GENESIS GROUP HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ACCOUNTING POLICIES
Basis of Presentation
Genesis Group Holdings, Inc., (formerly known as Genesis Realty Group, Inc.) and i-RealtyAuction.com, Inc.) (“we”, “us”, “our”, “Genesis” or “the Company”, which, unless the context otherwise indicates, includes the Company and its consolidated subsidiaries) was incorporated on November 22, 1999 under the laws of the State of Delaware. The Company is a provider of specialty contracting services, primarily in the installation of fiber optic telephone cable. These services are provided throughout the United States and include engineering, construction, maintenance and installation services to telecommunications providers, underground facility locating services to various utilities including telecommunications providers, and other construction and maintenance services to electric and gas utilities and others.
On September 17, 2012 the Company acquired 100% of the outstanding capital stock of TNS, Inc. (“TNS”), an Illinois corporations based in Des Plaines, Illinois. TNS is a provider of structured cabling and distributed antenna systems primarily in the Chicago, Illinois area. The purchase price for TNS was $4,927,500 paid with $700,000 in cash, 5,000,000 shares of common stock and 4,150 shares of Series F Preferred Stock. The Company granted the TNS sellers the right to put the shares of common stock to the Company for $.10 per share beginning March 17, 2014, and continuing for sixty days thereafter. Additional consideration will also be paid in the event certain operating results are achieved by TNS. The holders of the Series F Preferred Stock can demand that an aggregate of 3,000 shares of Series F Preferred be redeemed beginning on November 27, 2012, with the redemption to occur within twenty days of such request. The holders may also request an additional 575 shares of Series F Preferred be redeemed beginning on September 17, 2013 and an additional 575 shares of Series F Preferred be redeemed beginning on September 17, 2014. In the event that certain operating results are achieved or not achieved by TNS, additional shares of Series F Preferred Stock may be issued or issued shares of Series F Preferred Stock may be cancelled based on an agreed upon formula.
On September 17, 2012 the Company acquired all the outstanding capital stock of ADEX Corporation, a New York corporation, and ADEXCOMM Corporation, a New York Corporation (“ADEXCOMM”) and all outstanding membership interests of ADEX Puerto Rico LLC, a Puerto Rican limited liability company (“ADX Puerto RICO”), and together with ADEX and ADEXCOMM, the ADEX Entities. The ADEX entities are an international service organization that provides turnkey services and project staffing solutions exclusively to the telecommunication industry. ADEX assists telecommunications companies throughout the project life cycle of any network deployment. The purchase price for the ADEX entities was $15,198,262, which was paid with $12,819,594 in cash, a note in the amount of $1,046,000, and an amount of cash equal to the net working capital of the ADEX entities as of the closing date, $1,332,668. This payment was secured by the issuance of 1,500 shares of Series G Preferred Stock. As additional consideration the Company agreed to pay the ADEX sellers an amount of cash equal to the product of 0.75 (the “Multiplier”) multiplied by the adjusted EBITDA of the ADEX entities for the twelve months beginning October 1, 2012, (the “Forward EBITDA”). If the Forward EBITDA is less than $2,731,243, the Multiplier shall be adjusted to 0.50, and if the Forward EBITDA is greater than $3,431,243, the Multiplier shall be adjusted to 1.0. The company also agreed to pay the ADEX sellers an amount of cash equal to the amount, if any, by which the Forward EBITDA is greater than $3,081,243. In connection with these obligations, the Company issued 2,000 shares of Series G Preferred Stock, which are held in escrow. These shares are redeemable in the event the company defaults on its obligation to make the required payments. These shares of Series G Preferred are automatically cancelled if payments are made in cash by the Company.
On September 13, 2012, Genesis sold 60% of the outstanding shares of the common stock of Digital Comm Inc., to Billy Caudill, a former director of the company, in exchange for the issuance to Genesis by Billy Caudill of a non-recourse promissory note in the aggregate principal amount of $125,000 dated September 13, 2012 pursuant to a Purchase and Sale Agreement dated July 30, 2012. The note is secured by the purchased shares. Digital Comm Inc. was a wholly owned subsidiary which was acquired on January 14, 2010.
Principles of Consolidation and Accounting for Investments in Affiliate Company
The consolidated financial statements include the results of Genesis and its wholly owned subsidiaries, and RM Engineering, an entity under common control, which was acquired on December 29, 2011, which is consolidated in accordance with FASB guidance related to variable interest entities. All intercompany accounts and transactions have been eliminated in consolidation. The Company has the option to purchase the remaining ownership of RM Engineering for a de minimus amount.
We consolidate all variable interest entities (“VIEs”) where we are the primary beneficiary. For VIEs, we assess whether we are the primary beneficiary as prescribed by the accounting guidance on the consolidation of VIEs. The primary beneficiary of a VIE is the party that has the power to direct the activities that most significantly impact the performance of the entity and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the entity. We consolidated RM Engineering because of our option to purchase the remaining 51% ownership of RM Engineering for a de minimus amount.
The financial statements reflect all adjustments, consisting of only normal recurring accruals which are, in the opinion of management, necessary for a fair presentation of such statements. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). However, the financial statements do not include all of the financial information and footnotes required by GAAP for complete financial statements. Additionally, the results of operations for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the entire year. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2011 included in the Company’s 2011 Annual Report on Form 10-K, filed with the SEC on April 16, 2012.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and reporting period. Accordingly, actual results could differ from those estimates.
GENESIS GROUP HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. ACCOUNTING POLICIES (continued)
Segment Information
The Company operates in one reportable segment as a specialty contractor, providing engineering, construction, maintenance and installation services to telecommunications providers, underground facility locating services to various utilities including telecommunications providers, and other construction and maintenance services to electric and gas utilities and others. All of the Company’s operating segments have been aggregated into one reporting segment due to their similar economic characteristics, products and production methods, and distribution methods.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the amount paid to acquire subsidiaries over the estimated fair value of the net assets acquired. Goodwill and intangibles with indefinite useful lives are not amortized but are subject to an annual impairment test. The company will test goodwill and non-amortized intangibles using a two-step process. Under the first test, the company determines the fair value of ech reporting unit to which goodwill has been assigned and then compares the fair value to the unit’s carrying value, including goodwill. If the fair value exceeds the carrying value, no impairment loss is recognized. If the carrying value exceeds the fair value, the goodwill of the reporting unit is considered potentially impaired and the second step is performed to measure the impairment loss. Under the second step, the company calculates the implied fair value of goodwill by deducting the fair value of all tangible and intangible net assets, including any unrecognized intangible assets, of the reporting unit from the fair value of the unit as determined in the first step. The company then compares the implied fair value of goodwill to the carrying value of goodwill. If the implied fair value of goodwill is less than the carrying value of goodwill, the company recognizes an impairment loss equal to the difference.
The company is in the process of having a valuation performed of the goodwill and other intangible assets acquired in order to determine the proper allocation between goodwill and recognized intangible assets.
Revenue Recognition
The Company recognizes revenue on arrangements in accordance with ASC Topic 605-10-S99, Revenue Recognition-Overall-SEC Materials. Revenue is recognized only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collectability of the resulting receivable is reasonably assured.
The Company’s revenues are generated from contracted services to design, installation, and repair services of structured data and voice cabling systems to small and mid-size commercial and governmental entities. Prior to commencement of services and depending on the length of the services to be provided, the Company secures the client’s acceptance of a written proposal. Generally, the services are provided over a period ranging between 2 days to 14 days. If the Company anticipates that the services span over a month, the Company usually requires a down payment from the customer, which help pay for the cabling and accessories and it will provide a monthly progress billing, based on services rendered, or upon completion of the contracted services.
