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

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

For the transition period from          to
 
Commission File Number 000-31355
 
BEACON ENTERPRISE SOLUTIONS GROUP, INC.
(Exact name of registrant as specified in its charter)
 
Nevada
 
81-0438093
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
     
9300 Shelbyville Road, Suite 1020, Louisville, KY
 
40222
(Address of principal executive offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code
 (502) 657-3500
 Securities registered pursuant to Section 12(b) of the Act:
 None
 Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value.
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  ¨       No  þ
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  ¨       No  þ
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ     No  ¨
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  þ      No  ¨
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer ¨
 
Accelerated filer ¨
 
Non-accelerated filer ¨
 
Smaller reporting company þ
   
(Do not check if a smaller reporting company)          
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  ¨      No  þ
 
The aggregate market value of the voting and non-voting common equity held by non-affiliates was $8,728 based on the price of Beacon Enterprise Solutions Group, Inc.’s common stock as of December 5, 2011, as reported on the OTC Bulletin Board.
 
The number of shares outstanding of Beacon Enterprise Solutions Group, Inc.’s common stock as of December 5, 2011 was 37,631,896.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
Documents
 
Form 10-K Reference
None
 
Not Applicable
  
 
 

 
 
Beacon Enterprise Solutions Group, Inc.
FORM 10-K
 For the fiscal year ended September 30, 2011

 INDEX
 
 
   
   
Page
       
PART I
     
Item 1
Business
 
3
Item 1A
Risk Factors
 
6
Item 2
Properties
 
9
Item 3
Legal Proceedings
 
9
Item 4
Removed and Reserved
 
10
       
PART II
     
Item 5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
10
Item 7
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
11
Item 8
Financial Statements and Supplementary Data
 
17
Item 9
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
 
47
Item 9A
Controls and Procedures
 
47
Item 9B
Other Information
 
48
       
PART III
Item 10
Directors, Executive Officers and Corporate Governance
 
49
Item 11
Executive Compensation
 
51
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
63
Item 13
Certain Relationships and Related Transactions, and Director Independence
 
64
Item 14
Principal Accounting Fees and Services
 
65
       
PART IV
Item 15
Exhibits, Financial Statement Schedules
 
66
 
Signatures
 
70
 
 
Page 2

 
 
 
PART I
  
Item 1.  Business
 
 Beacon Enterprise Solutions Group, Inc. and subsidiaries (collectively the “Company”) provides global telecommunications and technology systems infrastructure services, encompassing a comprehensive suite of consulting, design, installation, and infrastructure management offerings. Beacon’s portfolio of infrastructure services spans all professional and construction requirements for design, build and management of telecommunications, network and technology systems infrastructure. Professional services offered include consulting, engineering, program management, project management, construction services and infrastructure management services; these services are offered either as a comprehensive contract vehicle or as unbundled services. Beacon also offers special services in support of qualified projects in the smart buildings/campuses/cities and data center verticals. Finally, Beacon provides managed information technology and telecommunications services in selected local markets. In this report, the terms “Company,” “Beacon,” “we,” “us” or “our” mean Beacon Enterprise Solutions Group, Inc. and all subsidiaries included in our consolidated financial statements.
 
General
 
The Company was originally formed to acquire companies that would allow it to serve the small and medium-sized business enterprises (the “SME Market”) on an integrated, turn-key basis from system design, procurement and installation through all aspects of providing network service and designing and hosting network applications.  During the fiscal year ended September 30, 2010, in response to identification of a significant underserved market, our business strategy shifted to become a global leader in the design, implementation and management of high performance ITS infrastructure solutions.  Beacon’s portfolio of ITS infrastructure services spans all professional and construction requirements for design, build and management of telecommunications, network and technology systems infrastructure, while continuing to provide managed information technology and telecommunications services in selected local markets.
 
For the purpose of this report on Form 10-K, all amounts are in thousands except share and per share data.  Beacon generated net sales of $18,894 for the year ended September 30, 2011. For the year ended September 30, 2011, Beacon recognized net income of approximately $3,222. Total assets were $11, 922 as of September 30, 2011.
 
Operations
 
Services
 Beacon provides global telecommunications and technology systems infrastructure services encompassing a comprehensive suite of consulting, design, installation, and infrastructure management offerings.  Beacon’s portfolio of infrastructure services spans all professional and construction requirements for design, build and management of telecommunications, network and technology systems infrastructure.  Professional services offered include consulting, engineering, program management, project management, construction services and infrastructure management services; these services are offered either as a comprehensive contract vehicle or as unbundled services
 
These services are provided to clients who require a global reach, proven experience and resources, and the consistent, predictable results that can only be offered by a single global company. Today’s global clients and international enterprises demand the competitive advantage obtained through outsourcing, without the additional cost, internal overhead and multiple points of failure that come from bidding for services from small regional professional services firms or contractors. Beacon offers companies a competitive, single-source advantage for consulting, design, implementation, program management, project management and managed services regardless of location. By overcoming the barriers to entry found in the telecommunications and technology systems channels, Beacon is offering the Fortune 1000 client a vehicle to more fully integrate global enterprise standards, reduce internal pressure on scarce IT and Facilities resources, reduce the risk that comes with multiple points of failure and increase operating income through the efficiencies that accompany true global strategic sourcing. Beacon offers this sourcing capability to our clients on a global, multi-national and regional basis.
 
 
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Management Services.  In addition to offering consulting, design, engineering and installation of telecommunications and technology systems infrastructure, Beacon offers infrastructure management services to address planning, moves, adds and changes to their telecommunications and technology systems. This service effectively bundles together all Beacon infrastructure services and offers them to clients under global, multi-national or regional umbrella agreements. To protect client investments and reduce total cost of ownership; global, multi-national or regional infrastructure management services are designed to: (i) reduce internal cost and complexity for obtaining engineering, installation or management related expenses, (ii) facilitate enterprise-wide standardization, (iii) eliminate duplicated effort, (iv) protect warranties, and (v) reduce costs associated with moves, adds and changes. The previously unavailable data which may be extracted from the Beacon management system can provide strategic planning insight and empirical data for management decisions, including the viability of new enterprise initiatives. Infrastructure management services also allow the telecommunications and technology systems infrastructure to be maintained by a planned and budgeted continuum, rather than as a reaction to a series of disconnected projects. Although Beacon clients may begin by using one of our discrete, project-oriented services (described below), the business model indicates that they will frequently evolve into a global, multi-national or regional infrastructure management client.
 
Design, Engineering & Construction Services.  The increasing economic, regulatory and environmental issues facing executives, IT and Facilities professionals has increased the number of complex technical and operational issues that need to be solved for each customer. In order to address these issues, Beacon has moved beyond the expected baseline of technical and educational requirements (Professional Engineer, RCDD, PMP, CPP, CISSP, etc.) into a new paradigm of cross-disciplinary business and technical professionals who understand the benefit of standardization, predictability and consistency when provided within a process-driven solution. Beacon provides each client with access to world-class engineering, design and installation resources, but offers them within a manner designed to permit a reduction in bottom line expenditures while reducing the workload of scarce internal resources. This contrasts the traditional bid mentality where clients lose any cost-benefit gained from the bid or proposal process, through increased pressure on internal resources needed to maintain the corporate standard while controlling the cost of administration of multiple vendors for identical tasks across a global enterprise. Beacon’s solution to the dramatic changes in world markets — geopolitical, macroeconomics, and technology, is to make business capability portable by providing the processes needed to make services delivery available on a global, multi-national or regional basis.
 
