vice President and General Manager at VARtek.
 
Michael Grendi, Chief Financial Officer, Treasurer and Secretary. On February 17, 2010, the Company appointed Michael Grendi to the officer position of Chief Financial Officer, Treasurer and Secretary. Mr. Grendi has over 20 years of experience with publicly traded companies in the fields of finance and accounting. His prior roles have included: Chief Financial Officer of the Americas Division for Travelex, a UK based global technology company specializing in foreign exchange, Head of Domestic Corporate Finance Group for Yum! Brands, which operates and licenses such well known chains as Taco Bell, Pizza Hut and KFC; Head of North American M&A and Private Placement Group at ABN AMRO and Vice President of the Corporate Finance Group at Societe Generale. On October 14, 2011, Mr. Grendi resigned from the Company to pursue other opportunities.

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Victor Agruso, Chief Human Resource Officer. On April 15, 2010, the company appointed Victor Agruso to the officer position of Chief Human Resource Officer. Mr. Agruso brings over 20 years of corporate leadership and international experience in strategic planning, organization development, talent management and related information technologies in a variety of public and private sector industries, in both union and non-union environments, and with organizations ranging in size from emerging growth to Fortune 100 companies. Victor started his career providing retained executive search services to venture capital funded start-ups in Boston’s high-tech community. He then held increasingly responsible HR executive positions with Nike, Hallmark Cards, Humana and Maritz. Most recently, he has defined and implemented wide-ranging HR capabilities as an advisor to marquee companies seeking to accelerate profitable growth strategies, including Beacon since 2008.
Messrs. Widener and Henderson were elected as Directors based on their extensive industry experience while Mr. Rhodes has a unique blend of public company and telecom private investor experience to provide a fresh perspective to the Board. We have chosen to combine the CEO and Board Chair positions primarily due to the size of the organization and to fully utilize the vast industry experience of Mr. Widener. We seek to establish a diverse Board and have accomplished this through a Board comprised of varying levels of experience, both within and outside the industry, and a mix of public and private company exposure.

Audit Committee
 
Our board of directors has an Audit Committee, the purpose of which is to review and evaluate the results and scope of the audit and other services provided by our independent registered public accounting firm, as well as our accounting principles and system of internal accounting controls, and to review and approve any transactions between us and our directors, officers or significant shareholders. In fulfilling its responsibility, the Audit Committee pre-approves, subject to stockholder ratification, the selection of our independent registered public accounting firm. The Audit Committee also reviews our consolidated financial statements and the adequacy of our internal controls.controls particularly given our risk environment. The Audit Committee meets at least quarterly with our management and our independent registered public accounting firm to review and discuss the results of audits or reviews of our consolidated financial statements, the evaluation of our internal audit controls and risk mitigation, and the overall quality of our financial reporting and our critical accounting policies. The Audit Committee meets separately, at least quarterly, with the independent registered public accounting firm. In addition, the Audit Committee oversees our existing procedures for the receipt, retention and handling of complaints related to auditing, accounting and internal control issues, including the confidential, anonymous submission by employees of concerns on questionable accounting and auditing matters. The board of directors has determined the Audit Committee to be comprised of John D. Rhodes III and J. Sherman Henderson III. The Audit Committee does not include a financial expert. As of the date of filing, J. Sherman Henderson III is independent in accordance with Nasdaq Marketplace Rules and regulations established by the Securities and Exchange Commission, or SEC Regulations, governing audit committee member independence.
 
Section 16(a) Beneficial Ownership Reporting Compliance
 
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires the directors, executive officers, and persons who own more than 10 percent of a registered class of a company’s equity securities to file with the SEC initial reports of ownership (Form 3) and reports of changes in ownership (Forms 4 and 505) of such class of equity securities. Such officers, directors, and greater than 10 percent shareholders of a company are required by SEC Regulations to furnish us with copies of all such Section 16(a) reports that they file.
 
To our knowledge, with the exception of the following, based solely on our review of the copies of such reports furnished to us during the year ended September 30, 2009,2011, all Section 16(a) filing requirements applicable to our executive officers, directors and greater than 10 percent beneficial owners were met. Due to miscommunication, although all disclosures were appropriately reflected within Current Reports onForm 8-K and Quarterly Reports onForm 10-Q, submission of several Forms 4 for Robert H. Clarkson, J. Sherman Henderson III and John D. Rhodes III, were filed on December 30, 2008. Disclosure controls have been implemented to mitigate this error in miscommunication.
 
Code of Ethics
 
Pursuant to Section 406 of the Sarbanes-Oxley Act of 2002, we have adopted a Code of Ethics for all employees including the Chief Executive Officer and Principal Financial Officer. The Code of Ethics is posted on our website, www.askbeacon.com (under the caption Investor Relations -> Relations/Management). We intend to satisfy the disclosure requirement regarding any amendment to, or waiver of, a provision of the Code of Ethics for the Chief Executive Officer and Principal Financial Officer by posting such information on our website. We undertake to provide to any person a copy of this Code of Ethics upon request to our Corporate Secretary at our principal executive’sexecutive offices.


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Item 11.Executive Compensation
 
Item 11. Executive Compensation

COMPENSATION DISCUSSION AND ANALYSIS
 
In this section, we will give an overview and analysis of our compensation program and policies, the material compensation decisions we have made under those programs and policies, and the material factors that we considered in making those decisions. Later in this Part III under the heading “Additional Information Regarding Executive Compensation,” you will find tables containing specific information about the compensation earned by, and equity awards granted to, the following individuals, whom we refer to as our “named executive officers”:
 
 • ·Bruce Widener, Chairman, Chief Executive Officer and Director
 • ·Richard C. Mills, PresidentGerald Bowman, Chief Operating Officer
 • ·Robert Mohr,Michael Grendi, Former Chief Financial Officer, Treasurer and Secretary
·Victor Agruso, Chief Human Resource Officer
 
The discussion below is intended to help you understand the detailed information provided in those tables and put that information into context within our overall compensation program.

Overview of Compensation Philosophy
 
The goal of our compensation program for our named executive officers is the same as our goal for operating Beacon — to create long-term value for our stockholders. Toward this goal, we have designed and implemented our compensation programs for our named executive officers to reward them for sustained financial and operating performance and leadership excellence, to align their interests with those of our stockholders and to encourage them to remain with us for long and productive careers. Most of our compensation elements simultaneously fulfill one or more of our performance, alignment and retention objectives, as described below. These elements consist of salary, annual bonus and share-based incentive compensation. In deciding on the type and amount of compensation for each named executive, we focus on both current pay and the opportunity for future compensation. We combine the compensation elements for each named executive in a manner we believe optimizes the executive’s contribution to us.

Overview of Compensation Objectives
 
Performance.
 
The amount of compensation for each named executive officer reflects his superior management experience, continued high performance and exceptional career of service to us. Key elements of compensation that depend upon the named executive officer’s performance include:
 
• Base salary, which provides fixed compensation based on competitive market practice and in accordance with the terms of the executive’s employment agreement.
• Bonus, which is discretionary and payable in cash or equity incentives based on an assessment of each executives’ performance against pre-determined quantitative and qualitative measures within the context of our overall performance.
• Equity incentive compensation in the form of stock optionsand/or restricted stock subject to vesting schedules that require continued service with us.
• Our matching contributions to our named executive officers who participate in our 401(k) plan.
• Other benefits.
Base salary, which provides fixed compensation based on competitive market practice and in accordance with the terms of the executive’s employment agreement.
Bonus, which is discretionary and payable in cash or equity incentives based on an assessment of each executives’ performance against pre-determined quantitative and qualitative measures within the context of our overall performance.
Equity incentive compensation in the form of stock options and/or restricted stock subject to vesting schedules that require continued service with us.
Other benefits.
 
Base salary and bonus are designed to reward annual achievements and be commensurate with the executive’s scope of responsibilities, demonstrated leadership abilities, and management experience and effectiveness. Share-based compensation is focused on motivating and challenging the executive to achieve superior, longer-term, sustained results.


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Alignment.
 
We seek to align the interests of our named executive officers with those of our stockholders, and provide them with an opportunity to acquire a proprietary interest in us, by evaluating executive performance on the basis of key financial measurements, which we believe closely correlate to long-term stockholder value, including revenue,net sales, operating profit and cash flow from operating activities. Key elements of compensation that align the interests of the named executives with stockholders include equity incentive compensation, which links a significant portion of compensation to stockholder value because the total value of those awards corresponds to stock price appreciation that correlates strongly with meeting company performance goals.

Retention.
 
Due to extensive management experience, our senior executives are on occasion presented with other professional opportunities, including ones at potentially higher compensation levels. We attempt to retain our executives by using continued service as a determinant of total pay opportunity. Key elements of compensation that require continued service to receive any, or maximum, payout include the vesting terms in our equity-based compensation programs, including stock option and restricted stock awards.

 
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Implementing Our Objectives

Determining Appropriate Pay Levels.
 
We compete with many other companies for experienced and talented executives. As such, market information regarding pay practices at peer companies (as provided in the public reports filed by such companies with the SEC) is reviewed and considered in assessing the reasonableness of compensation and ensuring that compensation levels remain competitive in the marketplace.
 
We rely upon our subjective judgment in making compensation decisions, after reviewing our performance and carefully evaluating an executive’s performance during the year against established goals, leadership qualities, operational performance, business responsibilities, and such individual’s career with us, current compensation arrangements and long-term potential to enhance stockholder value. Specific factors affecting compensation decisions for our named executive officers include:

• Key financial measurements such as revenue, operating profit and cash flow from operating activities.
• Strategic objectives such as acquisitions, dispositions or joint ventures.
• Promoting commercial excellence by launching new or continuously improving services, and attracting and retaining customers.
• Achieving specific operational goals for us including improved productivity, simplification and risk management.
• Achieving excellence in their organizational structure and among their employees.
Key financial measurements such as net sales, operating profit and cash flow from operating activities.

Strategic objectives such as acquisitions, dispositions or joint ventures.

Promoting commercial excellence by launching new or continuously improving services, and attracting and retaining customers.

Achieving specific operational goals for us including improved productivity, simplification and risk management.

Achieving excellence in their organizational structure and among their employees.
 
We generally do not adhere to rigid formulas or necessarily react to short-term changes in business performance in determining the amount and mix of compensation elements. Although we consider competitive market compensation paid by other companies, we do not attempt to maintain a certain target percentile within a peer group or otherwise rely on those data to determine executive compensation. We incorporate flexibility into our compensation programs and in the assessment process to respond to and adjust for the evolving business environment.

Allocation of CompensationCompensation.
 
There is no pre-established policy or target for the allocation of compensation, other than the employment agreements as previously referenced. We strive to achieve an appropriate mix between equity incentive awards and cash payments in order to meet our objectives. Any apportionment goal is not applied rigidly and does not control our compensation decisions; we use it as another tool to assess an executive’s total pay opportunities and whether we have provided the appropriate incentives to accomplish our compensation objectives. Our mix


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of compensation elements is designed to reward recent results and motivate long-term performance through a combination of cash and equity incentive awards. We believe the most important indicator of whether our compensation objectives are being met is our ability to motivate our named executive officers to deliver superior performance and retain them on a cost-effective basis.

Timing of CompensationCompensation.
 
As discussed elsewhere, compensation (including salary base adjustments, stock options and restrictive stock awards, incentive plan eligibility, incentive plan goal specifications and incentive plan payments, for our named executive officers) are typically reviewed annually.

Minimum Stock Ownership RequirementsRequirements.
 
We do not have any minimum stock ownership guidelines. All of our named executive officers, however, currently beneficially own either one, or a combination, of shares of common stock, shares of our restricted stock, or stock options to purchase our common stock.