Fair Value
The company applies a three-level valuation hierarchy for valuation hierarchy for fair value measurements. The categorization of assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. Level 1 inputs to the valuation methodology utilize unadjusted quoted market prices in active markets for identical assets and liabilities. Level 2 inputs to the valuation methodology are other observable inputs, including quoted market prices for similar assets and liabilities, quoted prices for identical and similar asets and liabilities in the markets that are not active, or other inputs that are observable or can be corroborated by observable market data. Level 3 inputs to the valuation methodology are unobservable inputs based upon management’s best estimate of the inputs that market participants would use in pricing the asset or liability at the measurement date, including assumptions about risk. The company utilizes fair value measurements in determining the carrying value of its investment and derivative liabilities.
For purposed of determining the carrying value of its investments, the company used a Level 3 input. For purposes of determining the derivative liability, the company used Level 3 inputs
Recently Issued Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board (“FASB”) issued guidance on testing goodwill for impairment. The new guidance provides an entity the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines that this is the case, it is required to perform the currently prescribed two-step goodwill impairment test to identify potential goodwill impairment and measure the amount of goodwill impairment loss to be recognized for that reporting unit (if any). If an entity determines that the fair value of a reporting unit is greater than its carrying amount, the two-step goodwill impairment test is not required.
The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012
2. ACQUISITIONS AND DISPOSALS
Disposal of Digital Comm, Inc. Subsidiary
On September 13, 2012, the company sold 60% of the outstanding shares of the common stock of Digital Comm Inc., to Billy Caudill, a former director of the company, in exchange for the issuance to the company by Billy Caudill of a non-recourse promissory note in the aggregate principal amount of $125,000 dated September 13, 2012 pursuant to a Purchase and Sale Agreement dated July 30, 2012. The note is secured by the purchased shares.
Acquisition of TNS, Inc.
On September 17, 2012 the Company acquired 100% of the outstanding capital stock of TNS, Inc. (“TNS”), an Illinois corporations based in Des Plaines, Illinois. TNS is a provider of structured cabling and distributed antenna systems primarily in the Chicago, Illinois area. The purchase price for TNS was $4,927,500 paid with $700,000 in cash, 5,000,000 shares of common stock and 4,150 shares of Series F Preferred Stock. The Company granted the TNS sellers the right to put the shares of common stock to the Company for $.10 per share beginning March 17, 2014, and continuing for sixty days thereafter. Additional consideration will also be paid in the event certain operating results are achieved by TNS. The holders of the Series F Preferred Stock can demand that an aggregate of 3,000 shares of Series F Preferred be redeemed beginning on November 27, 2012, with the redemption to occur within twenty days of such request. The holders may also request an additional 575 shares of Series F Preferred be redeemed beginning on September 17, 2013 and an additional 575 shares of Series F Preferred be redeemed beginning on September 17, 2014. In the event that certain operating results are achieved or not achieved by TNS, additional shares of Series F Preferred Stock may be issued or issued shares of Series F Preferred Stock may be cancelled based on an agreed upon formula.
GENESIS GROUP HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Acquisition of ADEX Entities
On September 17, 2012 the Company acquired all the outstanding capital stock of ADEX Corporation, a New York corporation, and ADEXCOMM Corporation, a New York Corporation (“ADEXCOMM”) and all outstanding membership interests of ADEX Puerto Rico LLC, a Puerto Rican limited liability company (“ADX Puerto RICO”), and together with ADEX and ADEXCOMM, the ADEX Entities. The ADEX entities are an international service organization that provides turnkey services and project staffing solutions exclusively to the telecommunication industry. ADEX assists telecommunications companies throughout the project life cycle of any network deployment. The purchase price for the ADEX entities was approximately $15,198,262, which was paid with $12,819,594 in cash, a note in the amount of $1,046,000, and an amount of cash equal to the net working capital of the ADEX entities as of the closing date, $1,332,668. This payment was secured by the issuance of 1,500 shares of Series G Preferred Stock. As additional consideration the Company agreed to pay the ADEX sellers an amount of cash equal to the product of 0.75 (the “Multiplier”) multiplied by the adjusted EBITDA of the ADEX entities for the twelve months beginning October 1, 2012, (the “Forward EBITDA”). If the Forward EBITDA is less than $2,731,243, the Multiplier shall be adjusted to 0.50, and if the Forward EBITDA is greater than $3,431,243, the Multiplier shall be adjusted to 1.0. The company also agreed to pay the ADEX sellers an amount of cash equal to the amount, if any, by which the Forward EBITDA is greater than $3,081,243. In connection with these obligations, the Company issued 2,000 shares of Series G Preferred Stock, which are held in escrow. These shares are redeemable in the event the Company defaults on its obligation to make the required payments. These shares of Series G Preferred are automatically cancelled if payments are made in cash by the Company.
The final purchase prices for the above acquisitions were calculated as follows:
| | | TNS | | | ADEX | |
| Cash | | $ | 700,000 | | | $ | 12,819,594 | |
| Promissory Notes | | | - | | | | 2,378,668 | |
| Common Stock | | | 77,500 | | | | - | |
| Redeemable Preferred Stock | | | 4,150,000 | | | | - | |
| | | | | | | | | |
| Total Purchase Price | | $ | 4,927,500 | | | $ | 15,198,262 | |
| the final purchase prices were allocated to the assets acquired and liabilities assumed as follows: | |
| | | | | | | |
| | | TNS | | | ADEX | |
| Goodwill and other intangible assets, primarily customer list | | $ | 4,730,231 | | | $ | 10,284,144 | |
| Good will and other intangibles of Unaudited profroma results of operations as if the Company had acquired TNS and ADEX as of January 1, 2011 and had disposed of Digital as of January 1, 2011 are as follows: |
| | | | | | | | | | | | | | | | |
| Quarter Ended September 30, 2011 | | | | | | | | | | | | | | | |
| | | Genesis | | | TNS | | | ADEX | | | Digital | | | Total | |
| Revenue | | $ | 651,299 | | | $ | 937,401 | | | $ | 10,525,019 | | | $ | (402,870 | ) | | $ | 11,710,849 | |
| Income (loss) from operations | | $ | (440,208 | ) | | $ | (166,691 | ) | | $ | 580,649 | | | $ | 170,739 | | | $ | 144,489 | |
| Net income (loss) | | $ | 1,397,244 | | | $ | (16,691 | ) | | $ | 550,762 | | | $ | 204,450 | | | $ | 2,135,765 | |
| Income (loss) per share basic and diluted | | $ | 0.010 | | | $ | (0.001 | ) | | $ | 0.004 | | | $ | 0.001 | | | $ | 0.014 | |
GENESIS GROUP HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| Quarter Ended September 30, 2012 | | | | | | | | | | | | | | | |
| | | Genesis | | | TNS | | | ADEX | | | Digital | | | Total | |
| Revenue | | $ | 1,477,097 | | | $ | 518,628 | | | $ | 8,470,513 | | | $ | (555,998 | ) | | $ | 9,910,240 | |