Special Services.  Additionally, Beacon leverages existing areas of internal expertise for projects involving data centers and smart (intelligent) buildings/campuses/cities in both the federal and private space; the nature of these engagements are unique and as such qualify for designation as a Beacon Special Service. Data Center Special Services rely on existing expertise in consulting, design, project management, bid management and construction of data centers. Service delivery for data centers range from one or more compartmentalized professional services up to acting as the prime contractor for the construction or retrofit of the entire data center. The approach to smart or intelligent buildings/campuses/cities is primarily an engineering or design service, but can involve design/build projects. Enabled by the increasing availability of Internet compatible building systems, with demand created by pressure on building developers and managers to become more sensitive to energy management and reduction of carbon footprint for the built environment, the experience and knowledge required to design the infrastructure for the more than 15 low-voltage systems found in most offices are escalating in demand.
 
Customers
 
Because Beacon provides infrastructure management services to global and multi-national customers, the primary target clients can be defined as the Fortune 1000, or the broader Forbes Global 2000. Global clients may also elect to use Beacon’s services in an ala carte fashion, typically using Design & Engineering services which are more portable when used outside of an infrastructure managed services contract vehicle. The business model for global, multi-national, federal and regional clients who use one or more unbundled services allows for migration to a fully managed services offering where all services are offered under a single contractual umbrella.

Suppliers
 
Beacon establishes manufacturer, distributor and subcontractor relationships from the global perspective. The lack of competitors offering infrastructure management services with a global reach provides Beacon with a distinct advantage. In addition, the global managed services business model provides an exclusive client relationship which is also attractive to suppliers. Beacon has accounts with various suppliers that provide services, products and materials necessary to fulfill our services and the needs of our customers. Such services and products are typically available from more than one supplier and we routinely review our supplier relationships to determine which have the most attractive footprint, logistics offerings and volume-based pricing. We use multiple criteria to evaluate our suppliers and purchase with those that provide us with the best overall fit.

Beacon also engages professional and construction-related services firms as contractors in specialized geographical areas, the qualification and selection of these firms’ is based on the same stringent background, chemical screening (where permissible by law) and technical assessments used in the hiring of our employees. Contractors are held to the same high levels of service delivery, knowledge of customer and industry standards, and compliance with Beacon and industry best practices. Contractors are only used with customer knowledge and consent and in those cases when geographical challenges or special skills are needed and cannot be overcome with internal resources.
 
 
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Seasonality
 
Due to the breadth of services offered to Beacon clients, seasonality issues are minimal. Some seasonality deltas are noted between professional and construction services, however the volume core services and infrastructure management services tend to mitigate the seasonal differences for the unbundled services offered on a global or regional basis.
 
Customer Concentration
 
For the years ended September 30, 2011 and 2010, our largest customer accounted for approximately 78% and 64% of sales, respectively. Although we expect we will continue to have a high degree of customer concentration, our customer engagements are typically covered by multi-year contracts or master service agreements under which we have been operating for a number of years.
 
Competition
 
Beacon’s service delivery offerings, and therefore its competitors, can be divided into two broad categories. First, services that are offered individually, generally in response to the client needs for a single service within a single project or task, and secondly, services that are offered as a single source package (managed services and outsourcing) and delivered as part of a regional, national, multi-national or global contract, generally with a specified window of time. When offering a single service in response to a single project or task, there are numerous competitors. These tend to be mid- to small-sized competitors that are single site or confined to specific geographic regions and generally aggressively compete for private or publicly announced work. Further, they typically specialize in only one of multiple services the client may actually need. These smaller, single service competitors are generally viewed as being commoditized. Beacon’s model allows us to successfully leverage the bigger managed services offering and introduce scalability by allowing our clients the option to expand the number of services offered and the geography over which the service is delivered. By removing the business risk associated with having only a single service to offer to new and existing clients, it further allows Beacon to differentiate itself by offering a higher level of service with a more predictable price. So by leveraging the multi-service, global capabilities of Beacon, we attain a significant competitive edge for the first category of competitors, as well as reduce the pool of competitors for the full-spectrum managed infrastructure services offered across broad geographic areas. There are several national infrastructure firms that have the size and funding to become direct competitors, but by nature of their size and current business models they would experience significant internal resistance to change.
 
Employees

Beacon currently employs 76 people in offices located in Louisville, KY, Columbus, OH, Raritan, NJ, Cincinnati, OH and Prague, Czech Republic. None of Beacon’s employees is subject to a collective bargaining agreement.
 
Available Information
 
Our Internet address is www.askbeacon.com, where we make available, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports, as soon as practicable after such reports are electronically filed with, or furnished to, the SEC. The SEC reports can be accessed through the “SEC Filings” link in the “Investor Relations” section of our website. Other information found on our website is not part of this or any other report we file with, or furnish to, the Securities and Exchange Commission, or the SEC.
 
Code of Ethics
 
We have adopted a Code of Ethics that applies to all of our directors, officers and employees. The Code is available on our website. If any waivers of the Code are granted, the waivers will be disclosed in an SEC filing on Form 8-K. Our website also includes the Charters of the Audit Committee and the Compensation Committee. Stockholders may request free copies of these documents by writing to Greg Guilford, 9300 Shelbyville Road, Suite 1020, Louisville, KY 40222, by calling 502-657-3500 or by sending an email request to greg.guilford@askbeacon.com.
 
The public may also read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, at www.sec.gov.
 
 
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Item 1A. Risk Factors
 
You should carefully consider the risks described below together with all of the other information included in this report before making an investment decision with regard to our securities. The statements contained in or incorporated into this report that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. If any of the following risks actually occurs, our business, financial condition or results of operations could be harmed. In that case, the trading price of Beacon Common Stock could decline, and you may lose all or part of your investment.
 
Risks Relating to the Business
 
 In this discussion of the “Risks Relating to the Business,” unless otherwise noted or required by the context, references to “us,” “we,” “our,” “Beacon” and similar terms refer to Beacon, as defined above.
 
Beacon has a history of losses.
 
Beacon has incurred losses since its inception. While we expect to achieve a positive cash flow basis and have taken significant steps to do so, this may not occur. Our ability to operate profitably is dependent upon our ability to manage the portfolio of ITS infrastructure service offerings in an economically successful manner but, we may not be able to do this. Our prospects must be considered in light of the numerous risks, expenses, delays and difficulties frequently encountered in the competitive and high risk telecommunications and ITS services industry, as well as the risks generally inherent in the current economic environment. We may never achieve sustained recurring net sales and profitability on a consistent and growing basis.
 
Beacon may require additional financing.
 