Role of Compensation Committee.
 
The Compensation Committee of our Board has primary responsibility for assisting the Board in developing and evaluating potential candidates for executive positions, including the CEO, and for overseeing the development of executive succession plans. As part of this responsibility, the Compensation Committee oversees the design, development and implementation of the compensation program for the CEO and the other named executive officers. The Compensation Committee evaluates the performance of the CEO and determines CEO compensation in light of the goals and objectives of the compensation program.

 
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Role of Executive Officers in Determining CompensationCompensation.
 
The CEO and the Compensation Committee together assess the performance of the other named executives and determine their compensation, based on initial recommendations from the CEO. Our CEO assists the Compensation Committee in reaching compensation decisions with respect to the named executives other than the CEO. The other named executives do not play a role in their own compensation determination, other than discussing individual performance objectives with the CEO. Our CEO is not involved with any aspect of determining his own compensation. The Compensation Committee makes all compensation decisions for our CEO. Although our CEO assists the Compensation Committee in reaching compensation decisions with respect to the other named executive officers, the Compensation Committee has final discretionary authority to approve compensation of all named executive officers, including our CEO.

Role of Compensation Consultant.
 
The Compensation Committee did not use the services ofengaged a compensation consultant to establish the compensation program for named executive officers for fiscal year 2008 but did engage a consultant to assist in fiscal year 2009 and 2010 compensation consideration. In the future, the Compensation Committee may engage or seekwill rely on input from the advice of compensation consultants to provide insight on compensation trends along with general views on specific compensation programs.Chief Human Resource Officer, who was hired during the fiscal year ended September 30, 2010.

Equity Grant Practices.
 
The exercise price of each stock option awarded to our named executive officers, as non-qualified stock options or under our long-term incentive plan, is equal to the closing price of our stock on the date of grant. The Compensation Committee has no pre-set schedule as to when, or if, such grants shall occur.


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Annual Compensation Objectives
 
Base Salary.
 
Base salaries for our named executive officers depend on the scope of their responsibilities, their performance, and the period over which they have performed those responsibilities. Decisions regarding salary increases take into account the executive’s current salary and the amounts paid to the executive’s peers within and outside Beacon. Base salaries are reviewed periodically, but are not automatically increased if the Compensation Committee believes that other elements of compensation are more appropriate in light of our stated objectives. This strategy is consistent with our primary intent of offering compensation that is contingent on the achievement of performance objectives.
 
Beacon entered into employment agreements with threefive of its key executives with no specific expiration dates that provide for aggregate annual compensation of $540,000$920 and up to $1,020,000$1,605 of severance payments for termination without cause. We discuss the terms and conditions of these agreements elsewhere in this Part III under “Additional Information Regarding Executive Compensation — Employment Agreements.”

Bonus.
 
Each September, the CEO reviews with the Compensation Committee our estimated full-year financial results against the financial, strategic and operational goals established for the year, and our financial performance in prior periods. Based on that review, the Compensation Committee determines on a preliminary basis whether each named executive officer has achieved the objectives upon which the bonus is evaluated. After reviewing the final full-year results, the Compensation Committee approves total bonuses to be awarded. Bonuses will be approved subject to the results of our year-end financial audit and paid shortly thereafter.
 
The Compensation Committee, with input from the CEO with respect to the other named executive officers, uses discretion in determining the current year’s bonus for each named executive officer. It evaluates our overall performance, the performance of the business unit or function that the named executive officer leads and conducts an assessment of each executive officer’s performance against expectations, which is reviewed at the end of the year. The bonuses also reflect (and are proportionate to) the consistently increasing and sustained annual financial results of Beacon. We believe that the annual bonus rewards the executives who drive these results and incentivizes them to sustain this performance.
 
Whether or not a bonus is in fact earned by an executive is based on both an objective analysis (predetermined operating profit targets based on budgeted operating revenues)net sales) and a subjective analysis (based on the individual’s contribution to us or the business unit), The financial objective for each named executive officer for fiscal year 20082011 and 20092010 are discussed below. In making the subjective determinations, the Compensation Committee does not base its determination on any single performance factor nor does it assign relative weights to factors, but considers a mix of factors, including evaluations of superiors, and evaluates an individual’s performance against such mix in absolute terms in relation to our other executives.

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The salaries paid and the annual bonuses awarded to the named executive officers for fiscal years 20082011 and 20092010 are discussed below and disclosed in the Summary Compensation Table.

Equity Awards
 
Our equity incentive compensation program is designed to recognize scope of responsibilities, reward demonstrated performance and leadership, motivate future superior performance, align the interests of the executive with our stockholders and retain the executives through the vesting period established for the awards. All of our officers and key employees (including our named executive officers) and our directors are eligible for grants of stock options and other stock-based awards (including restricted stock). We consider the grant size and the appropriate combination of stock options, common stock and restricted stock when making award decisions. Equity incentive compensation granted for fiscal 20082011 and 20092010 is discussed below and disclosed in the Summary Compensation Table. Existing ownership levels are not a factor in award determination, as we do not want to discourage executives from holding our stock.


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We have expensed stock option grants. When determining the appropriate combination of stock options and restricted stock, our goal is to weigh the cost of these grants with their potential benefits as a compensation tool. We believe that providing combined grants of stock options and restricted stock effectively balances our objective of focusing the named executive officers on delivering long-term value to our stockholders, with our objective of providing value to the executives with the equity awards. Stock options only have value to the extent the price of our stock on the date of exercise exceeds the exercise price on the grant date, and thus are an effective compensation element only if the stock price grows over the term of the award. In this sense, stock options are a motivational tool. Unlike stock options, restricted stock offers executives the opportunity to receive shares of our stock on the date the restricted stock vests. In this regard, restricted stock serves both to reward and retain executives, as the value of the restricted stock is linked to the price of our stock on the date the restricted stock vests.

401(k) Plan
 
We have a 401(k) Savings Plan qualified under Section 401(k) of the Internal Revenue Code, as amended, which is available to all our employees on date of hire. Employees may contribute their salary, up to the statutory level, to the plan through voluntary salary deferred payments. We matched 100% of the first 1% and 50% of the next 5% of each employee’s contribution up to 6% of the employee’s salary until November 9, 2008 at which time the Board of Directors voted to revise the matching contribution to a performance based, profit sharing match.

Eligible named executive officers participated in the 401(k) Plan in fiscal year 2008 and 2009 and received matching contribution from us under the 401(k) Plan for the year ended September 30, 2008 and 2009 as follows:
         
  Matching
  Matching
 
  Contributions
  Contributions
 
  for the Twelve
  for the Twelve
 
Named
 Months Ended
  Months Ended
 
Executive
 September 30,
  September 30,
 
Officer
 2008  2009 
 
Bruce Widener $4,274  $773 
Richard C. Mills $3,433  $577 
Kenneth Kerr $3,433  $ 
Robert Mohr $3,607  $606 
Other Compensation.
 
We provide our named executive officers with medical, dental and vision insurance coverage that areis consistent with those provided to our other employees. In addition, we provide certain perquisites, which are described in the Summary Compensation Table, to our named executive officers, as a component of their total compensation.
 
Compensation for Named Executive Officers in Fiscal 20082011 and 2009 Strength of company performance.2010.   The specific compensation decisions made for each of the named executive officers for the years ended September 30, 20082011 and 20092010 reflect our performance against key financial and operational measurements. A more detailed analysis of our financial and operational performance is contained in the Management’s Discussion & Analysis contained elsewhere in this Annual Report onForm 10-K. Revenue Net sales and earnings before interest, taxes, depreciation and amortization (EBITDA) for the years ended September 30, 20082011 and 20092010 fell below expectations. However,expectations, however we achieved several of our key priorities in combining and integrating the four acquisitions and transitioning to a publicly traded company during Fiscal 2008 and obtaining significant increases in business as we launched our Infrastructure Management Servicessales and launching internationalservices offerings while streamlining the operations to put the company in Fiscal 2009.position the company to achieve profitability.


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CEO Compensation.  In determining Mr. Widener’s compensation for the years ended September 30, 20082011 and 2009,2010, the Compensation Committee considered his performance against financial, strategic and operational goals for this year as follows:

Financial Objectives
 
Financial Objectives
RevenueNet sales and EBITDA for fell short of our projections for the years ended September 30, 20082011 and 2009.2010.
 
Strategic and Operational Goals
 
Company CapitalizationMr. Widener continued to demonstrate the ability to raise the capital needed to further the company’s operations.
   
Execute Phase I AcquisitionsMr. Widener successfully executed the Phase I Acquisition plan and reverse merger to create Beacon as a public company.
Integrate Phase I AcquisitionsWe successfully integrated the four companies into a single business providing the comprehensive services contemplated under the original plan.
Retain Excellent Team Mr. Widener continued to attract and retain a strong management team with expertise at all levels of the organization.

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Launched ForeignStreamline Operations Mr. Widener successfully launched foreign operations throughThe Company significantly reduced the acquisition of Symbiotec Solution AG.administrative cost structure while streamlining for scalability.
 
Mr. Widener’s salary for the years ended September 30, 20082011 and 2009 were $190,378 and $235,342 which included retro pay for the successful conclusion of the Phase I Acquisitions and unpaid retro-pay of $32,308 related to an increase received during the year,2010 was $240, respectively.
 
Other Named Executive Officers’ Compensation.  In determining the compensation of Messrs. Mills and MohrBowman, Grendi, Agruso, for the years ended September 30, 20082011 and 2009,2010, the Compensation Committee compared their achievements against the performance objectives established for each of them by the CEO at the beginning of the year and discussed with each individual at the beginning of the year by the CEO.year. The Compensation Committee evaluated our overall performance and the contributions of each of the other named executive officers to that performance, as well as the performance of the departments that each individual leads when relevant. Each of the other named executive officers has an employment agreement which defines their base salaries. Mr. Mohr earned a bonus during the year ended September 30, 2008 for timely delivery of reports to the Securities and Exchange Commission. Based on our shortfall from our planned revenuenet sales and EBITDA, the base salaries remained the same as in Fiscal 20082010 for Fiscal 20092011 but were evaluated based on achieving specific goals for the fiscal year 2009.2011.

COMPENSATION COMMITTEE REPORT
 
The Compensation Committee of the Board of Directors has reviewed and discussed with management the Compensation Discussion and Analysis required by Item 402(b) ofRegulation S-K. Based on the review and discussion referred to above, the Compensation Committee recommended to the Board that the Compensation Discussion and Analysis be included in this Annual Report onForm 10-K.

