Beacon Enterprise Solutions Group, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders' Equity (Deficiency)

(Unaudited)

(all amounts in 000's except share data)

		Series A Convertible								Series A-1 Convertible								Series B Convertible																								Accumulated
		Preferred Stock								Preferred Stock								Preferred Stock								Common Stock								Additional								Other
						$1,000 Stated								$1,000 Stated								$1,000 Stated								$0.001 Par				Paid-In				Accumulated				Comprehensive
		Shares				Value				Shares				Value				Shares				Value				Shares				Value				Capital				Deficit				Income				Total
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																																			179												179
Warrants issued under consulting agreements																																			46												46
Amortization of market value of common stock vested for investor relations agreement																																			6												6
Amortization of non-employee stock options issued for performance of services																																			15												15
Warrants issued for credit facility																																			30												30
Discount on senior secured notes payable																																			78												78
Series A-1 Preferred Stock contractual dividends																																							(8	)							(8	)
Series A-1 Preferred Stock contractual dividends paid in in kind																																							(11	)							(11	)
Net income																																							6,257								6,257
Net change in accumulated other comprehensive income																																											588				588
Balance at December 31, 2010			30			$	30				311			$	311				700			$	700				37,376,396			$	37			$	37,491			$	(33,473	)		$	81			$	5,177

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

 

Page 5

---

 

 

Beacon Enterprise Solutions Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(all amounts in 000's)

		For the Three				For the Three
		Months Ended				Months Ended
		December 31,				December 31,
		2010				2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)		$	6,257			$	(1,031	)
Net (income) loss from discontinued operations (including gain on deconsolidation of $7,892 for the three months ended December 31, 2010)			(7,892	)		$	(161	)
Net loss from continuing operations			(1,635	)			(1,192	)
Adjustments to reconcile net income (loss) to net cash used in continuing operating activities:
Change in reserve for obsolete inventory			15				12
Change in reserve for doubtful accounts			37				37
Depreciation and amortization			132				163
Non-cash interest			26				88
Share based payments			276				319
Change in fair value of warrants with anti-dilution rights			-				24
Amortization of deferred finance fees			14				-
Change in deferred tax liability			15				-
Changes in operating assets and liabilities:
Accounts receivable			193				589
Inventory			16				85
Prepaid expenses and other assets			(100	)			(58	)
Accounts payable			(575	)			(730	)
Accrued expenses			1,030				(1,138	)
CASH USED IN CONTINUING OPERATING ACTIVITIES			(556	)			(1,801	)
CASH PROVIDED BY DISCONTINUED OPERATIONS			-				1,244
NET CASH USED IN OPERATING ACTIVITIES			(556	)			(557	)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures			(35	)			(168	)
Capital expenditures of discontinued operations			-				(186	)
NET CASH USED IN INVESTING ACTIVITIES			(35	)			(354	)
CASH FLOWS FROM CONTINUING FINANCING ACTIVITIES
Proceeds from sale of common stock, net of offering costs			-				2,425
Proceeds from issuance of senior secured notes payable, net of offering costs			1,377				-
Proceeds from non-current line of credit - related party			310				-
Payments on non-current line of credit - related party			(940	)			-
Payments on short term debt			-				(550	)
Repayment of convertible notes			-				(224	)
Payments of notes payable			(385	)			(169	)
NET CASH PROVIDED BY CONTINUING FINANCING ACTIVITIES			362				1,482
Effect of exchange rate changes on cash and cash equivalents			91				5
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS			(138	)			576
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD			246				227
CASH AND CASH EQUIVALENTS - END  OF PERIOD		$	108			$	803
Supplemental disclosures
Cash paid for:
Interest		$	31			$	24
Income taxes		$	-			$	-

 

In January 2010, the Financial Accounting Standards Board ("FASB") issued ASU No. 2010-02, “Accounting and Reporting for Decreases in Ownership of a Subsidiary- a Scope Clarification to address implementation issues related to the changes in ownership provisions in the Consolidation-Overall Subtopic (Subtopic 810-10) of the FASB Accounting Standards Codification. Subtopic 810-10 establishes the accounting and reporting guidance for noncontrolling interests and changes in ownership interests of a subsidiary. An entity is required to deconsolidate a subsidiary when the entity ceases to have a controlling financial interest in the subsidiary. Upon deconsolidation of a subsidiary, an entity recognizes a gain or loss on the transaction and measures any retained investment in the subsidiary at fair value. The gain or loss includes any gain or loss associated with the difference between the fair value of the retained investment in the subsidiary and its carrying amount at the date the subsidiary is deconsolidated. In contrast, an entity is required to account for a decrease in its ownership interest of a subsidiary that does not result in a change of control of the subsidiary as an equity transaction. See Note 4 for the impact on the condensed consolidated financial statements as of December 31, 2010.

 

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 condensed consolidated financial statements upon adoption.

 

Page 9

---

 

NOTE 4 —

DISCONTINUED OPERATIONS

 

As previously disclosed in the Company’s Current Report on Form 10-Q filed on August 16, 2010, due to a contractual dispute with its one significant customer and the inability to reach a settlement, Datacenter Contractors AG’s (“DC”, formerly known as “Beacon Solutions AG”) Board has elected to discontinue DC’s operations.  As a result, the net sales and expenses associated with DC have been reclassified as discontinued operations for the three months ended December 31, 2009 in the condensed consolidated financial statements.