| Income (loss) from operations | | $ | (666,920 | ) | | $ | (140,600 | ) | | $ | (880,704 | ) | | $ | 223,850 | | | $ | (1,464,374 | ) |
| Net income (loss) | | $ | (1,788,299 | ) | | $ | (140,600 | ) | | $ | (940,006 | ) | | $ | 288,983 | | | $ | (2,579,922 | ) |
| Income (loss) per share basic and diluted | | $ | (0.008 | ) | | $ | (0.001 | ) | | $ | (0.004 | ) | | $ | 0.001 | | | $ | (0.012 | ) |
| Nine Months Ended September 30, 2011 | | | | | | | | | | | | | | | |
| | | Genesis | | | TNS | | | ADEX | | | Digital | | | Total | |
| Revenue | | $ | 2,703,830 | | | $ | 2,965,518 | | | $ | 26,251,950 | | | $ | (1,691,956 | ) | | $ | 30,229,342 | |
| Income (loss) from operations | | $ | (1,866,641 | ) | | $ | 171,278 | | | $ | 965,835 | | | $ | 487,294 | | | $ | (242,234 | ) |
| Net income (loss) | | $ | (3,458,960 | ) | | $ | 171,278 | | | $ | 887,732 | | | $ | 748,256 | | | $ | (1,651,694 | ) |
| Income (loss) per share basic and diluted | | $ | (0.028 | ) | | $ | 0.001 | | | $ | 0.007 | | | $ | 0.006 | | | $ | (0.013 | ) |
| Nine Months Ended September 30, 2012 | | | | | | | | | | | | | | | |
| | | Genesis | | | TNS | | | ADEX | | | Digital | | | Total | |
| Revenue | | $ | 4,400,863 | | | $ | 1,958,941 | | | $ | 23,768,369 | | | $ | (1,691,956 | ) | | $ | 28,436,217 | |
| Income (loss) from operations | | $ | (1,551,183 | ) | | $ | 12,969 | | | $ | (508,575 | ) | | $ | 487,294 | | | $ | (1,559,495 | ) |
| Net income (loss) | | $ | (3,227,567 | ) | | $ | 12,969 | | | $ | (597,255 | ) | | $ | 748,256 | | | $ | (3,063,597 | ) |
| Income (loss) per share basic and diluted | | $ | (0.017 | ) | | $ | - | | | $ | (0.003 | ) | | $ | 0.004 | | | $ | (0.016 | ) |
3. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
| | | September 30, | | | December 31, | |
| | | 2012 | | | 2011 | |
| Vehicles | | $ | 506,038 | | | $ | 605,247 | |
| Computers and Office Equipment | | | 322,397 | | | | 91,098 | |
| Equipment | | | 794,972 | | | | 440,241 | |
| Small Tools | | | - | | | | 20,504 | |
| Total | | | 1,623,407 | | | | 1,157,089 | |
| | | | | | | | | |
| Less accumulated depreciation | | | (1,449,750 | ) | | | (818,331 | ) |
| | | | | | | | | |
| Property and equipment, net | | $ | 173,657 | | | $ | 338,759 | |
Depreciation expense for the three months ended September 30, 2012 was $41,434, as compared to $14,916 in the same period of 2011. Depreciation for the nine months ended September 30, 2012 was $80,644 as compared to $28,066 for the same period in 2011.
GENESIS GROUP HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. BANK DEBT
Bank debt consists of the following:
| | | September 30, 2012 | | | December 31, 2011 | |
| | | | | | | |
| Two installment notes payable, payable monthly principal and interest of $621.24 and $533.24, interest at 9.05% and 0% secured by vehicle, maturing June 2015 and July 2016 | | $ | 25,063 | | | $ | 51,569 | |
| Three Lines of credit, payable monthly principal and interest, with interest ranging 5.5% to 8.05%, guaranteed personally by principal shareholders, maturing July 2012, June 2015 and February 2020 | | | 466,731 | | | | 761,078 | |
| | | | 491,794 | | | | 812,647 | |
| Less: Current portion of debt | | | (347,045 | ) | | | (114,358 | ) |
| Long term portion of bank debt | | $ | 144,749 | | | $ | 698,289 | |
5. NOTES PAYABLE – OTHER
Notes payable, other consist of the following:
| | September 30, 2012 | | | December 31, 2011 | |
| | | | | | |
| Note payable, UTA refer to Note 6 | | $ | - | | | $ | 516,522 | |
| Note payable, Mid-Market Capital, refer to Note 6 | | 13,000,000 | | | | | |
| Promissory note, 6% interest, due June 2013 unsecured (described further below) | | | - | | | | 825,761 | |
| 8% convertible promissory notes, unsecured, maturing November 2011, paid January 2012 through May 2012 | | | -0- | | | | 112,500 | |
| Convertible promissory notes, unsecured, maturing in December 2012 | | | 50,000 | | | | - | |
| Acquisition promissory note to former shareholders of RM Engineering & Leasing, unsecured, non-interest, matured in March 2012 and June 2012 | | | 200,000 | | | | 200,000 | |
| Convertible promissory notes, unsecured, maturing in December 2012 | | | 25,000 | | | | - | |
| Promissory notes, unsecured, maturing in October 2012 | | | 530,000 | | | | - | |
| Promissory notes due on demand, due June 2011 | | | | | |
| non- interest bearing with 1,000,000 share equity component | | | -0- | | | | 8,000 | |
| Promissory note, unsecured, non-interest bearing due July 2011, | | | | | |
| with 2,000,000 common shares equity component | | | 9,500 | | | | 39,500 | |
| | | | | | | | | |
| | | | 13,814,500 | | | | 1,702,283 | |
| | | | | | | | | |
| Less: Current portion of debt | | | (1,464,500 | ) | | | (876,522 | ) |
| | | | | | | | | |
| Long term portion of notes payable, other | | $ | 12,350,000 | | | $ | 825,761 | |
On July 5, 2011the Company entered into a definitive master funding agreement (“Master Agreement”) with Tekmark® Global Solutions, LLC (“Tekmark”) and MMD Genesis LLC. (“MMD Genesis”). Pursuant to the parties’ Master Agreement, the Company did receive financing in the original principal amount of up to $2,000,000 from Tekmark and a line of credit in the original principal amount of up to $1,000,000 from MMD Genesis. Both financings were effected pursuant to Promissory Notes with two year terms, interest at 1% per month. Tekmark funding is secured by the Company’s accounts receivable. Funding by Tekmark was in the form of payroll funding support for specific and approved customers of the Company. On September 30, 2012, the remaining balance of $658,380 due to MMD Genesis, along with accrued interest of $122,760 was converted to 781 shares of preferred stock. As of September 30, 2012 and December 31, 2011the balances owed Tekmark and MMD Genesis was $0 and $497,381, and $0 and $328,380 respectively.
GENESIS GROUP HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
On August 6, 2010, UTA Capital LLC provided a working capital loan to the Company with Digital also as an additional borrower. The loan was evidenced by a Note and Warrant Purchase Agreement between Digital and Genesis and UTA Capital, LLC dated August 6, 2010. The Agreement called for two senior bridge notes in the amount of $1 million each, for an aggregate principal amount of $2 million. The Company received an initial draw from the first $1 million note of $960,000 net of fees.
Additionally, the Company issued to UTA Capital, LLC warrants to purchase 20,952,381 shares of common stock at a price of $0.15 per share which allow for cashless exercise. Pursuant to generally accepted accounting standards, the relative fair value of the warrant was calculated using the Black-Scholes Option Valuation Model. This amount, totaling approximately $455,540, had been recorded as a debt discount and charged to interest expense over the life of the promissory note.
On September 17, 2012 the Company repaid remaining principal of $750,000 plus accrued interest to UTA Capital. On September 16, 2012 the Company also entered into a Stock Purchase Agreement with UTA whereby the Company issued to UTA 24,940,263 shares of Genesis common stock on September 17, 2012 as consideration for UTA to retire and cancel a warrant dated August 6, 2010. In connection with the Stock Purchase Agreement, if it is subsequently determined that the shares issued to UTA did not represent 11.1% of the issued and outstanding shares of capital stock of the Company on a fully diluted basis as of September 17, 2012, the Company agrees to issue to UTA such additional shares of Genesis common stock required for the sum of the shares issued to UTA to equal 11.1% of the issued and outstanding capital stock of the Company on a fully diluted basis as of September 17, 2012.