Beacon may require additional capital to implement its long-term business plan. Such financing, if needed, may not be available to Beacon or, if it is, it may not be available on terms or at a valuation that would be beneficial to the interests of current stockholders.  In this regard, failure by Beacon to secure additional financing, if needed, on favorable terms could have severe adverse consequences relative to Beacon’s ability to grow and/or fully leverage existing business relationships and agreements, which ultimately could mean that Beacon may not be viable.
 
Rapid technological change and obsolescence could adversely affect Beacon’s business.
 
Our business is subject to technological innovation, with such developments potentially adversely affecting the business and operations of Beacon in the future.
 
Beacon’s success depends upon agreements with third parties.
 
Our business plan relies upon working with third party vendors in multiple aspects of the business. The success of our plan assumes successful relationships with third party vendors for contractor services, network access and hardware and software products which Beacon utilizes and sells. If Beacon is unable to attract competent corporate partners, or if such partners’ efforts are inadequate, Beacon’s business could be harmed.

Beacon has operations outside the United States.
 
Part of our growth strategy relies on further development of operations outside the United States such international operations are subject to additional risks, including:
                     
 
local political or economic instability;
                    
 
changes in governmental regulation;
               
 
changes in import/export duties;
                    
 
trade restrictions;
                    
 
lack of experience in foreign markets;
                    
 
difficulties and costs of staffing and managing operations in certain foreign countries;
                    
 
work stoppages or other changes in labor conditions;
                    
 
Page 6

 
 
 
difficulties in collecting accounts receivables on a timely basis or at all; and
                   
 
adverse tax consequences or overlapping tax structures.
 
We plan to continue to market and sell our products internationally to respond to customer requirements and market opportunities. Establishing and maintaining operations in any foreign country or region presents risks such as those described above as well as risks specific to the particular country or region. In addition, until a payment history is established over time with customers in a new geography or region, the likelihood of collecting receivables generated by such operations could be less than expectations. As a result, there is a greater risk that reserves set with respect to the collection of such receivables may be inadequate. If our operations in any foreign country are unsuccessful, we could incur significant losses which may impact profitability.
 
Additionally, changes in policies or laws of the United States or foreign governments resulting in, among other things, changes in regulations and the approval process, higher taxation, currency conversion limitations, restrictions on fund transfers or the expropriation of private enterprises, could reduce the anticipated benefits of our international expansion. If we fail to realize the anticipated net sales growth of our international operations, our business and operating results could suffer.
   
Beacon’s business is subject to inherent risks including those arising from customer acceptance, lost customers, and market competition.
 
Customer Acceptance.  Beacon’s intended customers may be unfamiliar with the services and technologies offered by Beacon for any number of reasons and therefore hesitant to use Beacon’s products and services. As a result, the sales cycle involved in obtaining new customers could be longer than initially forecasted. Beacon will need to educate customers as to the benefits of its products and services; this education may be costly and time consuming. Thus, Beacon cannot accurately forecast the timing and recognition of net sales from marketing of its products and services to new customers. Delays in market acceptance of Beacon’s products and services could harm Beacon’s profitability.
 
Lost Customers.  There is no guarantee that customers will continue to use the services of Beacon. The business is inherently very competitive on certain commoditized aspects of our service offerings and Beacon may not be successful with its business model in retaining customers.
 
Competition.  There are many companies operating in certain areas of Beacon’s basic market niche that have longer operating histories and greater financial, technical, marketing, sales, or other resources when compared to Beacon. While Beacon intends to enter into relationships with third parties to offset these competitive factors, there is no guarantee that Beacon will respond more effectively than its competitors to new or emerging products or changes in customer requirements. Increased competition, either from individual firms or collaborative ventures may harm Beacon’s ability to sell services on favorable terms, which in turn could lead to price cuts, reduced gross margins, or loss of market share. These factors could seriously harm Beacon’s business.
 
Beacon depends on its key employees.
 
Beacon is highly dependent on certain officers and employees. The loss of any of their services or Beacon’s inability to attract and retain other qualified employees could have an adverse impact on Beacon’s business and its ability to achieve its objectives. Beacon has employment and non-compete agreements with all key personnel. These agreements however will permit the employee to resign without cause at any time. Beacon may not be able to retain existing employees or be able to find, attract and retain other skilled personnel on acceptable terms.
 
Beacon has no patent protection for its products and services.
 
None of Beacon’s products or services is proprietary and, as a result, Beacon enjoys no patent protection. As a result, Beacon has a limited ability to protect what it does against infringement by others, including competitors who are larger and better capitalized.
 
Economic conditions could materially adversely affect us.
 
Our operations and performance depend significantly on national and worldwide economic conditions. Uncertainty about current national and global economic conditions poses a risk as consumers and businesses may postpone spending in response to tighter credit, negative financial news and/or declines in income or asset values, which could have a material negative effect on the demand for our products and services. Other factors that could influence demand include conditions in the real estate and mortgage markets, labor and healthcare costs, access to credit, consumer confidence, and other macroeconomic factors affecting consumer spending behavior. These and other economic factors could have a material adverse effect on demand for our products and services and on our financial condition and operating results.
 
 
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The current economic conditions have resulted in a tightening in the credit markets, a low level of liquidity in many financial markets, and extreme volatility in fixed income, credit, currency and equity markets. There could be a number of follow-on effects from the credit crisis and current economic environment on our business, including insolvency of key customers and suppliers and the inability for us to raise additional working capital to support the growth of our operations.
 
Beacon’s quarterly operating results may fluctuate significantly and will be difficult to predict.
 
Our results of operations may fluctuate from quarter to quarter as a result of a number of factors, including our services mix, development timeline and the rate at which customers accept our service offerings. Accordingly, our future operating results may be subject to variability from quarter to quarter and could be adversely affected in any particular quarter. It is possible that our operating results will be below the expectations of investors.
 
Catastrophic events or geo-political conditions may disrupt our business.
 
A disruption or failure of our systems or operations in the event of a major earthquake, weather event, cyber-attack, terrorist attack, or other catastrophic event could cause delays in completing sales, providing services or performing other mission-critical functions. A catastrophic event that results in the destruction or disruption of any of our critical business or information technology systems could harm our ability to conduct normal business operations and our operating results. Abrupt political change, terrorist activity, and armed conflict pose a risk of general economic disruption in affected countries, which may increase our operating costs. These conditions also may add uncertainty to the timing and budget for technology investment decisions by our customers.
 
Risks Relating to Ownership of Beacon Common Stock
 
No Assurances of a Public Market; Restrictions on Resale.
 
Although our Common Stock is currently traded on the OTC Bulletin Board (“OTC.BB”), trading may be extremely sporadic. A more active market for our common stock may not develop. Investors must be prepared to bear the economic risk of holding the securities for an indefinite period of time.
 
Potential dilution of outstanding options and warrants could interfere with Beacon’s ability to raise capital.
 
Beacon has outstanding options and warrants that are convertible into or exercisable for shares of our common stock. To the extent that outstanding options or warrants are exercised, dilution to the percentage ownership of Beacon’s shareholders will occur. In addition, the terms on which Beacon will be able to obtain additional equity capital may be adversely affected if the holders of outstanding options and warrants exercise them at a time when Beacon is able to obtain additional capital on terms more favorable to Beacon than those provided in the outstanding options and warrants.
 