The Compensation Committee
 
J. Sherman Henderson III
John D. Rhodes III


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ADDITIONAL INFORMATION REGARDING EXECUTIVE COMPENSATION
 
The following table sets forth a summary of the compensation of our named executive officers for the year ended September 30, 2009.2010.
Summary Compensation Table
                   Change in       
                   Pension       
                   Value and       
                   Nonquali-       
                Non-  fied       
                Equity  Deferred  All    
Name               Incentive  Compen-  Other    
and         Stock  Option  Plan  sation  Compen-    
Principal      Bonus ($)  Awards ($)  Awards ($)  Compensation  Earnings  sation  Total 
Position Year Salary ($)  (1)     (2)  ($)  ($)  ($)  ($) 
(A) (B) (C)  (D)  (E)  (F)  (G)  (H)  (I)  (J) 
                           
Bruce Widener 2011  261(3)  -   -   -   -      16(4)  277 
Chairman, Chief Executive 2010  281(5)  -   -   -   -       12(6)  293 
                                   
Gerald Bowman 2011  207(7)  -   -   -   -       43(8)  250 
Chief Operating Officer and President
 2010  160(9)  -   -   227(10)  -       12(11)  399 
                                   
Michael Grendi 2011  187(12)  -   -   -   -       16(13)  203 
Chief Financial Officer Treasurer and Secretary
 2010  105(14)  -   -   315(15)  -       5(16)  425 
                                   
Victor Agruso 2011  121(17)  -   -   -   -       -   121 
Chief Human Resource Officer 2010  31(18)  -   -   105(19)  -       6(20)  142 
                                   
Mark Gervasoni 2011  108(21)  -   -   -   -       -   108 
Chief Marketing and Sales Officer 2010  43(22)  -   -   358(23)  -       -   401 
                                   
Robert Mohr 2011  20(24)  -   -   -   -       -   20 
Former Chief Accounting Officer, Treasurer and Secretary
 2010  159(25)  -   -   -   -       12(26)  171 
                                   
Richard C. Mills 2011  -   -   -   -   -       -   - 
Former President 2010  105(27)  40(28)  -   -   -       6(29)  151 
 
                                     
              Change
    
              in
    
              Pension
    
              Value
    
              and
    
              Nonquali-
    
            Non-
 fied
    
            Equity
 Deferred
 All
  
            Incentive
 Compen-
 Other
  
        Stock
 Option
 Plan
 sation
 Compen-
  
      Bonus ($)
 Awards ($)
 Awards ($)
 Compen-
 Earnings
 sation
 Total
Name and Principal
 Year
 Salary ($)
 (1)
 (2)
 (3)
 sation ($)
 ($)
 ($)
 ($)
Position (A) (B) (C) (D) (E) (F) (G) (H) (I) (J)
 
Bruce Widener  2009   203,035(4)          104,795(5)          12,893(6)  215,928 
Chairman, Chief Executive  2008   190,378(7)                      11,912(8)  307,085 
Richard C. Mills  2009   156,086(9)      90,202(10)  104,795(11)          12,696(12)  363,779 
President  2008   110,494(13)      266,694(14)              10,578(15)  387,766 
Kenneth Kerr  2009   150,000(16)                      112,120(17)  262,119 
Chief Operating Officer  2008   109,615(18)                      10,306(19)  119,921 
Robert Mohr  2009   150,000(20)          63,699(21)          4,382(22)  218,081 
Chief Accounting Officer,  2008   126,923(23)  5,000(24)      7,358(25)          2,743(26)  142,024 
Treasurer and Secretary                                    
Gerald Bowman  2009   5,769(27)                          5,769 
Senior Vice President of Global Services                                    

  
(1)1.For purposes of this Summary Compensation Table, the cash incentive awards to the named executive officers, which are discussed in further detail under the heading “Compensation Discussion and Analysis — Compensation for Named Executive Officers for Fiscal Year 2009,”2011 have been characterized as “Non-Equity Incentive Plan Compensation” under column (G)(D).

 
(2)The amounts in Column (E) represent the proportionate amount of the total fair value of restricted stock recognized by us as an expense in fiscal years 2008 and 2009 for financial accounting purposes, disregarding for this purpose the estimate of forfeitures related to service-based vesting conditions. The fair values of these awards and the amounts expensed in fiscal year 2009 were determined in accordance with ASC 718. The awards for which expense is shown in column (E) include awards described in the Grants of Plan-Based Awards table included elsewhere in this section. The assumptions used in determining the grant date fair values of these awards are set forth in Note 16 to our consolidated financial statements included elsewhere in this annual report onForm 10-K.
(3)2.The amounts in column (F) represent the proportionate amount of the total fair value of stock options recognized by us as an expense in fiscal years 2008 and 2009 for financial accounting purposes, disregarding for this purposeof the estimate of forfeitures related to service-based vesting conditions. The fair value of these awards andgrant date, as determined using the amounts expensed in fiscal years 2008 and 2009 were determinedBlack-Scholes option pricing model in accordance with ASC 718. The awards for which expense is shown in column (F) include the awards described in the Grants of Plan-Based Awards table included elsewhere in this section. The assumptions used in determining the grant date fair values of these awards are set forth in Note 1615 to our consolidated financial statements included elsewhere in this annual report onForm 10-K.

 
(4)3.Amount includes $240,000$240 annual salary under the terms of Mr. Widener’s employment agreement and amounts agreed upon with FoundersBoard of Directors (“Board”) prior to execution of the employment agreement. Additionally Mr. Widener receives an annual automobile allowance of $12.

4.Amount paid for medical, dental and vision insurance.

5.Amount includes $240 annual salary under the terms of Mr. Widener’s employment agreement and amounts agreed upon with the Board prior to execution of the employment agreement.

 6.Amount paid for medical, dental and vision insurance.

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(5)7.Amount includes $200 annual salary under the terms of Mr. Bowman’s employment agreement and amounts agreed upon with the Board prior to execution of the employment agreement.

8.Amount paid for medical, dental and vision insurance and relocation.

9.Amount includes $150 annual salary under the terms of Mr. Bowman’s employment agreement and amounts agreed upon with the Board prior to execution of the employment agreement for partial year since execution of the agreement.

10.Amount relates to unrestricted stock grant which is discussed in further detail in Note 1615 to our consolidated financialsfinancial statements included elsewhere in this annual report onForm 10-K. See ‘Grants of Awards’ table for aggregate grant date fair value of options awarded.

 
(6)11.Amount paid for 401k match, medical, dental and vision insurance.insurance and relocation.


84


(7)12.Amount includes $180,000$180 annual salary under the terms of Mr. Widener’sGrendi’s employment agreement and amounts agreed upon with Foundersthe Board prior to execution of the employment agreement for partial year since execution of the agreement. Mr. Grendi resigned from the Company on October 14, 2011 to pursue other opportunities.

 
(8)13.Amount paid for medical, dental and vision insurance.

 
(9)14.Amount includes $150,000$180 annual salary under the terms of Mr. Grendi’s employment agreement and amounts agreed upon with the Board prior to execution of the employment agreement for partial year since execution of the agreement.

15.Amount relates to unrestricted stock grant which is discussed in further detail in Note 15 to our consolidated financial statements included elsewhere in this annual report on Form 10-K. See ‘Grants of Awards’ table for aggregate grant date fair value of options awarded.

16.Amount paid for medical, dental and vision insurance.

17.Amount includes $90 annual salary under the terms of Mr. Agruso’s employment agreement and amounts agreed upon with the Board related to working as an independent contractor

18.Amount includes $90 annual salary under the terms of Mr. Agruso’s employment agreement and amounts agreed upon with the Board prior to execution of the employment agreement for partial year since execution of the agreement related to working as an independent contractor.

19.Amount relates to unrestricted stock grant which is discussed in further detail in Note 15 to our consolidated financial statements included elsewhere in this annual report on Form 10-K. See ‘Grants of Awards’ table for aggregate grant date fair value of options awarded.

20.Amount paid for medical, dental and vision insurance.

21.Amount includes $150 annual salary under the terms of Mr. Gervasoni’s employment agreement and amounts agreed upon with the Board prior to execution of the employment agreement for partial year since execution of the agreement.

22.Amount includes $150 annual salary under the terms of Mr. Gervasoni’s employment agreement and amounts agreed upon with the Board prior to execution of the employment agreement for partial year since execution of the agreement.

23.Amount relates to unrestricted stock grant which is discussed in further detail in Note 15 to our consolidated financial statements included elsewhere in this annual report on Form 10-K. See ‘Grants of Awards’ table for aggregate grant date fair value of options awarded.
24.Amount includes $150 annual salary under the terms of Mr. Mills’ employment agreement and amounts agreed upon with FoundersBoard prior to execution of the employment agreement.agreement for partial year.

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(10)Amount relates to restricted stock grant which is discussed in further detail in Note 16 to our consolidated financial statements included elsewhere in this annual report onForm 10-K.
(11)Amount relates to unrestricted stock grant which is discussed in further detail in Note 16 to our consolidated financials statements included elsewhere in this annual report onForm 10-K.
(12)Amount paid for 401k, match, medical, dental and vision insurance.
(13)25.Amount includes $150,000$150 annual salary under the terms of Mr. Mills’ employment agreement for partial year sinceand amounts agreed upon with Board prior to execution of the employment agreement..agreement for partial year.
 
(14)Amount relates to restricted stock grant which is discussed in further detail in Note 16 to our consolidated financial statements included elsewhere in this annual report onForm 10-K.
(15)26.Amount paid for medical, dental and vision insurance.
 
(16)27.Amount includes $150,000$150 annual salary under the terms of Mr. Kerr’s employment agreement and amounts agreed upon with Founders prior to execution of the employment agreement.
(17)Amount paid for medical, dental and vision insurance.
(18)Amount includes $150,000 annual salary under the terms of Mr. Kerr’sMill’s employment agreement for partial year since execution of the employment agreement.
 
(19)Amount paid for medical, dental and vision insurance .
(20)Amount includes $150,000 annual salary under the terms of Mr. Mohr’s employment agreement and amounts agreed upon with Founders prior to execution of the employment agreement.
(21)Amount relates to unrestricted stock grant which is discussed in further detail in Note 16 to our consolidated financials statements included elsewhere in this annual report onForm 10-K.
(22)Amount paid for 401k match, medical, dental and vision insurance
(23)Amount includes $150,000 annual salary under the terms of Mr. Mohr’s employment agreement for partial year since execution of the employment agreement.
(24)28.Amount represents a bonus for timely filing of documents withpaid during the Securities Exchange Commission.year.
 
(25)Amount represents non-cash compensation expense recognized for financial accounting purposes determined in accordance with ASC 718.
(26)29.Amount paid for medical, dental and vision insurance.
Amount includes $150,000 annual salary under the terms of Mr. Bowman’s employment agreement for partial year since execution of the employment agreement
 
Employment Agreements
 
Beacon has entered into employment agreement with each of Bruce Widener, Richard C. MillsGerald Bowman, Michael Grendi, Victor Agruso and Robert Mohr,Mark Gervasoni, each effective as of May 8, 2009.throughout the year ended September 30, 2011. Each executive officer has agreed not to compete with us within the United States during the term of his employment and for a period of one year following his termination of employment, nor to solicit our employees for a period of two years following the termination of his employment.
 
Bruce Widener, Chairman of the Board and Chief Executive Officer, was granted a base salary of $240,000$240 per year, retroactive to January 1, 2009, with a bonus potential of an additional $240,000$240 based on achievement of an increase in EBITDA of $5.0 million for the fiscal year ended September 30, 2009 as compared to the fiscal year ended September 30, 2008, measured as 24% of Fiscal 2009 EBITDA.company and personal goals. In addition, the agreement includes a provision for three years severance pay for termination without cause, upon a change in control or if the executive resigns for good reason, including 50% of all unearned bonus opportunity for the


85


remaining term of the agreement, immediate vesting of all unearned options, outplacement services and office expenses of up to $2,000$2 per month during the severance period. Finally, the agreement provides a grant of options to purchase up to 1.0 million shares of our common stock at an exercise price of $1.19 per share which vest in equal amounts over a three year period on the anniversary of the grant. The term of the agreement is 36 months and it provides for a minimum annual 5% cost of living adjustment.
 