5. NOTE PAYABLE – MIDMARKET CAPITAL
On September 17, 2012, Genesis entered into a Loan and Security Agreement with the lender referred to therein, (“the “Lenders”) MidMarket Capital Partners, LLC as agent for the Lenders (the “Agent”) and certain subsidiaries of Genesis as Guarantors (the “Loan Agreement”). Pursuant to the Loan Agreement, the Lenders provided Genesis with senior secured first lien term loans in an aggregate amount of $13,000,000 (the “Term Loans”). A portion of the proceeds of the Term Loans were used to finance the acquisitions of ADEX, ADEX Puerto Rico, ADEXCOMM and TNS, to repay certain outstanding indebtedness, (including all indebtedness owed to UTA Capital, LLC) and to pay fees, costs and other expenses related thereto. The remainder of the Term Loan may be used by Genesis to finance certain other acquisitions (“Potential Acquisitions”) and for working capital and long-term financing needs.
The Term Loans mature September 17, 2017, provided that if the Company fails to raise by March 14, 2014, at least $30,000,000 in connection with a public offering of voting equity securities of Genesis, the Term Loans shall mature on June 17, 2014. If no Potential Acquisition is completed within ninety days of September 17, 2012, the Company is required to repay $750,000 of the Term Loan.
Interest on the Term Loan accrues at a rate of 12% per annum.
Subject to certain exceptions, all obligations of Genesis under the Term Loans are unconditionally guaranteed by each of Genesis’s existing and subsequently acquired or organized direct and indirect domestic subsidiaries (the “Guarantors”) pursuant to the terms of a Guaranty and Suretyship Agreement dated as of September 17, 2012, by Rives-Monterio Leasing, LLC and Tropical Communications, Inc., both wholly owned subsidiaries of Genesis, in favor of the Agent (the “Guaranty”), as supplemented by an Assumption and Joinder Agreement date as of September 17, 2012 by and among Genesis, ADEX, TNS and the Agent (the “Joinder”). Pursuant to the terms of the Loan Agreement, the Guaranty (as supplemented by the Joinder) and a Pledge Agreement dated as of September 17, 2012 by Genesis in favor of the Agent, the obligation of Genesis and the Guarantors in respect of the Term Loans are secured by a first priority security interest in substantially all of the assets of Genesis and the Guarantors, subject to certain customary exception.
The Term Loans are subject to certain representations and warranties, affirmative covenants, negative covenants, financial covenants and conditions. The Term Loans also contain events of default including, but not limited to, the failure to make payments of interest or premium, if any, on, or principal under the Term Loans, the failure to comply with certain covenants and agreements specified in the Loan Agreement and other loan documents entered into in connection therewith for a period of time after notice has been provided, the acceleration of certain other indebtedness resulting from the failure to pay principal on such other indebtedness, certain events of insolvency and the occurrence of any event, development or condition which has had or could reasonably be expected to have a material adverse effect. If any event a default occurs, the principal premium, if any, interest and any other monetary obligations on all the then outstanding amounts under the Term Loans may become due and payable immediately.
Pursuant to the Term Loan Agreement, Genesis issued warrants to the Lenders (the “Warrants”), which entitle the Lenders to purchase a number of shares of common stock equal to 10% of the fully diluted shares of Genesis common stock on the date on which the Warrants first become exercisable, which is the earlier of December 16, 2012 and the date Genesis files a registration statement on Form S-1 with respect to its common stock. The Warrants have an exercise price of $.01 per share, subject to adjustment as set forth in the Warrants, and will expire on March 16, 2013.
6. NOTE PAYABLE - RELATED PARTY
This account is comprised of the following loans from related parties:
| | | September 30, 2012 | | | December 31, 2011 | |
| | | | | | | |
| Principal shareholders of the Company, unsecured | | | | | | |
| Non-interest bearing, due on demand | | $ | - | | | $ | 1,635 | |
| | | | | | | | | |
| 3rd Party promissory note with company under common | | | | | | | | |
| Ownership by officer and former owner of Tropical. | | | | | | | | |
| 6.75% interest, monthly payments of interest only of | | | | | | | | |
| $1,007, unsecured and personally guaranteed by | | | | | | | | |
| Officer, due November 2016 | | | 105,694 | | | | 110,294 | |
| | | | | | | | | |
| Officer and former owner of RM Leasing, unsecured | | | | | | | | |
| Non-interest bearing, due on demand | | | 3,728 | | | | 3,728 | |
| | | | | | | | | |
| | | | 109,422 | | | | 115,657 | |
| | | | | | | | | |
| Less: Current portion of debt | | | (3,728 | ) | | | (5,364 | ) |
| | | | | | | | | |
| Long term portion of notes payable, other | | $ | 105,694 | | | $ | 110,293 | |
GENESIS GROUP HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. DERIVATIVE LIABILITY
The Company analyzed the Note and Purchase Warrant Agreement referred to in Note 6 based on the provisions of ASC 815-15 and determined that the conversion option of the loan agreement qualifies as an embedded derivative.
The fair value upon inception of the embedded derivatives are calculated using the Black-Scholes option pricing model and recorded as embedded derivative liabilities. The embedded derivatives are revalued at the end of each reporting period and any resulting gain or loss is recognized as a current period charge to the statement of operations.
The Company accounts for the embedded conversion features included in its warrants as derivative liabilities. The aggregate fair value of derivative liabilities as of September 30, 2012 and December 31, 2011 amounted to $361,881 and $1,143, respectively. The increase of $360,738 in the fair value of the derivative liability between the respective periods is included in other expense. The Company used a common stock price of $.0197, with a risk free interest rate of 1%, and using comprables, a 57% common stock volatility to determine the fair value of the derivative liability as of September 30, 2012.
8. INCOME TAXES
No provisions for income taxes have been made because the Company has sustained cumulative losses since the commencement of operations. As of September 30, 2012 and December 31, 2011 the Company had net operating loss carry forwards (“NOL’s”) of approximately $6,734,000 and $3,827,000, which will be available to reduce future taxable income and expense through 2031, subject to limitations pursuant to IRC Section 382 in the event of a more than fifty percent change of ownership.
9. COMMON STOCK
On August 8, 2012 the Company issued 2,000,000 shares of the Company’s common stock in exchange for consulting services relating to public relations valued at the fair market price of $0.012 per share for a value of $24,000.
On August 29, 2012 the Company issued 24,940,263 shares of the Company’s common stock to UTA Capital in exchange for UTA Capital exercising common stock warrants with a cashless exercise. The common stock was valued at the fair market price of $0.016 per share. The total value of the shares issued was $399,044.
On September 17, 2012 the Company issued 5,000,000 shares of the Company’s common stock with a fair market price of $0.0155 per share in connection with the acquisition of TNS, Inc. The common stock was issued to the principals of TNS, Inc. The total value of the stock issued was $77,500.
10. PREFERRED STOCK
In July 2012 the Company issued to various investors 350 shares of Series C Preferred Stock in exchange for $350,000.
In August 2012 the Company issued to various investors 50 shares of Series B Redeemable Preferred Stock in Exchange for $50,000.
In September 2012 the Company issued to various investors 3,000 shares of Series E Preferred Stock in exchange for $3,000,000. The Series E Preferred Stock was issued with warrants to purchase 4.99% of the fully diluted issued and outstanding common stock.
In September 2012 the Company issued to various investors 781 shares of Series E Preferred Stock in exchange for certain lenders converting principal and accrued interest on notes payable of $781,140.
As of September 30, 2012 the accrued preferred dividend was $71,034. As of September 30, 2011 the accrued dividend was $0.