The price of Beacon Common Stock may fluctuate significantly.
 
Stock of public companies can experience extreme price and volume fluctuations. These fluctuations often have been unrelated or out of proportion to the operating performance of such companies. Beacon expects its stock price to be similarly volatile. These broad market fluctuations may continue and could harm Beacon’s stock price. Any negative change in the public’s perception of the prospects of Beacon or companies in Beacon’s industry could also depress Beacon’s stock price, regardless of Beacon’s actual results. Factors affecting the trading price of Beacon’s common stock may include:
                      
 
variations in operating results;
                    
 
announcements of technological innovations, new products or product enhancements, strategic alliances or significant agreements by Beacon or by competitors;
                    
 
recruitment or departure of key personnel;
                    
 
litigation, legislation, regulation or technological developments that adversely affect Beacon’s business; and
                    
 
market conditions in Beacon’s industry, the industries of their customers and the economy as a whole.
 
Further, the stock market in general, and securities of microcap companies in particular, can experience extreme price and volume fluctuations. Continued market fluctuations could result in extreme volatility in the price of the Beacon Common Stock, which could cause a decline in the value of Beacon Common Stock. You should also be aware that price volatility might be worse if the trading volume of the Beacon Common Stock is low.
 
 
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The SEC may limit the number of shares of Beacon Common Stock that may be registered for resale at any one time.
 
The Federal securities laws distinguish between a primary offering made by an issuer and a secondary offering made by an issuer on behalf of a selling shareholder. Recently, the SEC has made public statements indicating the SEC’s Division of Corporation Finance will question the ability of issuers to register shares for resale in a secondary offering where the number of shares offered exceed an estimated one-third of the total number of shares held by non-affiliates prior to the underlying private transaction. Although this position is not written or settled law, it is possible the SEC staff will view any resale offering by investors as an offering by Beacon and deem it a primary offering if the number of shares Beacon seeks to register exceeds the estimated one-third threshold. Even if the number of shares Beacon seeks to register is below the estimated one-third threshold, the SEC staff may still take the position that the offering is a primary offering rather than a secondary offering. In that event, Beacon may seek to register only a portion of its Common Stock at any one time and will only be able to register additional Common Stock after the passage of time and the sale of substantially all of the Registrable Securities subject to the previous registration statement.
 
Beacon Common Stock may be subject to Penny Stock Rules, which could affect trading.
 
Broker-dealer practices in connection with transactions in “penny stocks” are regulated by certain rules adopted by the SEC. Penny stocks generally are equity securities with a price of less than $5.00, subject to exceptions. The rules require that a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, deliver a standardized risk disclosure document that provides information about penny stocks and the risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in connection with the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. In addition, the rules generally require that prior to a transaction in a penny stock the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the liquidity of penny stocks. If the Beacon Common Stock becomes subject to the penny stock rules, holders of Beacon Common Stock or other Beacon securities may find it more difficult to sell their securities.
 
Beacon’s operation as a public company subjects it to extensive corporate governance and disclosure regulations that will result in additional operating expenses.
 
As a public company, Beacon incurs significant legal and accounting expenses associated with its public company reporting requirements.  Like many smaller public companies, Beacon faces a significant impact from required compliance with Section 404 of the Sarbanes-Oxley Act of 2002. Section 404 requires management of public companies to evaluate the effectiveness of internal control over financial reporting. The SEC has adopted rules implementing Section 404 for public companies as well as disclosure requirements. Any failure to implement effective or improved internal controls, or to resolve difficulties encountered in their implementation, could harm Beacon’s operating results, or cause a failure to meet reporting obligations or result in management assessing internal control over financial reporting as not sufficient. Any such result could cause investors to lose confidence in Beacon’s reported financial information, which could have a material adverse effect on its stock price.
 
Item 2.  Properties
 
Beacon’s corporate and executive offices are located at 9300 Shelbyville Road, Suite 1020, Louisville, KY 40222 in approximately 4,000 square feet of office space leased through March 2016. Additionally, we have offices in Cincinnati, OH consisting of approximately 6,500 square feet of office space leased through May 2016, Columbus, OH consisting of approximately 3,000 square feet leased through February 2012, and Prague, Czech Republic consisting of approximately 4,700 square feet leased through June 2015. We believe our facilities are adequate for the continuing operations of our existing business.
             
Item 3. Legal Proceedings
 
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. As of September 30, 2011, this suit was settled by the primary parties with no payment required by the Company.
 
 
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During the year ended September 30, 2011, Beacon was named a party in a lawsuit filed in Swiss court, seeking approximately $232 of unpaid liabilities incurred in connection with the discontinued Datacenter Contractors AG (“DC”, formerly “Beacon Solutions AG”) subsidiary.  Although the outcome of this matter cannot be predicted at this time, a motion to dismiss was filed in commercial court and our council has advised that our basis for procedural arguments is strong.  As such no provision has been made in the  consolidated financial statements related to this action as of September 30, 2011, as the Company believes that the ultimate disposition of this matter will not have a material adverse effect on the Company’s financial position or results of operations.
 
No other legal proceedings in the normal course of business are required to be disclosed under this Item 3.
 
Item 4. Removed and Reserved
 
Part II
             
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Information
 
Our common stock, par value $.001 per share, has been traded on the OTC Bulletin Board, first under the symbol “BESG.OB” subsequently changed to the symbol “BEAC.OB,” since January 7, 2008. Prior to that time, our common stock was traded on the OTC Bulletin Board under the symbol “SGEG.OB.”

The public market for our stock is limited and sporadic. The following table sets forth, for the period indicated, the high and low last sale price for our common stock as reported on the OTC Bulletin Board:

Quarter Ended
 
High
   
Low
 
             
Fiscal 2010
           
             
December 31, 2009
  $ 1.01     $ 0.81  
March 31, 2010
  $ 1.50     $ 1.02  
June 30, 2010
  $ 1.53     $ 1.01  
September 30, 2010
  $ 1.10     $ 0.35  
                 
Fiscal 2011
               
                 
December 31, 2010
  $ 0.75     $ 0.35  
March 31, 2011
  $ 0.70     $ 0.38  
June 30, 2011
  $ 0.53     $ 0.25  
September 30, 2011
  $ 0.40     $ 0.18  
 
Holders
 
As of December 5, 2011, we had approximately 215 stockholders of record.
 
Dividends
 
We have not paid cash dividends on shares of our common stock and do not anticipate doing so in the foreseeable future. The payment of dividends on shares of our common stock will depend on earnings, financial condition and other business and economic factors affecting us at such time as our board of directors may consider relevant.
 
Under our Articles of Incorporation and the Certificates of Designation of Series B, C-1 and C-2 Preferred Stock, without the consent of holders of a majority of each Series of Preferred Stock, we may not pay any dividends upon shares of Common Stock until we have paid the aggregate accrued dividends upon such preferred stock and such amounts that the holders of such preferred stock would receive if they were to convert their shares of preferred stock into shares of common stock.
 