Richard Mills, President,Gerald Bowman, Chief Operating Officer, was granted a base salary of $150,000$200 per year with a bonus potential of $80,000 based onan additional amount targeted at 100% of base salary upon achievement of an increase in EBITDA of $5.0 million for the fiscal year ended September 30, 2009 as compared to the fiscal year ended September 30, 2008, measured as 8% of Fiscal 2009 EBITDA.company and personal goals. In addition, the agreement provides for commissions of approximately $120,000 based on the achievement of specific revenue targets and an expense allowance of $12,000 for entertaining clients and corporate functions. Further, the agreement includes a severance provision for 12 months severanceof the lesser of 24 months’ pay or $245 for termination without cause or if the executive resigns for good reason. Finally,Upon a change in control the agreement providesexecutive will receive a grant of optionspayment equal to purchase up to 1.0 million shares of our common stock at an exercise price of $1.19 per share which vest in equal amounts over a three year period on the anniversary of the grant.12 months then current salary.
 
Robert Mohr,Michael Grendi, Chief AccountingFinancial Officer, Secretary and Treasurer, was granted a base salary of $150,000$180 per year with a bonus potential of an additional $60,000 based onamount targeted at 50% of base salary upon achievement of an increase in EBITDA of $5.0 million for the fiscal year ended September 30, 2009 as compared to the fiscal year ended September 30, 2008, measured as 6% of Fiscal 2009 EBITDA.company and personal goals. In addition, the agreement includes a severance provision for 12 months severanceof the lesser of 24 months’ pay or $245 for termination without cause or if the executive resigns for good reason. Finally,Upon a change in control the executive will receive a payment equal to 12 months then current salary. On October 14, 2011, Mr. Grendi resigned from the Company to pursue other opportunities.
Victor Agruso, Chief Human Resource Officer, was annualized compensation of $150 per year, in addition, the agreement providesincludes a grantseverance provision of the lesser of 24 months’ pay or $245 for termination without cause or if the executive resigns for good reason.
Mark Gervasoni, Chief Marketing and Sales Officer, was granted a base salary of $150 per year with a bonus potential of an additional amount targeted at 100% of base salary upon achievement of company and personal goals. In addition, the agreement includes a provision for 12 months’ severance pay for termination without cause, upon a change in control or if the executive resigns for good reason. Mr. Gervasoni voluntarily resigned on May 31, 2011.

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Grants of Awards
    Estimated Future Payouts Estimated Future Payouts Under   All Other       
    Under Non-Equity Incentive Equity Incentive Plan Awards All Option     Grant 
    Plan Awards   Other Awards:     Date 
                   Stock Number  Exercise  Fair 
                   Awards: of  or Base  Value of 
                   Number Securities  Price of  Stock 
                   of Shares Under-  Option  and 
                   of Stock lying  Awards  Option 
   Grant Threshold  Target Maximum Threshold  Target  Maximum Or Units (#) Options  ($/Sh)  Awards ($) 
Name Date ($)  ($) ($) (#)  (#)  (#)           
(A) (B) (C)  (D) (E) (F)  (G)  (H) (I) (J)  (K)  (L) 
                             
Bruce Widener 5/8/2009                     1,000,000  $1.19  $750 
                                  
Gerald Bowman 7/9/2009                      150,000  $1.61  $153 
Gerald Bowman 5/27/2010                       250,000  $1.40  $227 
                                     
Michael Grendi 2/5/2010                        200,000  $1.07  $134 
Michael Grendi 5/27/2010                        200,000  $1.40  $183 
                                     
Victor Agruso 11/12/2009                        100,000  $1.07  $31 
Victor Agruso 6/7/2010                        100,000  $1.60  $75 
                                     
Richard C. Mills 12/20/2007                     782,250(4)         $664 
Richard C. Mills 5/8/2009                        1,000,000  $1.19  $750 
The table above details options granted to company officers to purchase up to 250,000 shares of our commoncommons stock, at an exercise price of $1.19 per share which vest in equal amounts over a three year period on the anniversary of the grant.
Grants of Awards
Grants of Awards
                                             
                  All Other
   Grant
                All
 Option
   Date
                Other
 Awards:
 Exercise
 Fair
                Stock
 Number of
 or Base
 Value of
    Estimated Future Payouts
       Awards:
 Securities
 Price of
 Stock
    Under Non-Equity Incentive
 Estimated Future Payouts Under Equity Incentive
 Number
 Under-
 Option
 and
    Plan Awards Plan Awards of Shares
 lying
 Awards
 Option
  Grant
 Threshold
 Target
 Maximum
 Threshold
 Target
 Maximum
 of Stock
 Options
 ($/Sh)
 Awards ($)
Name
 Date
 ($)
 ($)
 ($)
 (#)
 (#)
 (#)
 or Units (#)
 (1)
 (2)
 (3)
(A)
 (B) (C) (D) (E) (F) (G) (H) (I) (J) (K)��(L)
 
Bruce Widener  5/8/2009                               1,000,000  $1.19   750,000 
Richard C. Mills  12/20/2007                           782,250(4)          663,863 
Richard C. Mills  5/8/2009                               1,000,000  $1.19   750,000 
Robert Mohr  3/26/2008                               60,000  $1.20   43,200 
Robert Mohr  1/9/2009                               75,000  $0.80   37,500 
Robert Mohr  5/8/2009                               250,000  $1.19   187,500 
On May 8, 2009, Mr. Widener was granted additional options to purchase 1,000,000 shares of our common stock with a strike price of $1.19,and the closing price on the date of the grant. The fair value of the options, columns (J), (K) and (L) respectively, on the date of grant of this options grant under ASC 718 was $750,000.718.
 
OnAdditionally column (I) discusses the December 20, 2007, Mr. Mills was granted of 782,250 shares of Beacon restricted stock to Mr. Mills, of which 150,000 shares vested immediately and 632,250 shares vest in equal amounts annually on each of December 21, 2008, 2009, and 2010. The full grant date fair value of this restricted stock award under ASC 718 is $666,874. On May 8, 2009, Mr. Mills was granted additional options to purchase 1,000,000 shares of our common stock with a strike price of $1.19, the closing price on the date of the grant. The fair value of the options on the date of grant of this options grant under ASC 718 was $750,000.
On March 26, 2008, Mr. Mohr was granted options to purchase 60,000 shares of our common stock with a strike price of $1.20, the closing price on the date of grant. The fair value of the options on the date of grant of this options grant under ASC 718 was $43,320. . On January 1, and May 8, 2009, Mr. Mohr was granted


86


additional options to purchase 75,000 and 250,000 shares of our common stock respectively with a strike price of $.80 and $1.19, the closing price on the date of the grant. The fair value of the options on the dates of grant of these options grant under ASC 718 was $37,500 and $187,500.$667.
 
There werewas no other equity or share-based awards granted during the years ended September 30, 20082011 and 20092010 to the named executive officers.
 
Outstanding Equity Awards at Fiscal Year-End
 
The following table details the equity incentive awards outstanding as of September 30, 2009.2011. For additional information about the option awards, see “Equity Awards” and “Compensation for Named Executive Officers in Fiscal Year 2009”2011” under “Compensation Discussion and Analysis.”

 
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Outstanding Equity Awards at Fiscal Year-End

                                     
  Option Awards Stock Awards
                  Equity
                  Incentive
                Equity
 Plan
                Incentive
 Awards:
      Equity
         Plan
 Market or
      Incentive
         Awards:
 Payout
      Plan
         Number of
 Value of
      Awards:
       Market
 Unearned
 Unearned
      Number of
     Number
 Value of
 Shares,
 Shares,
  Number of
 Number of
 Unearned
     of Shares
 Shares or
 Units or
 Units or
  Securities
 Securities
 Securities
     or Units
 Units of
 Other
 Other
  Underlying
 Underlying
 Underlying
     of Stock
 Stock
 Rights
 Rights
  Unexercised
 Unexercised
 Unexercised
     That Have
 That Have
 That Have
 That Have
  Options
 Options
 Options
 Option
 Option
 Not
 Not
 Not
 Not
  (#)
 (#)
 (#)
 Exercise
 Expiration
 Vested
 Vested
 Vested
 Vested
Name
 Exercisable
 Unexercisable
 Unexercisable
 Price
 Date
 (#)
 ($)
 (#)
 ($)
(A)
 (B) (C) (D) (E) (F) (G) (H) (I) (J)
 
Bruce Widener      1,000,000      $1.19   5/8/2019                
Richard C. Mills                      421,500   442,575         
Richard C. Mills      1,000,000      $1.19   5/8/2019                 
Robert Mohr  20,000   40,000      $1.20   3/26/2018                 
Robert Mohr  75,000          $0.80   1/9/2019                 
Robert Mohr      250,000      $1.19   5/8/2019                 
  Option Awards Stock Awards
                   Equity
                   Incentive
                 Equity Plan
                 Incentive Awards:
       Equity         Plan Market or
       Incentive         Awards: Payout
       Plan         Number of Value of
       Awards:       Market Unearned Unearned
       Number of     Number Value of Shares, Shares,
  Number of  Number of Unearned     of Shares Shares or Units or Units or
  Securities  Securities Securities     or Units Units of Other Other
  Underlying  Underlying Underlying     of Stock Stock Rights Rights
  Unexercised  Unexercised Unexercised     That Have That Have That Have That Have
  Options  Options Options Option Option Not Not Not Not
  (#)  (#) (#) Exercise Expiration Vested Vested Vested Vested
Name Exercisable  Unexercisable Unexercisable Price Date (#) ($) (#) ($)
(A) (B)  (C) (D) (E) (F) (G) (H) (I) (J)
                    
Bruce Widener  666,667   333,333   $1.19 5/8/2019    -    
                        
Gerald Bowman  100,000   50,000   $1.61 7/9/2019         
Gerald Bowman  83,333   166,667   $1.40 5/27/2020         
                        
Michael Grendi  66,667   133,333   $1.07 2/5/2020         
Michael Grendi  66,667   133,333   $1.40 5/27/2020         
                        
Victor Agruso  25,000   75,000   $1.07 11/12/2019         
Victor Agruso  33,333   66,667   $1.60 6/7/2020         
                        
Richard C. Mills  500,000   -   $1.19 5/8/2019         
 
Options Exercises and Stock Vested
 
The following table provides information on stock awards vested for the year ended September 30, 2009. Pursuant to a grant of 782,250 shares of restricted stock to Mr. Mills, our former president, awarded on December 20, 2007, 150,000 shares vested on that date when the stock was valued at $0.85 per share. Subsequent vesting occursoccurred in equal amounts annually on eachtotaled 421,500 shares vesting at a value of $1.20 per share as of December 21, 2008,31, 2009, andfor a total vested number of shares of 571,500.  On May 15, 2010, at December 21, 2008 whenpursuant to the separation agreement with the Company, the remaining 210,750 shares vested the stock was valued at $1.20 per share.were vested.
 
Option Exercises and Stock Vested
                 
  Option Awards Stock Awards
  Number
   Number
  
  of Shares
 Value
 of Shares
 Value
  Acquired
 Realized
 Acquired
 Realized
  on
 on
 on
 on
  Exercise
 Exercise
 Vesting
 Vesting
Name
 (#)
 ($)
 (#)
 ($)
(A)
 (B) (C) (D) (E)
 
Richard C. Mills          150,000  $127,500 
           210,750  $252,900 


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Potential Payments Upon Termination or Change in Control
 
The following table summarizes the value of the termination payments and benefits Mr.Messrs. Widener, Mills,Bowman, Grendi and MohrAgruso would receive if they had terminated employment on September 30, 20092011 under the circumstances shown pursuant to the terms of the employment agreements we have entered into with each of them. For further description of the employment agreement governing these payments, see “Employment Agreements.” Other than the employment agreements with our named executives, there is no formal policy with respect to payments to named executive officers upon a termination of such officer or change in control of the Company. In addition, the employment agreements with our named executives do not provide for any payments upon a change in control. The tables exclude (i) amounts accrued through September 30, 20092011 that would be paid in the normal course of continued employment, such as accrued but unpaid salary and earned annual bonus for fiscal year 20092011 and reimbursed business expenses and (ii) vested account balances under our 401(k) Plan that is generally available to all of our employees.