11. STOCK COMPENSATION
For the three month period ending September 30, 2012 the Company incurred $223,998 in stock compensation expense compared to $0 in 2011 from the issuance of 5,200,000 in shares of its common stock in 2010 that had been due to one of the Company’s officers, as compensation, both pursuant to the terms of his employment agreement and accrued salary plus the issuance of 10,500,000 bonus compensation shares to employees and officers and the issuance of 5,000,000 shares of common stock to one of the Company’s officers as compensation pursuant to the terms of his employment agreement, along with the issuance of 2,000,000 shares of common stock to a consultant in the third quarter of 2012. For the nine month period ended September 30 2012 the Company incurred $603,998 in stock compensation expense as compared to $930,000 in the same period of 2011.
12. RISKS AND UNCERTAINTIES
The Company is subject to risk and uncertainty common to start-up companies including, but not limited to, successful development, promotion, and sale of services, and expansion of market coverage.
As reflected in the accompanying financial statements, the Company has incurred significant losses from operations and negative operating cash flows, which have been financed primarily by proceeds from stock and debt issuance. As a result the Company had accumulated deficits of $13,599,948 and $9,620,926 at September 30, 2012 and December 31, 2011 respectively.
Management plans to continue raising additional working capital and funds for the continued development of its contracts for services through public sale of the Company's common stock, debt securities or borrowing from financial institutions. Management is also attempting to expand the number of job contracts which could increase cash flow during early stages of sales growth. No assurance can be given that the Company will successfully expand its number of third party jobs or that sufficient capital can be raised to support those contracts.
13. SUBSEQUENT EVENTS
During October 2012, the Company agreed to issue 1,175 shares of Series H Preferred Stock to various investors in exchange for $1,175,000.
| Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion of our financial condition and results of operation for the three and six months ended June 30, 2012 and 2011 should be read in conjunction with the unaudited financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Item 1A. Risk Factors appearing in our Annual Report on Form 10-K for the year ended December 31, 2011 as previously filed with the Securities and Exchange Commission. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.
Overview
Genesis Group Holdings, Inc. (formerly known as Genesis Realty Group, Inc.) (“Genesis” or “the Company”) is a provider of specialty contracting services, primarily in the installation of fiber optic telephone cable. These services are provided throughout the United States and include engineering, construction, maintenance and installation services to telecommunications providers, underground facility locating services to various utilities including telecommunications providers, and other construction and maintenance services to electric and gas utilities and others.
The following discussions compare the consolidated financial results of Genesis and its wholly owned subsidiaries for 2012 and 2011 and its liquidity and capital resources at September 30, 2012.
Results of Operations
Revenues for the three and nine month periods ended September 30, 2012 increased by approximately $2,299,000 and $3,170,000 or 353% and 117%, respectively, to approximately $2,950,000 and $5,874,000 as compared to approximately $651,000 and $2,704,000 in 2011 respectively, which results primarily from the company’s inclusion of revenues from the acquisitions of Tropical Communications, Inc. and Rives-Monteiro Engineering in 2011 and the company’s acquisitions of ADEX and TNS in 2012. The acquisitions of Tropical Communications, Rives-Monteiro Engineering, TNS and ADEX accounted for approximately all of the increase in revenues.
Cost of revenues earned in 2012 increased by approximately $1,399,000 and $2,070,000 or 423% and 137% respectively for the three and nine months to approximately $1,730,000 and $3,583,000 respectively, as compared to approximately $331,000 and $1,513,000 in 2011. Costs of revenues were 59% for the three months in 2012, as compared to 51% for the same period in 2011. Cost of revenues were 61% for the nine month period ended September 30, 2012, as compared to 56% for the same period of 2011. These increases in costs were the result of the Company’s acquisitions of Tropical Communications, Inc., Rives-Monteiro Engineering, TNS and ADEX which accounted for approximately all of the increase. The Company continued its efforts of cost containment and better utilization of its personnel. Cost of revenues for 2012 and 2011 primarily consisted of direct labor provided by employees, services provided by subcontractors, direct material and other related costs. For a majority of the contract services we perform, our customers provide all necessary materials and we provide the personnel, tools and equipment necessary to perform installation and maintenance services.
For the three and nine months periods ended September 30 periods in 2012 the Company incurred approximately $224,000 and $604,000 in stock compensation expense compared to $0 and $930,000 in 2011 from the issuance of 5,000,000 shares of its common stock to an officer of the Company and 2,000,000 shares of common stock to a consultant in 2012 and the issuance of 2,000,000 shares of its common stock to employees and 8,500,000 shares of its common stock to three of the officers of the Company as award based compensation during 2011.
For the three and nine month periods ended September 30, 2012 salaries and wages increased approximately $133,000 and $477,000 to approximately $741,000 and $1,495,000 in 2012 as compared to approximately $608,000 and $1,018,000 in 2011 respectively. The increase was due to the acquisitions of Tropical Communications, Rives-Monteiro Engineering, TNS and ADEX which accounted for the majority of the increase. The acquisitions of ADEX and TNS in September 2012 will cause salaries and wages to increase over previous levels.
General and administrative costs include all of our corporate costs, as well as costs of our subsidiaries management personnel and administrative overhead. These costs consist of office rental, legal, consulting and professional fees, travel costs and other costs that are not directly related to performance of our services under customer contracts. General and administrative expenses in 2012 for the three and nine month periods were 23% and 25% of revenues versus 21% and 40% in 2011. The costs increased approximately $554,000 and $392,000 or 400% and 36% respectively to approximately $692,000 and $1,473,000 respectively in 2012, as compared to approximately $138,000 and $1,081,000 respectively in 2011. The increases were primarily the result of increased costs for travel, and insurance and other costs. The acquisitions of Tropical Communications and Rives-Monteiro Engineering, TNS and ADEX accounted for the majority of the increase.
Interest expense increased by approximately $456,000 and $273,000 respectively to approximately $777,000 and $1,371,000 for the three and nine month period ended September 30, 2012, from approximately $321,000 and $1,098,000 in the same periods of 2011. The decrease was primarily a result of a decrease in costs associated with borrowing from 2011 to 2012.
The unrealized loss on the change in fair value of the derivative increased to a loss of approximately $361,000 as compared to a gain of approximately $2,158,000 and increased to a loss of approximately $361,000 as compared to a loss of approximately $495,000 for the same period in 2011.
Liquidity and Capital Resources
Liquidity is the ability of a company to generate sufficient cash to satisfy its needs for cash. At September 30, 2012 the Company had a positive working capital of approximately $1,634,000 as compared to a working capital deficit of approximately $1,277,000 at December 31, 2011. This 228% increase in working capital is primarily the result of the acquisitions of TNS and ADEX in September 2012, which both had positive working capital. The company also converted approximately $781,000 of debt to preferred stock.
Net cash used in operating activities for the nine months in 2012 was approximately $1,409,000 which reflects the increases in accounts receivable offset by the increases in accounts payable and accrued expenses, combined with the net loss for the period, as compared to net cash used by operating activities of approximately $898,000 for the nine months ended September 30,2011.
Net cash used from investing activities for the nine months ended September 30, 2012 was approximately $13,481,000, which primarily consists of cash paid for the acquisitions of TNS and ADEX, as compared to approximately $63,000 in 2011, which was primarily the purchase of capital equipment.
Net cash provided by financing activities for the nine months in 2012 was approximately $15,049,000 which resulted from proceeds from the sale of preferred stock of $4,671,000 and the Mid Market borrowings of $13,000,000, which was offset by the repayments of notes and loans payable. This is compared to approximately $1,030,000 in 2011, which was the result of third party borrowings and the sale of common stock.