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 DC 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 subsidiary from the condensed consolidated financial statements for the three months ended December 31, 2010.  The resultant deconsolidation generated a net income of $7,892 which is mainly composed of the elimination of the net liabilities of the discontinued DC operations from Beacon’s operations.

We accounted for the filing under the guidance of ASU No. 2010-02, “Accounting and Reporting for Decreases in Ownership of a Subsidiary- a Scope Clarification” which requires an entity to deconsolidate a subsidiary when the entity ceases to have a controlling financial interest in the subsidiary.

 

NOTE 5 —

ACCRUED EXPENSES

 

Accrued expenses consist of the following:

		As of				As of
		December 31,				September 30,
		2010				2010
Compensation related		$	742			$	483
Customer deposits			498				29
Dividends			172				153
Interest			60				50
Other			480				165
		$	1,952			$	880

 

NOTE 6 —

NOTES PAYABLE AND LINE OF CREDIT – RELATED PARTY

 

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.  The Notes bear interest at 9% APR.  The Placement will be 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 will also be used for additional working capital.  The Placement will expire on the sooner of (a) March 15, 2011 if the Minimum has not been met or (b) the date that the Maximum has been raised.  The Notes have not been and will not be registered under the 1933 Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.  The notes are secured by all business assets of the Company, as defined.  As of December 31, 2010 we have issued $1,551 of notes, 232,664 warrants and have recorded interest expense of $18.  We incurred financing fee of $174 which has been recognized as deferred finance fees 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 $78 and allocated the debt proceeds in accordance with the relative fair value method.  The notes payable have been recorded on the Condensed Consolidated Balance Sheet as of December 31, 2010 at $1,473 which is net of the discount representing the allocation of the $78 relative fair value to the warrants. We will record interest in the condensed consolidated statements of operations as the discounted note is accreted to face value over the life of the debt.

 

Page 10

---

 

 

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 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 December 31, 2010, we have issued 75,000 warrants.  Using the Black Scholes method, we have determined the warrants have a fair value of $30 which has been recorded as other expense for the three months ended December 31, 2010. As of December 31, 2010, we do not have an outstanding balance under this facility.

NOTE 7 —

RELATED PARTY TRANSACTIONS

 

 The Company has obtained insurance through an agency owned by one of its founding stockholders/directors.  Insurance expense of $31and $45 was paid to the agency for each of the three months ended December 31, 2010 and 2009, respectively.

NOTE 8 —

COMMITMENTS AND CONTINGENCIES

 

Litigation

 

On 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.  Although the outcome of this matter cannot be predicted at this time, Beacon believes this lawsuit is without merit.  As of December 31, 2010, no provision has been made in the condensed consolidated financial statements related to this action, as the Company believes that the ultimate disposition of this matter will not have a material adverse effect on the Company’s financial position or results of operations.

Operating Leases

 

The Company has entered into operating leases for office facilities in Louisville, KY, Columbus, OH Cincinnati, OH, and Prague, Czech Republic. Rent expense for the three months ended December 31, 2010 and 2009, respectively amounted to $50 and $48. 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:

 

2011		$	195
2012			116
2013			116
2014			89
2015			80
Thereafter			47
		$	643

 

Engagement of Investor Relations Firms

 

On December 17, 2009, we engaged an investor relations firm for a twenty four month period, the commitment date being November 1, 2009, providing for compensation payable in 50,000 shares of fully vested non-forfeitable common stock with an aggregate fair value of $45.  For three months ended December 31, 2010, we recorded approximately $6 of investor relations expense related to this agreement.

 

Engagement for Advisory Services

 

On January 1, 2009, we entered into a three year advisory agreement with a stockholder, whereby the party will provide corporate finance and business strategy advisory services pertaining to Beacon’s business affairs in the areas of business combinations, financing, etc. This agreement was subsequently extended to a total of 5 years in April 2010.  We recorded $9 of professional fees expense under this agreement for the three months ended December 31, 2010.

 

Page 11

---

 

 

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 three months ended December 31, 2010, we recorded approximately $46 of investor relation expense related to these agreements.

NOTE 9 —

STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

Each share of Series A, Series A-1 and Series B preferred stock has voting rights equal to the equivalent number of common shares into which it is convertible. The holders of the Series A and Series A-1 are entitled to receive contractual cumulative dividends in preference to any dividend on the common stock at the rate of 10% per annum on the initial investment amount commencing on the date of issue. The holders of the Series B 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 and Series A-1) at the rate of 6% per annum on the initial investment amount commencing on the date of issue. Such dividends are payable on January 1, April 1, July 1 and October 1 of each year. Dividends accrued but unpaid as of December 31, 2010, are $45 for Series A, $43 for Series A-1 and $84 for Series B, respectively.