 
Bruce Widener
Page 60

 
                     
        Termination
  
        by Company
 Termination
        without Cause
 Following or
        or Executive
 Prior to a
        with Good
 Change in
  Retirement
 Death
 Disability
 Reason
 Control
Benefit
 ($) ($) ($) ($) ($)
 
Cash Severance    $240,000(1) $240,000(1) $720,000(1)  (2)
Acceleration of Restricted Stock              (2)
Acceleration of Stock Options              (2)
Health & Welfare Benefits  (3)  (3)  3,121(3)  3,121(3)  (2)
 
Bruce Widener
           Termination    
           by Company  Termination 
           without Cause  following or 
           or Executive  prior to a 
           with Good  Change in 
  Retirement  Death  Disability  Reason  Control 
Benefit ($)  ($)  ($)  ($)  ($) 
                
Cash Severance  -  $240(1) $240(1) $720(1)  -(2)
                     
Acceleration of                    
Restricted Stock  -   -   -   -   -(2)
                     
Acceleration  of                    
Stock Options  -   -   -   -   -(2)
                     
Health & Welfare                    
Benefits  -(3)  -(3)  16(3)  35(3)  -(2)
 
Gerald Bowman
           Termination    
           by Company  Termination 
           without Cause  following or 
           or Executive  prior to a 
           with Good  Change in 
  Retirement  Death  Disability  Reason  Control 
Benefit ($)  ($)  ($)  ($)  ($) 
                
Cash Severance  -  $245(1) $245(1) $245(1)  200(2)
                     
Acceleration of                    
Restricted Stock  -   -   -   -   -(2)
                     
Acceleration  of                    
Stock Options  -   -   -   -   -(2)
                     
Health & Welfare                    
Benefits  -(3)  -(3)  16(3)  16(3)  -(2)
Page 61

Michael Grendi
           Termination    
           by Company  Termination 
           without Cause  following or 
           or Executive  prior to a 
           with Good  Change in 
  Retirement  Death  Disability  Reason  Control 
Benefit ($)  ($)  ($)  ($)  ($) 
                
Cash Severance  -  $245(1) $245(1) $245(1)  180(2)
                     
Acceleration of                    
Restricted Stock  -   -   -   -   -(2)
                     
Acceleration  of                    
Stock Options  -   -   -   -   -(2)
                     
Health & Welfare                    
Benefits  -(3)  -(3)  16(3)  16(3)  -(2)
Victor Agruso
           Termination    
           by Company  Termination 
           without Cause  following or 
           or Executive  prior to a 
           with Good  Change in 
  Retirement  Death  Disability  Reason  Control 
Benefit ($)  ($)  ($)  ($)  ($) 
                
Cash Severance  -  $245(1) $245(1) $245(1)  150(2)
                     
Acceleration of                    
Restricted Stock  -   -   -   -   -(2)
                     
Acceleration  of                    
Stock Options  -   -   -   -   -(2)
                     
Health & Welfare                    
Benefits  -(3)  -(3)  16(3)  16(3)  -(2)

(1)Excluding accrued, but unpaid, base salary, annual bonus, accrued vacation 401(k) payments and unreimbursed business expenses.

(2)Executive is not entitled to any specific payments upon a change in control, other than such payment that Executive would otherwise be entitled to if termination upon a change in control is by reason of death or disability or by the Company without Cause or the Executive for Good Reason, as provided in the related columns.

(3)Executive is entitled to continued participation in our group health plan, assuming he makes a timely election of continuation coverage under COBRA, at the Company’s expense.

 
Richard Mills
Page 62

 
                     
        Termination
  
        by Company
 Termination
        without Cause
 Following or
        or Executive
 Prior to a
        with Good
 Change in
  Retirement
 Death
 Disability
 Reason
 Control
Benefit
 ($) ($) ($) ($) ($)
 
Cash Severance    $37,500(1) $37,500(1) $150,000(1) $(2)
Acceleration of Restricted Stock           445,124(3) $(2)
Acceleration of Stock Options             $(2)
Health & Welfare Benefits  (4)  (4)  3,001(4)  3,001(4) $(2)

DIRECTOR COMPENSATION
 
(1)Excluding accrued, but unpaid, base salary, annual bonus, accrued vacation, 401(k) payments and unreimbursed business expenses.
(2)Executive is not entitled to any specific payments upon a change in control, other than such payment that Executive would otherwise be entitled to if termination upon a change in control is by reason of death or


88


disability or by the Company without Cause or the Executive for Good Reason, as provided in the related columns.
(3)Upon termination by the Company for Cause or the Executive for Good Reason, restricted stock vests as described in Note 14 to the consolidated financial statements.
(4)Executive is entitled to continued participation in our group health plan, assuming he makes a timely election of continuation coverage under COBRA, at the Company’s expense.
Robert Mohr
                     
        Termination
  
        by Company
 Termination
        without Cause
 Following or
        or Executive
 Prior to a
        with Good
 Change in
  Retirement
 Death
 Disability
 Reason
 Control
Benefit
 ($) ($) ($) ($) ($)
 
Cash Severance    $37,500(1) $37,500(1) $150,000(1)  (2)
Acceleration of Restricted Stock              (2)
Acceleration of Stock Options              (2)
Health & Welfare Benefits  (3)  (3)  977(3)  977(3)  (2)
(1)Excluding accrued, but unpaid, base salary, annual bonus, accrued vacation, 401(k) payments and unreimbursed business expenses.
(2)Executive is not entitled to any specific payments upon a change in control, other than such payment that Executive would otherwise be entitled to if termination upon a change in control is by reason of death or disability or by the Company without Cause or the Executive for Good Reason, as provided in the related columns.
(3)Executive is entitled to continued participation in our group health plan, assuming he makes a timely election of continuation coverage under COBRA, at the Company’s expense.
Gerald Bowman
                     
        Termination
  
        by Company
 Termination
        without Cause
 Following or
        or Executive
 Prior to a
        with Good
 Change in
  Retirement
 Death
 Disability
 Reason
 Control
Benefit
 ($) ($) ($) ($) ($)
 
Cash Severance    $37,500(1) $37,500(1) $150,000(1)  (2)
Acceleration of Restricted Stock              (2)
Acceleration of Stock Options              (2)
Health & Welfare Benefits  (3)  (3)  977(3)  977(3)  (2)
(1)Excluding accrued, but unpaid, base salary, annual bonus, accrued vacation, 401(k) payments and unreimbursed business expenses.
(2)Executive is not entitled to any specific payments upon a change in control, other than such payment that Executive would otherwise be entitled to if termination upon a change in control is by reason of death or disability or by the Company without Cause or the Executive for Good Reason, as provided in the related columns.
(3)Executive is entitled to continued participation in our group health plan, assuming he makes a timely election of continuation coverage under COBRA, at the Company’s expense.


89


DIRECTOR COMPENSATION
Compensation for Non-Management Directors.  Our directors have agreed to serve on our board of directors based on their existing equity position in Beacon. John D. Rhodes III was issued 300,000 Warrants to purchase Beacon common stock in exchange for his service on the board by unanimous vote in a Board Meeting on March 26, 2008. On January 9, 2009, the Compensation Committee resolved to pay directors $500$1 per meetings via telephone and $2,500$3 per meeting in person but the directors unanimously agreed to waive this compensation until such time as the company achieved positive net income.
 
The following table provides summary information of compensation of directors for the year ended September 30, 2009.2011.
 
Director Compensation
 
          Change in    
          Change in
Pension
    
          Pension
Value and
    
  Fees     Non- Value and
Non-
    
  Fees
Earned
     Non-
Equity
 Non-
Qualified
    
  Earned
or
Stock   Incentive Equity
Deferred
 Qualified
All  
  or
Paid in
 Stock
Awards
 Options Incentive
Plan
 Deferred
Compensation
 All
Other
  
  Paid in
Cash
 Awards
($)
 Options
Awards
 Plan
Compensation
 Compensation
Earnings
 Other
Compensation
 Total
Cash
($)
Awards
Compensation
Earnings
Compensation
Total
Name and Principal Position
 ($) (1) ($) ($) ($) ($) ($)
(A) (B) (C) (D) (E) (F) (G) (H)
 
   
             
 
Item 12.
Security Ownership of Certain Beneficial Owners and Management
 
The following table sets forth certain information regarding the ownership of our common stock as of November 30, 2009December 12, 2011 by (i) any person who is known to us to be the beneficial owner of more than five percent of our common stock, (ii) all directors, (iii) all executive officers named in the Summary Compensation Table herein and (iv) all directors and executive officers as a group. Warrants and options to acquire our common stock included in the amounts listed below are currently exercisable or will be exercisable within 60 days after November 30, 2009,December 12, 2011, and are deemed outstanding for computing the ownership percentage of the stockholder holding such warrantsand/or options, but are not deemed outstanding for computing the ownership percentage of any other stockholder.

         
  Beneficial
  
Name
 Ownership % of Class
 
Bruce Widener  2,580,000   5.8%
J. Sherman Henderson III(1)  1,150,000   2.6%
John D. Rhodes III(2)  2,965,766   4.2%
Richard C. Mills(3)  1,577,250   3.6%
Robert R. Mohr  95,000   0.0%
Directors and Named Executives Officers (as a group)  8,368,016   16.2%
  Beneficial    
  Common Share  % of 
Name Ownership  Class 
       
Bruce Widener  3,254,167   7%
John D. Rhodes III (1)  3,171,606   7%
Richard C. Mills (2)  2,769,500   6%
J. Sherman Henderson III (3)  1,035,000   2%
Michael Grendi  166,667   0%
Gerry Bowman  83,333   0%
Victor Agruso  83,333   0%
Directors and Named Executives Officers (as a group)
  10,563,606   17%
 
As a shareholdershareholders with a greater than 5% ownership of the company, Mr. Widener’sthe address of Messrs. Widener and Rhodes address is 1311 Herr Lane,9300 Shelbyville Road, Suite 1020, Louisville, KY.KY 40222

 
Page 63

 

(1)Includes 30,000 shares held by LANJK, LLC (a limited liability company wholly owned by Mr. Henderson).
 
(2)1.Includes the 166,666 shares into which the Exchange Bridge Note held by Dr. Rhodes is convertible, 173,000285,500 shares for which the Exchanged Bridge Warrants held by Dr. Rhodes are exercisable within 60 days of the date hereof, 300,000 warrants to purchase shares in exchange for his representation on the Board of Directors, 805,271 shares into which the Series B Preferred Stock is convertible, 350,000 Warrants issued pursuant to the Series B Preferred Stock purchase, 783,328and 716,662 warrants issued in exchange for an equity financing arrangement and warrants to purchase 87,500 shares of common stock pursuant to a debt financing arrangement.


90


2.
(3)632,250 of the shares of Beacon Common Stock are subject to a three-year vesting provision, where such shares vest in three equal installments on December 20, 2008, 2009 and 2010. In addition, Mr. Mills and his wife are the beneficial owners of 795,000482,500 shares of Beacon Common Stock. Pursuant to a grant of 782,250 shares of restricted stock to Mr. Mills, our former president, awarded on December 20, 2007, 150,000 shares vested on that date when the stock was valued at $0.85 per share. Subsequent vesting occurred in equal amounts annually totaled 421,500 shares vesting at a value of $1.20 per share as of December 31, 2009, for a total vested number of shares of 571,500.  On May 15, 2010, pursuant to the separation agreement with the Company, the remaining 210,750 shares were vested.