Our cash resources are not sufficient to meet anticipated working capital requirements for at least the following three to four months. Accordingly, to resolve this shortfall in liquidity the Company continues to pursue an aggressive course to raise funds from borrowings and capital raises, although there can be no assurances that the Company will be successful in its efforts.
Recent Accounting Pronouncements
In May 2011, the FASB issued guidance and clarification about the application of existing fair value measurements and disclosure requirements. This guidance will be effective for interim and fiscal periods beginning after December 15, 2011. We will review the requirements under the standard to determine what impacts, if any, the adoption would have on our consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable for a smaller reporting company.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based on his evaluation as of the end of the period covered by report, our Chief Executive Officer who also serves as our Chief Financial Officer has concluded that our disclosure controls and procedures were not effective such that the information relating to our company, required to be disclosed in our Securities and Exchange Commission reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to our management to allow timely decisions regarding required disclosure as a result of material weaknesses in our disclosure controls and procedures. The material weaknesses relate to our inability to timely file our reports and other information with the SEC as required under Section 13 of the Securities Exchange Act of 1934. To remediate the material weaknesses in disclosure controls and procedures related to our inability to timely file reports and other information with the SEC, we have hired experienced accounting personnel to assist with filings and financial record keeping.
Changes in Internal Control over Financial Reporting
There have been no changes in internal control over financial reporting that occurred during the nine months covered by this report that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
In May, 2012 a former employee filed suit in the United States District Court for the Southern District of Florida alleging entitlement for relief under the Fair Labor Standards Act, as amended, 29 U.S.C. §201 et. seq. The Company has asserted that the employee was an exempt managerial employee and not entitled to any relief under the act.
Item 1A. Risk Factors.
Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this prospectus, before deciding whether to invest in our common stock. If any of the following risks actually materializes, our business, financial condition and results of operations would suffer. The trading price of our common stock could decline as a result of any of these risks, and you might lose all or part of your investment in our common stock. You should read the section entitled “Forward-Looking Statements” immediately following these risk factors for a discussion of what types of statements are forward-looking statements, as well as the significance of such statements in the context of this prospectus.
Risks Related to Our Business
If we are unable to accurately estimate the overall risks or costs when we bid on a contract that is ultimately awarded to us, we may achieve a lower than anticipated profit or incur a loss on the contract.
Substantially all of our revenues are typically derived from fixed unit price contracts. Fixed unit price contracts require us to perform the contract for a fixed unit price irrespective of our actual costs. As a result, we realize a profit on these contracts only if we successfully estimate our costs and then successfully control actual costs and avoid cost overruns. If our cost estimates for a contract are inaccurate, or if we do not execute the contract within our cost estimates, then cost overruns may cause us to incur losses or cause the contract not to be as profitable as we expected. This, in turn, could negatively affect our cash flow, earnings and financial position.
The costs incurred and gross profit realized on such contracts can vary, sometimes substantially, from the original projections due to a variety of factors, including, but not limited to:
| | ● | onsite conditions that differ from those assumed in the original bid; |
| | | |
| | ● | delays caused by weather conditions or project owners notice to proceed; |
| | ● | contract modifications creating unanticipated costs not covered by change orders; |
| | ● | changes in availability, proximity and costs of construction materials, as well as fuel and lubricants for our equipment; |
| | ● | availability and skill level of workers in the geographic location of a project; |
| | ● | our suppliers’ or subcontractors’ failure to perform due to various reasons including bankruptcy; |
| | ● | fraud or theft committed by our employees; |
| | ● | mechanical problems with our machinery or equipment; |
| | ● | citations or fines issued by any governmental authority; |
| | ● | difficulties in obtaining required governmental permits or approvals or performance bonds; |
| | ● | changes in applicable laws and regulations; and |
| | ● | claims or demands from third parties alleging damages arising from our work or from the project of which our work is part. |
Economic downturns or reductions in government funding or infrastructure projects could reduce our revenues and profits and have a material adverse effect on our results of operations.
Our business is highly dependent on the amount and timing of infrastructure work funded by various governmental entities, and which, in turn, depends on the overall condition of the economy, the need for new or replacement infrastructure, the priorities placed on various projects funded by governmental entities and federal, state or local government spending levels.
The cancellation of significant contracts or our disqualification from bidding for new contracts could reduce our revenues and profits and have a material adverse effect on our results of operations.
Contracts that we enter into can usually be canceled at any time by the customer with payment only for the work already completed. In addition, we could be prohibited from bidding on certain governmental contracts if we fail to maintain qualifications required by those entities. A cancellation of an unfinished contract or our debarment from the bidding process could cause our equipment and work crews to be idled for a significant period of time until other comparable work became available, which could have a material adverse effect on our business and results of operations.
We operate in several states, including Ohio, Florida, Texas, Louisiana, and North Carolina any adverse change to the economy or business environment in any State that we perform work could significantly and adversely affect our operations, which would lead to lower revenues and reduced profitability.
Our acquisition strategy involves a number of risks.
In addition to organic growth of our business, we intend to continue pursuing growth through the acquisition of companies or assets that may enable us to expand our project skill-sets and capabilities, enlarge our geographic markets, add experienced management and increase critical mass to enable us to bid on larger contracts. However, we may be unable to implement this growth strategy if we cannot reach agreements for potential acquisitions on acceptable terms or for other reasons. Moreover, our acquisition strategy involves certain risks, including:
| | ● | difficulties in the integration of operations and systems; |
| | ● | difficulties applying our expertise in one market into another market; |
| | ● | the key personnel and customers of the acquired company may terminate their relationships with the acquired company; |
| | ● | we may experience additional financial and accounting challenges and complexities in areas such as tax planning and financial reporting; |
| | ● | we may assume or be held liable for risks and liabilities (including for environmental-related costs and liabilities) as a result of our acquisitions, some of which we may not discover during our due diligence; |
| | ● | our ongoing business may be disrupted or receive insufficient management attention; and |
| | ● | we may not be able to realize cost savings or other financial benefits we anticipated. |
Future acquisitions may require us to obtain additional equity or debt financing, as well as additional surety bonding capacity, which may not be available on terms acceptable to us or at all. Moreover, to the extent that any acquisition results in additional goodwill, it will reduce our tangible net worth, which might have an adverse effect on our credit and bonding capacity.
Our industry is highly competitive, with a variety of larger companies with greater resources competing with us, and our failure to compete effectively could reduce the number of new contracts awarded to us or adversely affect our margins on contracts awarded.
Essentially all of the contracts on which we bid are awarded through a competitive bid process, with awards generally being made to the lowest bidder, but sometimes recognizing other factors, such as shorter contract schedules or prior experience with the customer. Within our markets, we compete with many national, regional and local construction firms. Some of these competitors have achieved greater market penetration than we have in the markets in which we compete, and some have greater financial and other resources than we do. In addition, there are a number of national companies in our industry that are larger than we are and that, if they so desire, could establish a presence in our markets and compete with us for contracts. As a result, we may need to accept lower contract margins in order to compete against competitors that have the ability to accept awards at lower prices or have a pre-existing relationship with a customer. If we are unable to compete successfully in our markets, our relative market share and profits could be reduced.
Our dependence on subcontractors and suppliers of materials could increase our costs and impair our ability to complete contracts on a timely basis or at all, which would adversely affect our profits and cash flow.
We rely on third-party subcontractors to perform some of the work on many of our contracts. We generally do not bid on contracts unless we have the necessary subcontractors committed for the anticipated scope of the contract and at prices that we have included in our bid. Therefore, to the extent that we cannot engage subcontractors, our ability to bid for contracts may be impaired. In addition, if a subcontractor is unable to deliver its services according to the negotiated terms for any reason, including the deterioration of its financial condition, we may suffer delays and be required to purchase the services from another source at a higher price. This may reduce the profit to be realized, or result in a loss, on a contract.