 
Page 10

 
 
Recent Sales of Unregistered Securities
 
Information related to sales of unregistered securities has been included in our Quarterly Reports on Form 10-Q for the periods ended December 31, 2009, March 31, 2010 and June 30, 2010, March 31, 2011 and June 30, 2011 as well as our Current Reports on Form 8-K filed October 2, 2009, October 15, 2009, October 19, 2009, November 3, 2009, November 12, 2009, November 24, 2009 and December 15, 2009 and May 30, 2011.
 
Securities Authorized for Issuance under Compensation Plans
 
At the Company’s annual meeting on May 26, 2011, shareholders approved a resolution to reserve and authorize an additional 1,000,000 shares under the 2008 Long-Term Incentive Compensation Plan, bringing the total reserved and authorized to 2,000,000.
 
Equity Compensation Plan Information
 
   
(a)
   
(b)
   
(c)
 
   
Number of securities to
   
Weighted-average
   
Number of securities remaining
 
   
be issued upon exercise
   
exercise price of
   
available for future issuance under
 
   
of outstanding options,
   
outstanding options,
   
equity compensation plans (excluding
 
As of September 30, 2011
 
warrants and rights
   
warrants and rights
   
securities reflected in column (a))
 
                   
Equity compensation plans approved by security holders
    934,696     $ 1.23       1,065,304  
 
Issuer Purchases of Equity Securities
 
None. 
             
Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Beacon Enterprise Solutions Group, Inc. and subsidiaries (collectively the “Company”) is a provider of global, international and regional telecommunications and technology systems infrastructure services, encompassing a comprehensive suite of consulting, design, installation, and infrastructure management offerings. Beacon’s portfolio of infrastructure services spans all professional and construction requirements for design, build and management of telecommunications, network and technology systems infrastructure. Professional services offered include consulting, engineering, program management, project management, construction services and infrastructure management services. Beacon offers these services under a comprehensive contract vehicle or unbundled to some global and regional clients. Beacon also offers special services in support of qualified projects in the smart buildings/campuses/cities and data center verticals. Finally, Beacon provides managed information technology and telecommunications services in selected local markets. In this report, the terms “Company,” “Beacon,” “we,” “us” or “our” mean Beacon Enterprise Solutions Group, Inc. and all subsidiaries included in our consolidated financial statements.
 
Cautionary Statements — Forward Outlook and Risks
 
Certain statements contained in this annual report on Form 10-K, including, without limitation, statements containing the words “believes,” “anticipates,” “intends,” “expects,” “assumes,” “trends” and similar expressions, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon our current plans, expectations and projections about future events. However, such statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These factors include, among others, the following:

 
·
Our business may be materially adversely affected by the current economic environment. The recent disruptions in both domestic and global financial and credit markets have significantly impacted domestic and global economic activity and led to an economic recession. As a result of these disruptions, our customers and markets have been adversely affected. If we experience reduced demand because of these disruptions in the macroeconomic environment, our business, results of operation and financial condition could be materially adversely affected. If we are unable to successfully anticipate changing economic and financial conditions, we may be unable to effectively plan for and respond to these changes and our business could be adversely affected;

 
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·
effects of competition in the markets in which we operate;

 
·
liability and other claims asserted against us;

 
·
ability to attract and retain qualified personnel;

 
·
availability and terms of capital;

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

 
·
ability of customers to pay for services;

 
·
business disruption due to natural disasters or terrorist acts;

 
·
ability to successfully integrate the operations of acquired businesses and achieve expected synergies and operating efficiencies from the acquisitions, in each case within expected time-frames or at all;

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

 
·
changes in estimates and judgments associated with critical accounting policies and estimates.
 
For a detailed discussion of these and other factors that could cause our actual results to differ materially from the results contemplated by the forward-looking statements, please refer to Item 1(A) Risk Factors in this annual report on Form 10-K. The reader is encouraged to review the risk factors set forth therein. The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Except as required by law, we assume no responsibility for updating forward-looking statements to reflect unforeseen or other events after the date of this report.
 
Overview
 
The Company is a provider of global design, implementation and management of high performance Information Technology Systems (ITS) infrastructure solutions.  Beacon’s portfolio of ITS infrastructure services spans all professional and construction requirements for design, build and management of telecommunications, network and technology systems infrastructure. Professional services offered include consulting, engineering, program management, project management, construction services and infrastructure management services. Beacon offers these services under a comprehensive contract vehicle or unbundled to some global and regional clients. Beacon also offers special services in support of qualified projects in the smart buildings/campuses/cities and data center verticals. Finally, Beacon provides managed information technology and telecommunications services in selected local markets.
 
Organic Growth Strategy
 
With respect to our plans to increase net sales organically, we have identified, and are currently pursuing, several significant strategies, including:

 
·
Expansion of our a la carte services offered to existing major national, multi-national and global clients who have not signed an infrastructure managed services agreement. This has been initiated reorganizing sales/marketing on the sale of individual infrastructure services and the global managed services offering.  With reorganization of the professional services team structure, it permits Beacon to accommodate branch level services delivery to potential global clients.

 
·
Additionally we have added regional and major account sales resources in each business unit. This will facilitate the introduction of Fortune 1000, Global 2000 and qualifying multi-national firms. 
 
Results of Operations
 
For the years ended September 30, 2011 and 2010
 
          In order to best discuss and compare operations for the years ended September 30, 2011 and 2010 our North American and European operations will be presented and discussed separately.
 
 
Page 12

 
 
North American Operations

   
For the year ended September 30
 
   
2011
         
2010
             
   
North America
         
North America
         
Change
 
                               
Net Sales
  $ 11,142       100 %   $ 10,273       100 %   $ 869  
Cost of materials sold
    1,207       11 %     1,405       14 %     (198 )
Cost of services
    6,341       57 %     5,035       49 %     1,306  
Gross profit
    3,594       32 %     3,833       37 %     (239 )
Operating expense
                                       
Salaries and benefits
    5,112       46 %     5,139       50 %     (27 )
Selling, general and administrative
    3,024       27 %     4,043       39 %     (1,019 )
Intercompany services
    (2,552 )     -23 %     (328 )     -3 %     (2,224 )
Non-cash loss from sale of unit
    656               -               656  
Loss from operations
    (2,646 )  
NM
      (5,021 )  
NM
      2,375  
Other expense
    (1,022 )             (244 )             (778 )
Change if Fair Value of Warrants
    -               (4,373 )             4,373  
Net Loss before taxes
    (3,668 )             (9,638 )             5,970  
                                         
Income tax expense
    (59 )             (49 )             (10 )
                                         
Net loss from continuing operations
    (3,727 )             (9,687 )             5,960  
Net income from discontinued operations
    -               -                  
Net loss
  $ (3,727 )           $ (9,687 )           $ 5,960  
 
Net sales from our North American operations for the years ended September 30, 2011 and 2010 was $11,142 and $10,273.  Year to date sales growth of 8% reflects our ability to penetrate the market and increase understanding and acceptance of the value add and cost savings our service offerings provide.