3.Includes 30,000 shares held by LANJK, LLC (a limited liability company wholly owned by Mr. Henderson’s wife and managed by Mr. Henderson).
 
Item 13.
Certain Relationships and Related Transactions, and Director Independence
 
On July 16, 2007, BeaconAugust 17, 2010 we entered into a $500,000 Bridge Financing Facility provided by twolong term line of credit facility with one of our founding stockholders who are also directors for $4,000, the facility has an annual interest rate of 7.73% on any outstanding balance and a facility fee of the greater of $40 or 1% of the unused balance.  Additionally, 15,000 warrants, with a five year term at $1.00 per share, per month will be paid for each month the facility is outstanding.  As of September 30, 2011 and 2010, we have an outstanding balance of $0 and $630, respectively leaving an unused amount of $4,000 and $3,370, which is presented as a non-current liability in our Company. See Note 10consolidated balance sheet, as terms of the facility call for further details.an 18 month maturity date.  As of September 30, 2011, we have issued 165,000 warrants.  Using the Black Scholes prices model, we determined the fair value of the warrants and recorded as other expense of $71 for the year ended September 30, 2011.
On August 12, 2011, the Company modified the 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.  For any outstanding balance at month end under the credit facility, the director will receive warrant coverage of 15% to purchase common shares of the Company at an exercise price of the then current stock price.

Additionally under the revised agreement, during the next 24 months the Company may require the director to purchase shares of Common Stock at the then current stock price.   The aggregate purchase price of all shares purchased shall not exceed $2,000.  For the dollar amount of Common Stock purchased, the director will receive warrant coverage of 15% to purchase shares of Common stock of the Company at an exercise price of the then current stock price.  Finally, the Company’s Chief Executive Officer (CEO) agreed that, upon the exercise of the share purchase commitment in whole or in part by the Company, the director shall have the right to purchase up to 1,200,000 shares of Common Stock from the CEO for a purchase price of $0.01 per share.
On October 26, 2011, the Company decided to terminate this long term line of credit facility and associated put right.
 
On November 15, 2007, we issued $200,000$100 of convertible notes payable (the “Bridge Notes”) in a separate debt financing. Of this amount, $100,000 of the Bridge Notes was issued to one of the directors of Beacon. See Note 10 for further details.
Beacon has obtained insurance through an agency owned by one of our founding stockholders/directors. Insurance expense paid through the agency for the year ended September 30, 2008 and 2009 was $114,378 and $190,000 and is included in selling, general and administrative expense in the accompanying consolidated statement of operations.
On December 28, 2007, we entered into an equity financing arrangement with two of our directors that provided up to $300,000 of additional funding, the terms of which provided for compensation of 10,000 warrants to purchase common stock at $1.00 per share per month, to each individual for the period the financing arrangement was in effect. The warrants have a five-year term. The financing arrangement was terminated upon the close of theSeries A-1 Placement. Accordingly, we recognized $58,700 of interest expense for the years ended September 30, 2008 based on the fair value of the warrants as they were earned. The fair values were calculated using the Black-Scholes option pricing model with the following assumptions:
                                     
    Expected
   Fair Value
     Risk-Free
 Value
 Charge to
  Quantity
 Life
 Strike
 of Common
 Volatility
 Dividend
 Interese
 per
 Interest
Date Earned
 Earned (Days) Price Stock Rate Yield Rate Warrant Expense
 
1/28/2008  20,000   1,825  $1.00  $1.90   66.34%  0%  2.80% $1.34  $26,800 
2/28/2008  20,000   1,825  $1.00  $1.50   66.34%  0%  2.73% $0.99  $19,800 
3/7/2008  10,000   1,825  $1.00  $1.75   66.34%  0%  2.45% $1.21  $12,100 
On May 15, 2008, we entered into an equity financing arrangement with one of our directors that provided up to $500,000 of additional funding, the terms of which provided for issuance of warrants to purchase 33,333 shares of common stock at $1.00 per share per month for the period the financing arrangement is presented as a current liability in effect. The warrants have a five-year term. The financing arrangement terminates upon the close of a $3,000,000 equity financing event. On August 19, 2008, we modified the agreement to increase the commitment to $3,000,000 of additional funding that decreases on a dollar for dollar basisour consolidated balance sheet as we raise capital in subsequent equity financing transactions up to $3,000,000, upon mutual agreement of our director and us, or on December 31, 2008. As of September 30, 2008, $1,700,000 remained available under this equity arrangement. In consideration for this financing arrangement, we agreed to issue a five year warrant to purchase 100,000 shares of common stock at an exercise price of $1.00 per share in addition to the ongoing warrants earned under the original agreement. In addition, contingent upon the exercise of any part of the equity financing commitment, two of our founding stockholders would earn the right to purchase up to 1,655,425 shares of their stock owned by the investors for a purchase price of $0.01 per share. Accordingly, we recognized $176,9992011 and $288,945 of interest expense for the years ended September 30, 2008 and 2009


91


based on the fair value of the warrants as they were earned. The fair values were calculated using the Black-Scholes option pricing model with the following assumptions:2010, respectively.
                                     
     Expected
     Fair Value
        Risk-Free
  Value
  Charge to
 
  Quantity
  Life
  Strike
  of Common
  Volatility
  Dividend
  Interese
  per
  Interest
 
Date Earned
 Earned  (Days)  Price  Stock  Rate  Yield  Rate  Warrant  Expense 
 
6/15/2008  33,333   1,825  $1.00  $1.01   66.34%  0%  3.73% $0.58  $19,333 
7/15/2008  33,333   1,825  $1.00  $1.25   66.34%  0%  3.12% $0.78  $26,000 
8/15/2008  33,333   1,825  $1.00  $1.50   66.34%  0%  3.41% $1.00  $33,333 
8/19/2008  100,000   1,825  $1.00  $1.25   66.34%  0%  3.07% $0.78  $78,000 
9/15/2008  33,333   1,825  $1.00  $1.05   66.34%  0%  2.59% $3.61  $20,333 
                                     
For year ended September 30, 2008                         $176,999 
                             
10/15/2008  33,333   1,825  $1.00  $1.20   66.34%  0%  2.90% $0.74  $24,666 
11/15/2008  33,333   1,825  $1.00  $0.85   66.34%  0%  2.33% $0.45  $15,000 
12/15/2008  33,333   1,825  $1.00  $1.52   66.34%  0%  1.50% $0.99  $33,000 
12/31/2008  16,667   1,825  $1.00  $1.01   66.34%  0%  1.55% $0.57  $9,500 
1/9/2009  100,000   1,825  $1.00  $0.80   66.34%  0%  1.51% $0.41  $41,000 
2/9/2009  33,333   1,825  $1.00  $0.80   66.34%  0%  1.99% $0.41  $13,667 
3/9/2009  33,333   1,825  $1.00  $0.54   66.34%  0%  1.90% $0.23  $7,667 
4/9/2009  33,333   1,825  $1.00  $0.75   66.34%  0%  1.90% $0.37  $12,333 
5/9/2009  33,333   1,825  $1.00  $1.19   66.34%  0%  2.09% $0.72  $23,970 
6/9/2009  33,333   1,825  $1.00  $1.35   66.34%  0%  2.73% $0.86  $28,666 
7/9/2009  33,333   1,825  $1.00  $1.61   66.34%  0%  2.31% $1.08  $35,983 
8/9/2009  33,333   1,825  $1.00  $1.20   66.34%  0%  2.75% $0.74  $24,533 
9/9/2009  33,333   1,825  $1.00  $1.00   66.34%  0%  2.38% $0.57  $18,960 
                                     
For year ended September 30, 2009                         $288,945 
                             
The equity financing arrangement expired on December 16, 2009 upon closing of a $3,000,000 of equity financing at which time the directors contingent right to acquire the shares of the founding shareholders was terminated.
On July 14, 2008, we issued 400 shares of Series B Preferred Stock and 200,000 (“Series B Offering Warrants”) five year common stock purchase warrants exercisable at $1.20 per share in a Private Placement transaction for proceeds of $400,000 from one of our directors. The Series B Preferred Stock is convertible into common stock at any time, at the option of the holder at a conversion price of $.90 per share. The Series B Preferred Stock is also automatically convertible into shares of our common stock, at the then applicable conversion price upon the closing of a firm commitment underwritten public offering of shares of our common stock yielding aggregate proceeds of not less than $20 million or under certain other circumstances when the trading volume and average trading prices of the stock attain certain specified levels.
On August 20, 2008, we entered into a $100,000 debt financing arrangement with one of our directors under which we borrowed $100,000 at a 12.00% annual interest rate the principal of which is not due on any specific date. We also paid a 1.00% origination fee upon initiation of the credit facility. The proceeds of the credit facility were used as short term working capital collateralized by our accounts receivable. We have accrued $2,400 of interest expense related to this credit facility during the year ended September 30, 2008 which is included in accrued expenses and other current liabilities in the consolidated financial statements
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, 2009. We are permitted, but not required, to redeem these shares at a 1% per month premium beginning 30 days from the date of their issuance at our discretion


92


On January 9, 2009, we entered into an equity financing arrangement with one of our directors that provided a commitment up to $2.2 million of additional funding. This arrangement superseded the existing equity financing arrangement between the same director and the Company that had been entered into on May 15, 2008 and amended August 19, 2008. Under the terms of this equity financing arrangement, under certain circumstances the Company may sell shares of its common stock to this director at the same price per share and other terms as the most recent sale of shares of its Common Stock to a third party in a transaction intended to raise capital. On August 10, 2009, we renewed the existing equity financing arrangement to provide a commitment of up to $3.0 million of additional funding. In the event that the equity financing arrangement is drawn upon by the Company, then the director will have the right to purchase shares of common stock from two of the founding stockholders at a purchase price of $0.001 per share. The financing available under this arrangement will be reduced on a dollar for dollar basis by the amount of the proceeds of the ongoing private placements of the Company’s securities or any additional placements of equity financing. This arrangement Terminated on December 15, 2009 upon close of $3,000,000 financing event.
Under a marketing agreement with a company owned by the wife of Beacon’s former president, we provideprovided procurement and installation services as a subcontractor.  WeAs of September 30, 2011 and 2010 we earned revenuenet sales of approximately $230,000$0 and $1.7 million$323 for procurement and installation services provided under this marketing agreement, of which $195,000$0 and $465,000$198 is recorded as accounts receivable in the accompanying consolidated balance sheetsheets.
The Company has obtained insurance through an agency owned by one of its founding stockholders/directors.  Insurance expense of $148 and $150 was paid to the agency for the years ended September 30, 20082011 and 2009.2010, respectively.
 
On August 7, 2009, we entered intoFor the year ended September 30, 2011, in connection with a non-interest bearing demand note withconstruction bond the Company obtained through an agency owned by one of our its founding stockholders/directors, in33,120 warrants were issued.  Using the amountBlack Scholes pricing model, we determined the fair value of $500,000. See Note 10 for further information.the warrants and recorded as other expense of $15.

 
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Item 14.
Principal Accountant Fees and Services
Marcum LLP audited our consolidated financial statements for the years ended September 30, 2008 and 2009.
Fees

The following table presents fees for professional services rendered by Marcum LLP for the audit of our annual financial statements for the years ended September 30, 20082011 and 2009:2010:
 
         
  For the Year
  For the Year
 
  Ended
  Ended
 
  September 30,
  September 30,
 
  2008  2009 
 
Audit fees $146,700  $203,085 
Audit related fees      
Tax fees      
Other fees      
         
  $146,700  $203,085 
         
  For the year  For the year 
  ended  ended 
  September 30,  September 30, 
  2011  2010 
Audit fees $155  $297 
Tax fees  -   - 
Other fees  -   - 
  $155  $297 

In accordance with its written charter, the Audit Committee reviews and discusses with Marcum LLP, on a periodic basis, any disclosed relationships or services that may impact the objectivity and independence of the independent registered accounting firm and pre-approves all audit and permitted non-audit services (including the fees and terms thereof) to be performed for us by our independent registered public accounting firm.
 