We also rely on third-party suppliers to provide most of the materials for our contracts. We normally do not bid on contracts unless we have commitments from suppliers for the materials required to complete the contract and at prices that we have included in our bid. Thus, to the extent that we cannot obtain commitments from our suppliers for materials, our ability to bid for contracts may be impaired. In addition, if a supplier is unable to deliver materials according to the negotiated terms of a supply agreement for any reason, including the deterioration of its financial condition, we may suffer delays and be required to purchase the materials from another source at a higher price. This may reduce the profit to be realized, or result in a loss, on a contract.
If we are unable to attract and retain key personnel and skilled labor, or if we encounter labor difficulties, our ability to bid for and successfully complete contracts may be negatively impacted.
Our ability to attract and retain reliable, qualified personnel is a significant factor that enables us to successfully bid for and profitably complete our work. This includes members of our management, project managers, estimators, supervisors, foremen, equipment operators and laborers. The loss of the services of any of our management could have a material adverse effect on us. Our future success will also depend on our ability to hire and retain, or to attract when needed, highly-skilled personnel. Competition for these employees is intense, and we could experience difficulty hiring and retaining the personnel necessary to support our business. If we do not succeed in retaining our current employees and attracting, developing and retaining new highly-skilled employees, our reputation may be harmed and our future earnings may be negatively impacted.
Our contracts may require us to perform extra or change order work, which can result in disputes and adversely affect our working capital, profits and cash flows.
Our contracts generally require us to perform extra or change order work as directed by the customer even if the customer has not agreed in advance on the scope or price of the extra work to be performed. This process may result in disputes over whether the work performed is beyond the scope of the work included in the original project plans and specifications or, if the customer agrees that the work performed qualifies as extra work, the price that the customer is willing to pay for the extra work. These disputes may not be settled to our satisfaction. Even when the customer agrees to pay for the extra work, we may be required to fund the cost of such work for a lengthy period of time until the change order is approved by the customer and we are paid by the customer.
To the extent that actual recoveries with respect to change orders or amounts subject to contract disputes or claims are less than the estimates used in our financial statements, the amount of any shortfall will reduce our future revenues and profits, and this could have a material adverse effect on our reported working capital and results of operations. In addition, any delay caused by the extra work may adversely impact the timely scheduling of other project work and our ability to meet specified contract milestone dates.
Our failure to meet schedule or performance requirements of our contracts could adversely affect us.
In most cases, our contracts require completion by a scheduled acceptance date. Failure to meet any such schedule could result in additional costs, penalties or liquidated damages being assessed against us, and these could exceed projected profit margins on the contract. Performance problems on existing and future contracts could cause actual results of operations to differ materially from those anticipated by us and could cause us to suffer damage to our reputation within the industry and among our customers.
Unanticipated adverse weather conditions may cause delays, which could slow completion of our contracts and negatively affect our revenues and cash flow.
Because much of our work is performed outdoors, work on our contracts is subject to unpredictable weather conditions, which could become more frequent or severe if general climatic changes occur.. While revenues can be recovered following a period of bad weather, it is generally impossible to recover the inefficiencies, and significant periods of bad weather typically reduce profitability of affected contracts both in the current period and during the future life of affected contracts. Such reductions in contract profitability negatively affect our results of operations in current and future periods until the affected contracts are completed.
Timing of the award and performance of new contracts could have an adverse effect on our operating results and cash flows.
It is generally very difficult to predict whether and when new contracts will be offered for tender, as these contracts frequently involve a lengthy and complex design and bidding process, which is affected by a number of factors, such as market conditions, financing arrangements and governmental approvals. Because of these factors, our results of operations and cash flows may fluctuate from quarter to quarter and year to year, and the fluctuation may be substantial. In addition, the timing of the revenues, earnings and cash flows from our contracts can be delayed by a number of factors, including adverse weather conditions such as prolonged or intense periods of rain, snow, storms or flooding, delays in receiving material and equipment from suppliers and changes in the scope of work to be performed. Such delays, if they occur, could have adverse effects on our operating results for current and future periods until the affected contracts are completed.
Our dependence on a limited number of customers could adversely affect our business and results of operations.
Due to the size and nature of our construction contracts, one or a few customers have in the past and may in the future represent a substantial portion of our consolidated revenues and gross profits in any one year or over a period of several consecutive years. One customer may comprise a significant percentage of revenues at a certain point in time. The loss of business from any one of such customers could have a material adverse effect on our business or results of operations. Because we do not maintain any reserves for payment defaults, a default or delay in payment on a significant scale could materially adversely affect our business, results of operations and financial condition.
We may incur higher costs to lease, acquire and maintain equipment necessary for our operations, and the market value of our owned equipment may decline.
We own most of the construction equipment used on our projects. However, to the extent that we are unable to buy construction equipment necessary for our needs, either due to a lack of available funding or equipment shortages in the marketplace, we may be forced to rent equipment on a short-term basis, which could increase the costs of performing our contracts.
The equipment that we own or lease requires continuous maintenance, for which we maintain our own repair facilities. If we are unable to continue to maintain the equipment in our fleet, we may be forced to obtain third-party repair services, which could increase our costs. In addition, the market value of our equipment may unexpectedly decline at a faster rate than anticipated.
An inability to obtain performance bonding could limit the aggregate dollar amount of contracts that we are able to pursue.
As is customary in the construction business, we are required to provide surety bonds to secure our performance under certain construction contracts. Our ability to obtain surety bonds primarily depends upon our capitalization, working capital, past performance, management expertise and reputation and certain external factors, including the overall capacity of the surety market. Surety companies consider such factors in relationship to the amount of our backlog and their underwriting standards, which may change from time to time. Events that affect the insurance and bonding markets generally may result in bonding becoming more difficult to obtain in the future, or being available only at a significantly greater cost. Our inability to obtain adequate bonding, and, as a result, to bid on new contracts, could have a material adverse effect on our future revenues and business prospects.
Our operations are subject to hazards that may cause personal injury or property damage, thereby subjecting us to liabilities and possible losses, which may not be covered by insurance.
Our workers are subject to the usual hazards associated with providing construction and related services on construction sites. Operating hazards can cause personal injury and loss of life, damage to or destruction of property, plant and equipment and environmental damage. We maintain insurance coverage in amounts and against the risks that we believe are consistent with industry practice, but this insurance may not be adequate to cover all losses or liabilities that we may incur in our operations.
Insurance liabilities are difficult to assess and quantify due to unknown factors, including the severity of an injury, the determination of our liability in proportion to other parties, the number of incidents not reported and the effectiveness of our safety program. If we were to experience insurance claims or costs above our estimates, we might also be required to use working capital to satisfy these claims rather than to maintain or expand our operations. To the extent that we experience a material increase in the frequency or severity of accidents or workers’ compensation claims, or unfavorable developments on existing claims, our operating results and financial condition could be materially and adversely affected.
Environmental and other regulatory matters could adversely affect our ability to conduct our business and could require expenditures that could have a material adverse effect on our results of operations and financial condition.