 

The Company applies the classification and measurement principles enumerated in ASC 815 with respect to accounting for its issuances of the Series A, A-1, and B preferred stock. The Company is required, under Nevada law, to obtain the approval of its Board of Directors in order to effectuate a merger, consolidation or similar event resulting in a more than 50% change in control or a sale of all or substantially all of its assets.

 

We evaluate convertible preferred stock at each reporting date for appropriate balance sheet classification.

Preferred Stock Dividends

 

 We follow the guidelines of ASC 505 Equity - Dividends and Stock Splits when accounting for pay-in-kind (“PIK”) dividends that are settled in convertible securities with beneficial conversion features. Therefore, we recorded $0 and $25 of deemed dividends for the three months ended December 31, 2010 and 2009, respectively, 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 PIK election dates.

 

Issuance of non-employee compensatory options

 

During the fiscal year ended September 30, 2010, in consideration for services, we granted options to purchase 250,000 shares of Common Stock vesting ratably over a 36 month period.  We calculated the fair value of the options using the Black-Scholes option pricing model resulting in a fair value determination of $188, to be recognized over a 36 month period. For the three months ended December 31, 2010 we recognized share based compensation of $15 related to these options.

 

Stock Options and Other Equity Compensation Plans

 

During the three months ended December 31, 2010, our Board of Directors authorized the Company to grant two tranches of employee stock options to purchase 140,000 and 585,115 shares of common stock, respectively.  The options have ten year terms and vest over 5 and 3 year periods, respectively.  We calculated the fair value of the options using the Black-Scholes option pricing model with the following assumptions:

 

		For the Three
		Months Ended
		December 31,
		2010
Stock Price		$	0.63
Expected Life			5.5 - 7.5
Volatility			178	%
Risk-free interest rate			1.17	%
Dividend Yield			0	%
Fair value of options			$0.60 - $0.62

 

Page 12

---

 

 

We recognized non-cash share-based employee compensation expenses as follows:

 

		For the Three				For the Three
		Months Ended				Months Ended
		December 31,				December 31,
		2010				2009
Non-Cash Share-Based Compensation Expense
Restricted Stock		$	-			$	45
Stock Options			179				200
Total Stock Compensation Expense		$	179			$	245

 

A summary of the status of our stock option plan and the changes during the three months ended December 31, 2010, is presented in the table below:

										Weighted
										Average
						Weighted				Remaining				Aggregate
		Number				Average				Contractual				Intrinsic
		Of Options				Exercise Price				Life				Value
Options Outstanding at October 1, 2010			3,718,533			$	1.47
Granted			725,115			$	0.93
Forfeited			-			$	-
Options Outstanding at December 31, 2010			4,443,648			$	2.40				8.97			$	-
Options Exercisable, December 31, 2010			1,301,799			$	1.18				8.50			$	-

 

As of December 31, 2010, there was $1,841 in unamortized share-based compensation cost. This cost is expected to be recognized over the remaining weighted average vesting period of approximately 2 years.

 

  

NOTE 10 —

Segment Reporting

 

 In accordance with ASC 280 “Segment Reporting,” our operating segments are those components of our business for which separate and discrete 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.

 

In accordance with ASC 280, the Company reports two operating segments, North America and Europe.  The Company’s chief decision-makers review financial information presented on a consolidated basis, accompanied by disaggregated information about net 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 net sales, segment operating profitability, and total assets by segment. Shared corporate operating expenses are reported in the United States (“U.S.”) segment.

 

The Company is organized primarily on the basis of operating units which are segregated by geography in the U.S. and Europe.  For the three months ended December 31, 2010 our segment results, net of Discontinued Operations (see Note 4 for more details) are as follows:

 

Page 13

---

 

		United States				Europe				Total
Net sales		$	2,710			$	1,264			$	3,974
Loss from operations			(684	)			(704	)			(1,388	)
Other expense			(184	)			(101	)			(285	)
Depreciation and amortization			(122	)			(10	)			(132	)
Net loss from continuing operations			(883	)			(752	)			(1,635	)
Net loss from discontinued operations			-				7,892				7,892
Assets			9,391				2,243				11,634
Capital expenditures			35				-				35
Goodwill			2,792				-				2,792
Intangible Assets			2,947				-				2,947

 

In our European operations 96% of the net sales were generated by one customer for the three months ended December 31, 2010.

NOTE 11 —

SUBSEQUENT EVENTS

 

As of February 11, 2011 we have received additional net proceeds of $825 (gross proceeds of $927 less offering costs of $102 and issued 139,110 warrants related to the Senior Secured Notes.

 

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

 

Page 14

---

 

 

 

ITEM 1. LEGAL PROCEEDINGS

 

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

 

ITEM 4. Removed and Reserved.

 

ITEM 5. Other Information

 

ITEM 6. EXHIBITS

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

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

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

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

*

This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934

 

Page 21

---

 

 

SIGNATURES

 

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

Date: February 14, 2011	Beacon Enterprise Solutions Group, Inc.
	By:	/s/ Bruce Widener
		Bruce Widener
		Chief Executive Officer and Chairman of the
		Board of Directors
		and
Date: February 14, 2011	By:	/s/ Michael Grendi
		Michael Grendi
		Principal Financial Officer

 

Page 22

---