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Item 15.Exhibits, Financial Statement Schedules

     
 3.1 Amended and Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report onForm 10-K dated January 13, 2009).
 3.2 Certificate of Designation of the Series B Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report onForm 10-Q dated August 19, 2008).

2.1Non-Interest-Bearing Promissory Note dated February 26, 2010 (incorporated by reference to Exhibit 2.03.A to the Company’s Current Report on Form 8-K filed March 2, 2010).

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 3.3 Restated Bylaws (Incorporated by reference to Exhibit 3.2 toForm 10-KSB dated October 16, 2003).
 4.1 Form of warrant to purchase common stock granted in connection with August 19, 2008 financing arrangement between the Company and one of its directors (incorporated by reference to Exhibit 4.1 to the Company’s Annual Report onForm 10-K dated January 13, 2009).
 4.2 Registration Rights Agreement dated November 12, 2008 by and between the Company and the placement agent for the November 2008 offering of Common Stock (incorporated by reference to Exhibit 4.2 to the Company’s Annual Report onForm 10-K dated January 13, 2009).
 4.3 Form of warrant to purchase common stock granted in connection with November 2008 offering of Common Stock (incorporated by reference to Exhibit 4.3 to the Company’s Annual Report onForm 10-K dated January 13, 2009).
 4.4 Form of convertible promissory notes and warrants granted in connection with the 2007 convertible debt financing (incorporated by reference to Exhibit 10.1 to the Company’s Current Report onForm 8-K dated December 28, 2007).
 4.5 Form of warrant to purchase common stock granted in connection with the offering of Series A andSeries A-1 Preferred Stock, as amended and recirculated July 30, 2008 (incorporated by reference to Exhibit 4.5 to the Company’s Annual Report onForm 10-K dated January 13, 2009).
 4.6 Form of warrant to purchase common stock granted to the placement agent retained in connection with the offering of Series A andSeries A-1 Preferred Stock (incorporated by reference to Exhibit 10.3 to the Company’s Current Report onForm 8-K dated December 28, 2007).
 4.7 Form of warrant to purchase common stock granted to affiliates of placement agent retained in connection with the offering of Series A andSeries A-1 Preferred Stock (incorporated by reference to Exhibit 10.4 to the Company’s Current Report onForm 8-K dated December 28, 2007).
 4.8 Form of warrant to purchase common stock granted in connection with the offering of Series B Preferred Stock (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report onForm��10-Q dated August 19, 2008).
 4.9 Form of warrant to purchase common stock granted in connection with the July 2008 offering of Common Stock (incorporated by reference to Exhibit 4.2 to the Company’s Quarterly Report onForm 10-Q dated August 19, 2008).
 4.10 Form of warrant to purchase common stock issued to J. Sherman Henderson and Robert A. Clarkson on July 10, 2008 (incorporated by reference to Exhibit 4.3 to the Company’s Quarterly Report onForm 10-Q dated August 19, 2008).
 4.11 Form of the Convertible Promissory Notes, dated January 22, 2009, made and issued by the Company to various investors, in the aggregate principal amount of $500,000 (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report onForm 10-Q dated February 23, 2009).
 4.12 Form of the Warrants, dated January 22, 2009, made and issued by the Company to various investors (incorporated by reference to Exhibit 4.2 to the Company’s Quarterly Report onForm 10-Q dated February 23, 2009).
 4.13 Form of warrant to purchase common stock granted to the investors in connection with the June 2009 offering of Common Stock (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report onForm 10-Q dated August 12, 2009).
 4.14* Form of warrant to purchase common stock granted to the investors in connection with the September 2009 Private Placement.
 10.1 Placement Agency Agreement dated July 25, 2008 by and between the Company and the Placement Agent (incorporated by reference to Exhibit 10.1 to the Company’s Annual Report onForm 10-K dated January 13, 2009).
 10.2 Letter Agreement dated July 25, 2008 by and between the Company and the Placement Agent (incorporated by reference to Exhibit 10.2 to the Company’s Annual Report onForm 10-K dated January 13, 2009).
 10.3 Letter agreement dated August 19, 2008 by and between the Company and one of its directors (incorporated by reference to Exhibit 10.3 to the Company’s Annual Report onForm 10-K dated January 13, 2009).

94

2.2Subordinated Security Agreement dated February 26, 2010 (incorporated by reference to Exhibit 2.03.B to the Company’s Current Report on Form 8-K filed March 2, 2010).


     
 10.4 Loan Agreement dated September 4, 2008 by and between the Company and First Savings Bank (incorporated by reference to Exhibit 10.4 to the Company’s Annual Report onForm 10-K dated January 13, 2009).
 10.5 Letter Agreement dated January 9, 2009, by and between the Company and John Rhodes, relating to an equity financing agreement (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report onForm 10-Q dated February 23, 2009).
 10.6 Form of the Note Purchase Agreement, dated January 22, 2009, by and between the Company and various investors (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report onForm 10-Q dated February 23, 2009).
 10.7 Work Order dated December 19, 2008, by and between the Company and Johnson & Johnson Services, Inc. (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report onForm 10-Q dated February 23, 2009).
 10.8 Promissory Note, dated January 7, 2009, made and issued by the Company to John Rhodes (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report onForm 10-Q dated February 23, 2009).
 10.9 Beacon Solutions 2008 Long Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report onForm 10-Q dated May 13, 2009.)
 10.10 Letter Agreement dated August 10, 2009 by and between the Company and John Rhodes (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report onForm 10-Q dated August 12, 2009).
 10.11 Promissory Note dated August 10, 2009 made and issued by the Company to John Rhodes Family Limited Partnership (incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report onForm 10-Q dated August 12, 2009).
 10.12 Selling Agency Agreement dated June 12, 2009 by and between the Company and the selling agent named therein (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report onForm 10-Q dated August 12, 2009)
 10.13 Secured Promissory Note, dated December 20, 2007, issued by Beacon to ADSnetcurve (incorporated by reference to Exhibit 10.6 to the Company’s Current Report onForm 8-K dated December 28, 2007).
 10.14 Asset Purchase Agreement, dated October 15, 2007, by and between Beacon and CETCON, Incorporated (“CETCON”)(incorporated by reference to Exhibit 10.7 to the Company’s Current Report onForm 8-K dated December 28, 2007).
 10.15 Secured Promissory Note, dated December 20, 2007, issued by Beacon to CETCON (incorporated by reference to Exhibit 10.8 to the Company’s Current Report onForm 8-K dated December 28, 2007).
 10.16 Asset Purchase Agreement, dated October 15, 2007, by and between Beacon and Strategic Communications, LLC (incorporated by reference Exhibit 10.9 to the Company’s Current Report onForm 8-K dated December 28, 2007).
 10.17 Promissory Note, dated December 20, 2007, issued by Beacon to Strategic (incorporated by reference to Exhibit 10.10 to the Company’s Current Report onForm 8-K dated December 28, 2007).
 10.18 Asset Purchase Agreement, dated October 15, 2007, by and between Beacon and RFK Communications, LLC (“RFK”) (incorporated by reference to Exhibit 10.11 to the Company’s Current Report onForm 8-K dated December 28, 2007).
 10.19 Secured Promissory Note, dated December 20, 2007, issued by Beacon to RFK (incorporated by reference to Exhibit 10.12 to the Company’s Current Report onForm 8-K dated December 28, 2007).
 10.20 Agreement and Plan of Merger, dated October 15, 2007, by and among Beacon, BH Acquisition Sub, Inc., Bell Haun Systems, Inc. (“BHS”) and BHS shareholders (incorporated by reference to Exhibit 10.13 to the Company’s Current Report onForm 8-K dated December 28, 2007).
 10.21 Promissory Note, dated December 20, 2007, issued by Beacon to the BHS shareholders (incorporated by reference to Exhibit 10.14 to the Company’s Current Report onForm 8-K dated December 28, 2007).

95



     
 10.22 Promissory Notes, dated December 20, 2007, issued by Beacon to Thomas O. Bell and Michael T. Haun (incorporated by reference to Exhibit 10.15 to the Company’s Current Report onForm 8-K dated December 28, 2007).
 10.23 Registration Rights Agreement, dated December 20, 2007, between Beacon, the placement agent for the Preferred Stock offerings and certain investors (incorporated by reference to Exhibit 10.16 to the Company’s Current Report onForm 8-K dated December 28, 2007).
 10.24** Employment Agreement , dated December 2007, between the Company and Bruce Widener (incorporated by reference to Exhibit 99.8 to the Company’s Quarterly Report onForm 10-Q dated February 19, 2008).
 10.25** Employment Agreement, dated December 2007, between the Company and Richard C. Mills (incorporated by reference to Exhibit 99.6 to the Company’s Quarterly Report onForm 10-Q dated February 19, 2008).
 10.26** Employment Agreement, dated December 2007, between the Company and Robert R. Mohr (incorporated by reference to Exhibit 99.5 to the Company’s Quarterly Report onForm 10-Q dated February 19, 2008).
 10.27** Employment Agreement dated May 12, 2009 by and between the Company and Bruce Widener (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report onForm 10-Q dated August 12, 2009).
 10.28** Employment Agreement dated May 22, 2009 by and between the Company and Richard C. Mills (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report onForm 10-Q dated August 12, 2009).
 10.29** Employment Agreement dated May 22, 2009 by and between the Company and Robert Mohr (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report onForm 10-Q dated August 12, 2009).
 10.30 Documents related to the Integra Bank Credit Facility (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report onForm 10-QSB dated May 15, 2008).
 10.31 Registration Rights Agreement dated July 25, 2008 by and between the Company and the placement agent retained in the July 2008 offering of Common Stock (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report onForm 10-Q dated August 19, 2008).
 10.33* Placement Agency Agreement dated September 28, 2009 by and between the Company and the Placement Agent.
 14.1 Code of Ethics (incorporated by reference to Exhibit 14.1 to the Company’s Annual Report onForm 10-K dated January 13, 2009).
 21.1 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 to the Company’s Annual Report onForm 10-K dated January 13, 2009).
 31.1* Certification of Principal Executive Officer, pursuant toRules 13a-14(a) of the Sarbanes-Oxley Act of 2002.
 31.2* Certification of Principal Executive Officer, pursuant toRules 13a-14(a) of the Sarbanes-Oxley Act of 2002.
 32.1* Certification of Principal Executive Officer, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
 32.2* Certification of Principal Executive Officer, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
3.1Amended and Restated Articles of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed January 13, 2009).

3.2Certificate of Designation of the Series B Preferred Stock (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q filed August 19, 2008).

3.3Restated Bylaws (Incorporated by reference to Exhibit 3.2 to Form 10-KSB dated October 16, 2003).

3.4Certificate of Designation of Series C Preferred Stock (incorporated by reference to Exhibits to our Quarterly Report on Form 10-Q for the period ended March 31, 2011).

3.5Amendment No. 1 to the Certificate of Designation of the Series C Preferred Stock (incorporated by reference to Exhibits to our Quarterly Report on Form 10-Q for the period ended March 31, 2011).

4.1Form of warrant to purchase common stock granted in connection with August 19, 2008 financing arrangement between the Company and one of its directors (incorporated by reference to Exhibit 4.1 to the Company’s Annual Report on Form 10-K filed January 13, 2009).