Our operations are subject to laws and regulations relating to workplace safety and worker health, which, among other things, regulate employee exposure to hazardous substances. Immigration laws require us to take certain steps intended to confirm the legal status of our immigrant labor force, but we may nonetheless unknowingly employ illegal immigrants. Violations of such laws and regulations could subject us to substantial fines and penalties, cleanup costs, third-party property damage or personal injury claims. In addition, these laws and regulations have become, and enforcement practices and compliance standards are becoming, increasingly stringent. Moreover, we cannot predict the nature, scope or effect of legislation or regulatory requirements that could be imposed, or how existing or future laws or regulations will be administered or interpreted, with respect to products or activities to which they have not been previously applied. Compliance with more stringent laws or regulations, as well as more vigorous enforcement policies of the regulatory agencies, could require us to make substantial expenditures for, among other things, pollution control systems and other equipment that we do not currently possess, or the acquisition or modification of permits applicable to our activities.
The effectiveness of disclosure controls is inherently limited.
We do not expect that our disclosure controls and procedures, or our internal control over financial reporting, will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system objectives will be met. The design of a control system must also reflect applicable resource constraints, and the benefits of controls must be considered relative to their costs. As a result of these inherent limitations, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. Failure of the control systems to prevent error or fraud could materially adversely impact our financial results and our business.
Risks Related to Our Financial Results and Financing Plans
Actual results could differ from the estimates and assumptions that we use to prepare our financial statements.
To prepare financial statements in conformity with generally accepted accounting principles (“GAAP”), management is required to make estimates and assumptions, as of the date of the financial statements, which affect the reported values of assets and liabilities, revenues and expenses, and disclosures of contingent assets and liabilities. Areas requiring significant estimates by our management include: contract costs and profits and application of percentage-of-completion accounting and revenue recognition of contract change order claims; provisions for uncollectible receivables and customer claims and recoveries of costs from subcontractors, suppliers and others; valuation of assets acquired and liabilities assumed in connection with business combinations; and accruals for estimated liabilities, including litigation and insurance reserves. Our actual results could differ from, and could require adjustments to, those estimates.
In particular we recognize contract revenue using the percentage-of-completion method. Under this method, estimated contract revenue is recognized by applying the percentage of completion of the contract for the period to the total estimated revenue for the contract. Estimated contract losses are recognized in full when determined. Contract revenue and total cost estimates are reviewed and revised on a continuous basis as the work progresses and as change orders are initiated or approved, and adjustments based upon the percentage of completion are reflected in contract revenue in the accounting period when these estimates are revised. To the extent that these adjustments result in an increase, a reduction or an elimination of previously reported contract profit, we recognize a credit or a charge against current earnings, which could be material.
We may need to raise additional capital in the future for working capital, capital expenditures and/or acquisitions, and we may not be able to do so on favorable terms or at all, which would impair our ability to operate our business or achieve our growth objectives.
Our ability to obtain additional financing in the future will depend in part upon prevailing credit and equity market conditions, as well as conditions in our business and our operating results; such factors may adversely affect our efforts to arrange additional financing on terms satisfactory to us. We have pledged substantially all of our other assets as collateral in connection with our credit. As a result, we may have difficulty in obtaining additional financing in the future if such financing requires us to pledge assets as collateral. In addition, under our credit facility, we must obtain the consent of our lenders to incur any amount of additional debt from other sources (subject to certain exceptions). If future financing is obtained by the issuance of additional shares of common stock, our stockholders may suffer dilution. If adequate funds are not available, or are not available on acceptable terms, we may not be able to make future investments, take advantage of acquisitions or other opportunities, or respond to competitive challenges.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
In July 2012 the Company issued to various investors 350 shares of Series C Preferred Stock in exchange for $350,000. On August 8, 2012 the Company issued 2,000,000 shares of the Company’s common stock in exchange for consulting services relating to public relations valued at the fair market price of $0.012 per share.
In August 2012 the Company issued to various investors 50 shares of Series B Redeemable Preferred Stock in exchange for $50,000.
On August 29, 2012 the Company issued 24,940,263 shares of the Company’s common stock to UTA Capital in exchange for UTA Capital exercising common stock warrants with an exercise price of $0.00. The common stock was valued at the fair market price of $0.016 per share.
On September 17, 2012 the Company issued 5,000,000 shares of the Company’s common stock with a fair market price of $0.0155 per share in connection with the acquisition of TNS, Inc. The common stock was issued to the principals of TNS, Inc.
In September 2012 the Company issued to various investors 3,000 shares of Series E Preferred Stock in exchange for $3,000.000.
In September 2012 the Company issued to various investors 781 shares of Series E Preferred Stock in exchange for certain lenders converting principal and accrued interest on notes payable of $781,139.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None
Item 6. Exhibits.
| No. | Description |
| 2.1 | Stock Purchase Agreement dated as of September 17, 2012, by and among T N S, Inc., Joel Raven and Michael Roeske and Genesis Group Holdings, Inc. * |
| 2.2 | Equity Purchase Agreement dated as of September 17, 2012, by and among ADEX Corporation, ADEXCOMM Corporation, ADEX Puerto Rico, LLC, Peter Leibowitz, Gary McGuire, Marc Freedman and Justin Leibowitz and Genesis Group Holdings, Inc. * |
| 3.1 | Series E Certificate of Designation filed with the Delaware Secretary of State on September 18, 2012. * |
| 3.2 | Series F Certificate of Designation filed with the Delaware Secretary of State on September 17, 2012. * |
| 3.3 | Series G Certificate of Designation filed with the Delaware Secretary of State on September 17, 2012. * |
| 10.1 | Loan and Security Agreement dated as of September 17, 2012, by and among Genesis Group Holdings, Inc., Rives-Monteiro Leasing, LLC, Tropical Communications, Inc., the lenders party thereto and MidMarket Capital Partners, LLC, as agent. (1) |
| 10.2 | Guaranty and Suretyship Agreement dated as of September 17, 2012 by Rives-Monteiro Leasing, LLC and Tropical Communications, Inc. in favor of MidMarket Capital Partners, LLC, as agent. (1) |
| 10.3 | Assumption and Joinder Agreement dated as of September 17, 2012 by and among Genesis Group Holdings, Inc., ADEX Corporation, T N S, Inc. and MidMarket Capital Partners, LLC, as agent. (1) |
| 10.4 | Pledge Agreement dated as of September 17, 2012 by Genesis Group Holdings, Inc. in favor of MidMarket Capital Partners, LLC, as agent. (1) |
| 10.5 | Form of Warrant, dated September 17, 2012. (1) |
| 10.6 | Purchase and Sale Agreement, dated as of July 30, 2012 by Genesis Group Holdings, Inc. and Billy Caudill. (1) |
| 10.7 | Promissory Note, dated September 13, 2012, issued by Billy Caudill to Genesis Group Holdings, Inc. (1) |
| 10.8 | Stock Purchase Agreement, dated as of September 6, 2012 by Genesis Group Holdings, Inc. and UTA Capital, LLC. (1) |
| 10.9 | Promissory Note, dated September 17, 2012, issued by Genesis Group Holdings, Inc. in connection with the acquisition of ADEX Corporation. (1) |
| 10.10 | Form of Subscription Agreement for Series E Preferred. (1) |
| 10.11 | Form of Commons Stock Purchase Warrant. (1) |
| 31.1 | Rule 13a-14(a)/ 15d-14(a) Certification of Chief Executive Officer * |
| 31.2 | Rule 13a-14(a)/ 15d-14(a) Certification of principal financial and accounting officer * |
| 32.1 | Section 1350 Certification of Chief Executive Officer* |
| 32.2 | Section 1350 Certification of Chief Financial Officer, principal financial and accounting officer* |
* filed herewith
(1) Incorporated by reference to the Company's Current Report on Form 8-K filed on September 21, 2012
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | GENESIS GROUP HOLDINGS, INC. |
| November 19, 2012 | By: /s/ Daniel J. Sullivan | |
| | Daniel J. Sullivan, Chief Financial Officer, principal financial and accounting officer |