   
For the years ended September 30,
 
   
2011
   
2010
       
   
North America
   
North America
   
Change
 
                   
Cost of services
                 
Direct labor
    1,639       1,884       (245 )
Subcontractor
    4,231       2,745       1,486  
Project expenses
    471       406       65  
Total cost of services
    6,341       5,035       1,306  
 
Cost of services increased for the years ended September 30, 2011 compared to the same period in 2010 as a result of increased volume and a shift in our business model whereby we utilize subcontractors to perform a larger portion of our service delivery as opposed to internal resources.  This change in business model was also the source of the reduction in direct labor expenses in 2011 compared to the same period in 2010.  In addition, sales in 2011 reflect a sales mix weighted toward our infrastructure management services business versus design and engineering services, which tend to be higher margin services, accounting for our overall margin decline.
 
Salaries and benefits of approximately $5,112 and $5,139 for the years ended September 30, 2011 and 2010 consisted of salaries and wages of approximately $3,326 and $2,913, benefits and payroll taxes of $968 and $943. Non-cash share-based compensation of $740 and $1,116 related primarily to granted stock options is included in salaries and wages and commissions and bonuses of $78 and $167.  While headcount was reduced, the increase in salaries year to date is attributable to a workforce shift to a higher salaried professional administrative and management workforce, the increase in salaries being offset by reduced share based compensation expense due to vesting and option forfeitures through workforce attrition.
 
 
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For the years ended September 30,
 
   
2011
   
2010
       
   
North America
   
North America
   
Change
 
                   
Selling, general and administrative
                 
Professional fees
    808       1,352       (544 )
Travel
    379       473       (94 )
Business Insurance
    316       205       111  
Depreciation and Amortization
    311       551       (240 )
Office related
    307       300       7  
Telecommunications and data
    206       345       (139 )
Bad debt
    161       146       15  
Other administrative services
    536       671       (135 )
Total selling, general and administrative
    3,024       4,043       (1,019 )
 
The reduction of selling, general and administrative costs reflects an ongoing, concerted effort to streamline operations and control costs, through negotiating fixed fee arrangements and eliminating duplicate or inefficient services, all the while increasing the efficiency and scalability of Beacon’s administrative infrastructure.  Management continues to monitor expenses in relation to business volume to achieve optimum results.
 
Included in the loss from operations is a non-cash charge of $656 related to the sale of a unit in our middle market business.  This transaction has allowed the company to reduce associated costs while continuing to move our focus to our core business.
 
European Operations
   
For the year ended September 30
 
   
2011
         
2010
             
   
Europe
         
Europe
         
Change
 
                               
Net Sales
  $ 7,752       100 %   $ 3,723       100 %   $ 4,029  
Cost of materials sold
    16       0 %     153       4 %     (137 )
Cost of services
    4,610       59 %     1,487       40 %     3,123  
Gross profit
    3,126       40 %     2,083       56 %     1,043  
Operating expense
                            0 %        
Salaries and benefits
    456       6 %     897               (441 )
Selling, general and administrative
    960       12 %     1,516       41 %     (556 )
Intercompany services
    2,552       33 %     328       9 %     2,224  
Loss from operations
    (842 )  
NM
      (658 )     -18 %     (184 )
Other expense
    (119 )             (15 )  
NM
      (104 )
                                         
Net loss before taxes
    (961 )             (673 )             (288 )
                                         
Income tax expense
    18               (14 )             32  
                                         
Net (loss) from continuing operations
    (943 )             (687 )             (256 )
Net income (loss) from discontinued operations
    7,892               (8,181 )             16,073  
Net income (loss)
  $ 6,949             $ (8,868 )           $ 15,817  
 
Net sales from European operations for the years ended September 30, 2011 and 2010 was $7,752 and $3,723 and show the growth in this segment as our operations gain traction in Europe.  The increase in net sales reflects our success in leveraging our experiences to increase business from our largest customer and gain access to new markets.  We expect our ability to grow net sales in our European segment will continue as we onboard new programs and expand into new markets.
 
   
For the years ended September 30,
 
   
2011
   
2010
       
   
Europe
   
Europe
   
Change
 
                   
Cost of services
                 
Direct Labor
    260       -       260  
Subcontractor
    4,081       1,060       3,021  
Project expenses
    269       427       (158 )
Total cost of services
    4,610       1,487       3,123  
 
The increase in cost of services sold primarily reflects the increased net sales in Europe in 2011.  In addition, the increase illustrates the maturing business in Europe and installation of our subcontractor business model.  The volume and shift in work being delivered by subcontractors rather than internal resources is primarily responsible for the increase in subcontractor cost incurred in 2011, as a percentage of sales, in comparison with the same periods in 2010.
 
 
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Additionally, gross profit as a percentage of sales decreased significantly during year ended September 30, 2011 compared to 2010 due to the majority of work being completed in European countries with higher cost structures and change in product mix away from higher margin professional services toward our infrastructure management services, which typically are higher cost and lower margin because the work is delivered by subcontractors.
 
Salaries and benefits of approximately $456 and $897 for the years ended September 30, 2011 and 2010 consisted of salaries and wages of $217 and $734, and $239 and $163 of related benefits.  The decrease in salaries resulting from reducing headcount in the European market based on our better understanding of staffing needs.
 
   
For the years ended September 30,
 
   
2011
   
2010
       
   
Europe
   
Europe
   
Change
 
                   
Selling, general and administrative
                 
Bad debt
    367       580       (213 )
Outside services
    233       81       152  
Professional fees
    79       283       (204 )
Travel
    63       266       (203 )
Office related
    167       163       4  
Other administrative services
    51       143       (92 )
Total selling, general and administrative
    960       1,516       (556 )
 
The overall decrease reflects our operating experience in Europe which we leveraged to improve the structure and operating efficiency of the administrative function.
 
Liquidity and Capital Resources
 
For the year ended September 30, 2011, we generated net income of $3,222, which includes income from discontinued operations of $7,892 (see Note 4), non-cash expenses for share based compensation of $1,022, non-cash depreciation and amortization expense of $350 and cash used in continuing operations amounting to $1,306. Our accumulated deficit amounted to $36,583, while we had cash of $861 and a working capital deficit of $2,169.
 
Financing transactions we completed during the year ended September 30, 2011 include the following:
 
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 exercisable at $1.00 per share, per month are earned for each month the facility is outstanding.    On August 12, 2011, the Company modified this agreement, extending the term another 24 months, and reducing the credit facility to $2,000, with an annual interest rate of 7.75% on any outstanding balance.  On October 26, 2011, the Company has decided to terminate the long term line of credit facility and associated put right entered into on August 17, 2010 and revised August 12, 2011, with one of our directors.  See Note 10 for additional details.
 
On November 23, 2010, we initiated a private placement (the “Placement”) of up to $3,000 of 12 month Senior Secured Notes (“Notes”) with warrants to purchase 150 shares of Beacon’s common stock at $0.40 per share for every $1 in principal invested, and bear interest at 9% APR.  The Placement was made on a "best efforts" basis with a Minimum of $600 and a Maximum of $3,000.  Net proceeds have been used to repay and replace an existing Senior Secured Bank Note totaling approximately $300 and for general working capital purposes.  The Placement expired on March 30, 2011, the date the Maximum was raised, with net proceeds received of $2,667 (gross proceeds of $3,000 less offering costs of $333).
 