4.2Registration Rights Agreement dated November 12, 2008 by and between the Company and the placement agent for the November 2008 offering of Common Stock (incorporated by reference to Exhibit 4.2 to the Company’s Annual Report on Form 10-K filed January 13, 2009).

4.3Form of warrant to purchase common stock granted in connection with November 2008 offering of Common Stock (incorporated by reference to Exhibit 4.3 to the Company’s Annual Report on Form 10-K filed January 13, 2009).

4.4Form of convertible promissory notes and warrants granted in connection with the 2007 convertible debt financing (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated December 28, 2007).

4.5Form of warrant to purchase common stock granted in connection with the offering of Series A and Series A-1 Preferred Stock, as amended and recirculated July 30, 2008 (incorporated by reference to Exhibit 4.5 to the Company’s Annual Report on Form 10-K filed January 13, 2009).

4.6Form of warrant to purchase common stock granted to the placement agent retained in connection with the offering of Series A and Series A-1 Preferred Stock (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K dated December 28, 2007).

4.7Form of warrant to purchase common stock granted to affiliates of placement agent retained in connection with the offering of Series A and Series A-1 Preferred Stock (incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K dated December 28, 2007).

4.8Form of warrant to purchase common stock granted in connection with the offering of Series B Preferred Stock (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q filed August 19, 2008).

4.9Form of warrant to purchase common stock granted in connection with the July 2008 offering of Common Stock (incorporated by reference to Exhibit 4.2 to the Company’s Quarterly Report on Form 10-Q filed August 19, 2008).

4.10Form of warrant to purchase common stock issued to J. Sherman Henderson and Robert A. Clarkson on July 10, 2008 (incorporated by reference to Exhibit 4.3 to the Company’s Quarterly Report on Form 10-Q filed August 19, 2008).
 
4.11Form of the Convertible Promissory Notes, dated January 22, 2009, made and issued by the Company to various investors, in the aggregate principal amount of $500,000 (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q filed February 23, 2009).
 
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4.12Form of the Warrants, dated January 22, 2009, made and issued by the Company to various investors (incorporated by reference to Exhibit 4.2 to the Company’s Quarterly Report on Form 10-Q filed February 23, 2009).

4.13Form of warrant to purchase common stock granted to the investors in connection with the June 2009 offering of Common Stock (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q filed August 12, 2009).

4.14Form of warrant to purchase common stock granted to the investors in connection with the September 2009 Private Placement (incorporated by reference to Exhibit 4.1 to the Company’s Annual Report on Form 10-K filed December 29, 2010).

10.1Placement Agency Agreement dated July 25, 2008 by and between the Company and the Placement Agent (incorporated by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K filed January 13, 2009).

10.2Letter Agreement dated July 25, 2008 by and between the Company and the Placement Agent (incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K filed January 13, 2009).

10.3Letter Agreement dated August 19, 2008 by and between the Company and one of its directors (incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K filed January 13, 2009).

10.4Loan Agreement dated September 4, 2008 by and between the Company and First Savings Bank (incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K filed January 13, 2009).

10.5Letter Agreement dated January 9, 2009, by and between the Company and John Rhodes, relating to an equity financing agreement (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed February 23, 2009).

10.6Form of the Note Purchase Agreement, dated January 22, 2009, by and between the Company and various investors (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed February 23, 2009).

10.7Work Order dated December 19, 2008, by and between the Company and Johnson & Johnson Services, Inc. (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed February 23, 2009).

10.8Promissory Note, dated January 7, 2009, made and issued by the Company to John Rhodes (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed February 23, 2009).

10.9Beacon Solutions 2008 Long Term Incentive Plan (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed May 13, 2009.)

10.10Letter Agreement dated August 10, 2009 by and between the Company and John Rhodes (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q filed August 12, 2009).

10.11Promissory Note dated August 10, 2009 made and issued by the Company to John Rhodes Family Limited Partnership (incorporated by reference to Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q filed August 12, 2009).

10.12Selling Agency Agreement dated June 12, 2009 by and between the Company and the selling agent named therein (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed August 12, 2009).

10.13Secured Promissory Note, dated December 20, 2007, issued by Beacon to ADSnetcurve (incorporated by reference to Exhibit 10.6 to the Company’s Current Report on Form 8-K dated December 28, 2007).

10.14Asset Purchase Agreement, dated October 15, 2007, by and between Beacon and CETCON, Incorporated (“CETCON”)(incorporated by reference to Exhibit 10.7 to the Company’s Current Report on Form 8-K dated December 28, 2007).
10.15Secured Promissory Note, dated December 20, 2007, issued by Beacon to CETCON (incorporated by reference to Exhibit 10.8 to the Company’s Current Report on Form 8-K dated December 28, 2007).
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10.16Asset Purchase Agreement, dated October 15, 2007, by and between Beacon and Strategic Communications, LLC (incorporated by reference Exhibit 10.9 to the Company’s Current Report on Form 8-K dated December 28, 2007).

10.17Promissory Note, dated December 20, 2007, issued by Beacon to Strategic (incorporated by reference to Exhibit 10.10 to the Company’s Current Report on Form 8-K dated December 28, 2007).

10.18Asset Purchase Agreement, dated October 15, 2007, by and between Beacon and RFK Communications, LLC (“RFK”) (incorporated by reference to Exhibit 10.11 to the Company’s Current Report on Form 8-K dated December 28, 2007).

10.19Secured Promissory Note, dated December 20, 2007, issued by Beacon to RFK (incorporated by reference to Exhibit 10.12 to the Company’s Current Report on Form 8-K dated December 28, 2007).

10.20Agreement and Plan of Merger, dated October 15, 2007, by and among Beacon, BH Acquisition Sub, Inc., Bell Haun Systems, Inc. (“BHS”) and BHS shareholders (incorporated by reference to Exhibit 10.13 to the Company’s Current Report on Form 8-K dated December 28, 2007).

10.21Promissory Note, dated December 20, 2007, issued by Beacon to the BHS shareholders (incorporated by reference to Exhibit 10.14 to the Company’s Current Report on Form 8-K dated December 28, 2007).

10.22Promissory Notes, dated December 20, 2007, issued by Beacon to Thomas O. Bell and Michael T. Haun (incorporated by reference to Exhibit 10.15 to the Company’s Current Report on Form 8-K dated December 28, 2007).

10.23Registration Rights Agreement, dated December 20, 2007, between Beacon, the placement agent for the Preferred Stock offerings and certain investors (incorporated by reference to Exhibit 10.16 to the Company’s Current Report on Form 8-K dated December 28, 2007).

10.24**Employment Agreement , dated December 2007, between the Company and Bruce Widener  (incorporated by reference to Exhibit 99.8 to the Company’s Quarterly Report on Form 10-Q filed February 19, 2008).

10.25**Employment Agreement, dated December 2007, between the Company and Richard C. Mills (incorporated by reference to Exhibit 99.6 to the Company’s Quarterly Report on Form 10-Q filed February 19, 2008).

10.26**Employment Agreement, dated December 2007, between the Company and Robert R. Mohr (incorporated by reference to Exhibit 99.5 to the Company’s Quarterly Report on Form 10-Q filed February 19, 2008).

10.27**Employment Agreement dated May 12, 2009 by and between the Company and Bruce Widener (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed August 12, 2009).

10.28**Employment Agreement dated May 22, 2009 by and between the Company and Richard C. Mills (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q filed August 12, 2009).

10.29**Employment Agreement dated May 22, 2009 by and between the Company and Robert Mohr (incorporated by reference to Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q filed August 12, 2009).

10.30**Executive Employment Agreement dated as of June 1, 2010 by and between the Company and Mark A. Gervasoni (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed June 2, 2010)

10.31Documents related to the Integra Bank Credit Facility (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-QSB dated May 15, 2008).

10.32Registration Rights Agreement dated July 25, 2008 by and between the Company and the placement agent retained in the July 2008 offering of Common Stock (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed August 19, 2008).
10.33Project Management Services Agreement dated November 6, 2009 by and between Beacon Solutions AG, a wholly owned subsidiary of the Company, and Interxion (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed February 16, 2010).
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10.34Placement Agency Agreement dated September 28, 2009 by and between the Company and the Placement Agent (incorporated by reference to Exhibit 10.33 to the Company’s Annual Report on Form 10-K filed December 29, 2009).

10.35Amendment to the Executive Officer Employment Agreement dated September 16, 2011 by and between the Company and Bruce Widener (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed September 16, 2011).

10.36Amendment to the Executive Officer Employment Agreement dated September 16, 2011 by and between the Company and Jerry Bowman (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed September 16, 2011).

10.37Amendment to the Executive Officer Employment Agreement dated September 16, 2011 by and between the Company and Michael Grendi (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed September 16, 2011).

10.38Amendment to the Executive Officer Employment Agreement dated September 16, 2011 by and between the Company and Victor Agruso (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed September 16, 2011).

14.1Code of Ethics (incorporated by reference to Exhibit 14.1 to the Company’s Annual Report on Form 10-K filed January 13, 2009).

21.1*Subsidiaries of the Registrant.

31.1*Certification of Principal Executive Officer, pursuant to Rule 13a-14(a) of the Sarbanes-Oxley Act of 2002.

31.2*Certification of Principal Executive Officer, pursuant to Rule 13a-14(a) of the Sarbanes-Oxley Act of 2002.

32.1*Certification of Principal Executive Officer, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

32.2*Certification of Principal Executive Officer, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.INSXBRL Instance Document **

101.SCHXBRL Taxonomy Extension Schema Document ***

101.CALXBRL Taxonomy Extension Calculation Linkbase Document ***

101.DEFXBRL Taxonomy Extension Definition Linkbase Document ***

101.LABXBRL Taxonomy Extension Label Linkbase Document ***

101.PREXBRL Taxonomy Extension Presentation Linkbase Document ***

*Denotes filed herein.

**Denotes compensatory plan or management contract.

96



***Pursuant to applicable securities laws and regulations, the Company is deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and is not subject to liability under any anti-fraud provisions of the federal securities laws as long as the Company has made a good faith attempt to comply with the submission requirements and promptly amends the interactive data files after becoming aware that the interactive data files fails to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability.
Page 69

 
SIGNATURES
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on December 29, 2009.12, 2011.
 
BEACON ENTERPRISE SOLUTIONS GROUP, INC.
BEACON ENTERPRISE SOLUTIONS GROUP, INC.
 By:
/s/  Bruce WidenerBRUCE WIDENER
Bruce Widener
Chief Executive Officer and Chairman of the
Board of Directors
Chief Executive Officer and Chairman of the
Board of Directors

Date: December 29, 200912, 2011

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
 
SignatureTitle
Date
    
Signature
Title
Date
 
     
/s/  Bruce WidenerBRUCE WIDENER

Bruce Widener
 Chief Executive Officer and
December 12, 2011
Chairman of the Board
Bruce Widener(Principal Executive Officer) December 29, 2009
     
/s/  J. Sherman HendersonSHERMAN HENDERSON III

J. Sherman Henderson III
 Director December 29, 200912, 2011
J. Sherman Henderson III
     
/s/  Dr. JohnDR. JOHN D. RhodesRHODES III

DirectorDecember 12, 2011
Dr. John D. Rhodes III Director December 29, 2009
     
/s/  Robert MohrS. SCOTT FITZPATRICK

Robert Mohr
 Chief Accounting Officer
Vice President Corporate Controller &
December 12, 2011
Treasurer
S. Scott Fitzpatrick(Principal Financial Officer) December 29, 2009


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