On March 25, 2011 Beacon offered in a private placement 350 units of preferred stock (the "Series C-1 Units"), to two existing shareholders, at a purchase price of $2 per Series C-1 Unit.  As of June 30, 2011, we completed the sale of 350 Series C-1 Units for an aggregate purchase price of $526 and issued 350,000 warrants having a fair value, as determined using the Black Scholes pricing model, of $112
 
On May 4, 2011 Beacon offered in a private placement 100 units of preferred stock (the "Series C-2 Units"), at a purchase price of $2 per Series C-2 Unit, for an aggregate purchase price of $150 and issued 100,000 warrants having a fair value, as determined using the Black Scholes pricing model, of $32.
 
 
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In light of the recent progress we made in the execution of our business plan, the funding that occurred during the year, the proceeds from the Senior Secured Notes and C-3 private placement subsequent to year end (See Note 17 – Subsequent Events for information regarding additional financing) , we believe that our currently available cash and the funds expected to be generated from operations will enable us to operate our business and repay our debt obligations as they become due through October 1, 2012.

However, we may require additional capital in order to execute our business plan. If we are unable to raise additional capital, or encounter unforeseen circumstances that place constraints on our capital resources, we will be required to take various measures to conserve liquidity, which could include, but not necessarily be limited to, curtailing our business development activities, suspending the pursuit of our business plan, and controlling overhead expenses. We cannot provide any assurance that we will raise additional capital. We have not secured any commitments for new financing at this time, nor can we provide any assurance that new financing will be available to us on acceptable terms, if at all.
 
Off-Balance Sheet Arrangements
 
We have four operating lease commitments for real estate used for office space.
 
Contractual Obligations as of September 30, 2011:
 
The following is a summary of our contractual obligations and their respective maturity dates as of September 30, 2011:

Contractual Obligations
 
Total
   
2012
   
2013
   
2014
   
2015
   
2016
 
   
                                   
Long-term debt obligations
  $ 3,304     $ 3,280     $ 24     $ -     $ -     $ -  
Interest obligations (1)
    279       279       -       -       -       -  
Operating lease obligations (2)
    1,002       243       243       239       198       79  
   
                                               
   
  $ 4,585     $ 3,802     $ 267     $ 239     $ 198     $ 79  
 

 
(1)
Interest obligations assume Prime Rate of 3.25% at September 30, 2011. Interest rate obligations are presented through the maturity dates of each component of long-term debt.
          
(2)
Operating lease obligations represent payment obligations under non-cancelable lease agreements classified as operating leases and disclosed pursuant to ASC 840 “Accounting for Leases,” as may be modified or supplemented. These amounts are not recorded as liabilities as of the current balance sheet date.
 
Dividends on Series A and A-1 Preferred Stock are payable quarterly at an annual rate of 10%,  Series B, Series C-1 and C-2 Preferred Stock are payable quarterly at an annual rate of 6% in cash or the issuance of additional shares of Preferred Stock. If we were to fund dividends accruing during the year ending September 30, 2011 in cash, the total obligation would be $247 based on the number of shares of Series A, A-1,  B, C-1 and C-2 Preferred Stock outstanding as of September 30, 2011.
 
We currently anticipate the cash requirements for capital expenditures, operating lease commitments and working capital will likely be funded with our existing fund sources and cash provided from operating activities. In the aggregate, total capital expenditures are not expected to be significant for the year ended September 30, 2011 and could be curtailed should we experience a shortfall in expected financing.
 
Working Capital
 
As of September 30, 2011, our current liabilities exceed current assets by approximately $2,169 with the largest components being accounts payable and senior secured debt.  The $100 bridge note recorded in current liabilities is convertible into common stock and the note agreement provides for vesting of additional warrants to purchase shares of common should the holders continue to hold the debt and immediate vesting of the additional warrants upon conversion.
 
Critical Accounting Policies and Estimates
 
We consider the following to be critical policies: revenue and cost recognition, share based payments, common stock purchase warrants and other derivative financial instruments and fair value of financial assets and liabilities.
 
Recent Accounting Pronouncements
 
The information contained in Note 3 to the accompanying consolidated financial statements included in Item 8 to this annual report is incorporated herewith by reference.
 
 
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Item 8. Financial Statements and Supplementary Data
 
Consolidated Financial Statements of Beacon Enterprise Solutions Group, Inc.
 
   
Page
     
Report of Independent Registered Public Accounting Firm
 
18
Consolidated Balance Sheets as of September 30, 2011 and 2010
 
19
Consolidated Statements of Operations for the years ended September 30, 2011 and 2010
 
20
Consolidated Statement of Stockholders’ Equity (Deficiency) for the years ended September 30, 2011 and 2010
 
21
Consolidated Statements of Cash Flows for the years ended September 30, 2011 and 2010
 
22
Notes to Consolidated Financial Statements
 
23
 
 
Page 17

 
 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
To the Audit Committee of the
Board of Directors and Stockholders
Beacon Enterprise Solutions Group, Inc.
 
We have audited the accompanying consolidated balance sheets of Beacon Enterprise Solutions Group, Inc. and Subsidiaries (the “Company”) as of September 30, 2011 and 2010, and the related consolidated statements of operations, changes in stockholders’ equity (deficiency) and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
 
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
 
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Beacon Enterprise Solutions Group, Inc. and subsidiaries, as of September 30, 2011 and 2010, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
 
 
New York, NY
December 12, 2011
 
 
Page 18

 
 
Beacon Enterprise Solutions Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(all amounts in 000's except share and per share data)
 
   
September 30,
   
September 30,
 
   
2011
   
2010
 
             
ASSETS
           
             
Current assets:
           
Cash and cash equivalents
  $ 861     $ 246  
Accounts receivable, net
    3,752       4,535  
Inventory, net
    -       557  
Prepaid expenses and other current assets
    1,345       357  
Current assets of discontinued operations
    -       133  
Total current assets
    5,958       5,828  
                 
Property and equipment, net
    249       420  
Goodwill
    2,792       2,792  
Other intangible assets, net
    2,905       3,011  
Other assets
    18       20  
Total assets
  $ 11,922     $ 12,071  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
               
                 
Current liabilities:
               
Bridge note - related party
  $ 100     $ 100  
Current portion of long-term debt
    180       379  
Senior secured notes payable, net of unamortized deferred debt discount of $48
    2,952       -  
Accounts payable
    3,204       2,971  
Accrued expenses and other current liabilities
    1,691       880  
Current liabilities of discontinued operations
    -       8,558  
Total current liabilities
    8,127       12,888  
                 
Non-current line of credit - related party
    -       630  
Long-term debt, less current portion
    24       403  
Deferred tax liability
    212       153  
Total liabilities
    8,363       14,074  
                 
Stockholders' equity (deficiency)
               
Preferred Stock: $0.01 par value, 5,000,000 shares authorized, 1,491 and 1,041 shares issued and outstanding at September 30, 2011 and 2010, respectively, in the following classes:
               
Series A convertible preferred stock, $1,000 stated value, 4,500 shares authorized, 30 shares issued and outstanding at September 30, 2011 and 2010, respectively, (liquidation preference $96)
    30       30  
Series A-1 convertible preferred stock, $1,000 stated value, 1,000 shares authorized, 311 shares issued and outstanding at September 30, 2011 and 2010, respectively, (liquidation preference $471)
    311       311  
Series B convertible preferred stock, $1,000 stated value, 4,000 shares authorized, 700 shares issued and outstanding at September 30, 2011 and 2010, respectively, (liquidation preference $1,020)
    700       700  
Series C-1 convertible preferred stock, $1,500 stated value, 400 shares authorized, 350 issued and outstanding at September 30, 2011 (liquidation preference $703)
    525       -  
Series C-2 convertible preferred stock, $1,500 stated value, 2,000 shares authorized, 100 issued and outstanding at September 30, 2011 (liquidation preference $198)
    150       -  
Common stock, $0.001 par value 70,000,000 shares authorized 37,611,396 and 37,376,396 shares issued and outstanding at September 30, 2011 and 2010, respectively
    38       37  
Additional paid in capital
    38,342       37,137  
Accumulated deficit
    (36,583 )     (39,711 )
Accumulated other comprehensive income (loss)
    46       (507 )
Total stockholders' equity (deficiency)
    3,559       (2,003 )
Total liabilities and stockholders' equity (deficiency)
  $ 11,922     $ 12,071  
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
Page 19

 
 
 
Beacon Enterprise Solutions Group, Inc. and Subsidiaries
Consolidated Statements of Operations
(all amounts in 000's except share and per share data)

   
For the
   
For the
 
   
Year Ended
   
Year Ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
 
Net sales
  $ 18,894     $ 13,996  
Cost of goods sold
    1,223       1,558  
Cost of services
    10,951       6,522  
Gross profit
    6,720       5,916  
Operating expenses
               
Salaries and benefits
    5,568       6,036  
Selling, general and administrative
    3,984       5,559  
Loss on sale of unit
    656       -  
Total operating expenses
    10,208       11,595  
Loss from operations
    (3,488 )     (5,679 )
                 
Other expenses
               
Interest expense
    (420 )     (241 )
Other expenses
    (721 )     (18 )
Change in fair value of warrants
    -       (4,373 )
Total other expenses
    (1,141 )     (4,632 )
                 
Net loss before income taxes
    (4,629 )     (10,311 )
                 
Income tax expense
    (41 )     (63 )
                 
Loss from continuing operations
    (4,670 )     (10,374 )
Income (loss) from discontinued operations
    7,892       (8,181 )
                 
Net income (loss)
    3,222       (18,555 )
                 
Preferred Stock:
               
Contractual dividends
    (94 )     (175 )
Deemed dividends related to beneficial conversion feature
    -       (99 )
Net income (loss) available to common stockholders
  $ 3,128     $ (18,829 )
                 
Net loss per share to common stockholders - basic and diluted
               
Net loss per share from continning operations
    (0.12 )     (0.32 )
Net income (loss) per share from discontinued operations
    0.21       (0.25 )
    $ 0.09     $ (0.57 )
                 
Weighted average shares outstanding basic and diluted
    37,417,368       32,254,769  
                 
Other comprehensive income, net of tax
               
Net income (loss)
  $ 3,128     $ (18,829 )
Foreign currency translation adjustment
    553       (28 )
Comprehensive income (loss)
  $ 3,681     $ (18,857 )
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
Page 20

 
 
Beacon Enterprise Solutions Group, Inc. and Subsidiaries
Consolidated Statement of Stockholders' Equity (Deficiency)
(all amounts in 000's except share data)
 
    
Series A Convertible
   
Series A-1 Convertible
   
Series B Convertible
   
Series C-1 Convertible
   
Series C-2 Convertible
                     
Accumulated
       
   
Preferred Stock
   
Preferred Stock
   
Preferred Stock
   
Preferred Stock
   
Preferred Stock
   
Common Stock
   
Additional
         
Other
       
         
$1,000 Stated
         
$1,000 Stated
         
$1,000 Stated
         
$1,000 Stated
         
$1,000 Stated
         
$0.001 Par
   
Paid-In
   
Accumulated
   
Comprehensive
       
   
Shares
   
Value
   
Shares
   
Value
   
Shares
   
Value
   
Shares
   
Value
   
Shares
   
Value
   
Shares
   
Value
   
Capital
   
Deficit
   
Income
   
Total
 
Balance at September 30, 2009
    1,984     $ 1,984       752     $ 752       700     $ 700       -     $ -       -     $ -       24,655,990     $ 25     $ 17,977     $ (16,254 )   $ 10     $ 5,194  
                                                                                                                                 
Cumulative effect of change in accounting principle - fair value of warrants with anti dilutive rights
                                                                                                            (4,628 )             (4,628 )
Relcassification of derivative financial instruments
                                                                                                    10,095                       10,095  
Vested portion of share based payments to employee for services
                                                                                                    1,082                       1,082  
Common Stock issued in private placement
                                                                                    3,795,295       4       1,884                       1,888  
Private placement offering costs
                                                                                                    (584 )                     (584 )
Warrants issued for extension of non-interest bearing note
                                                                                                    64                       64  
Warrants issued under consulting agreements
                                                                                                    199                       199  
Common Stock issued for contingent earnout
                                                                                    175,000                                          
Common Stock issued for investor relations agreements
                                                                                    100,000               66                       66  
Amortization of non-employee stock options issued for performance of services
                                                                                                    34                       34  
Conversion of preferred shares to common stock
    (1,993 )     (1,993 )     (462 )     (462 )                                                     3,286,372       3       2,452                          
Common Stock issued upon exercise of warrants
                                                                                    4,738,966       5       3,659                       3,664  
Shares issued in conversion of bridge note to common
                                                                                    183,620               110                       110  
Cashless warrant exercises
                                                                                    441,153                                          
Preferred Stock contractual dividends
                                                                                                            (175 )             (175 )
Preferred Stock contractual dividends paid in kind
    39       39       21       21                                                                                               60  
Preferred stock deemed dividend
                                                                                                    99       (99 )                
                                                                                                                                 
Foreign currency translation adjustment
                                                                                                                    (517 )     (517 )
Net loss
                                                                                                            (18,555 )             (18,555 )
                                                                                                                                 
Balance at September 30, 2010
    30     $ 30       311     $ 311       700     $ 700       -     $ -       -     $ -       37,376,396     $ 37     $ 37,137     $ (39,711 )   $ (507 )   $ (2,003 )
                                                                                                                                 
Vested portion of share based payments to employees for services
                                                                                                    688                       688  
Warrants issued under consulting agreements
                                                                                                    183                       183  
Amortization of market value of common stock vested for investor relations agreement
                                                                                                    23                       23  
Common Stock issued for investor relations agreements
                                                                                    160,000       1       31                       32  
Amortization of non-employee stock options issued for performance of services
                                                                                                    63                       63  
Warrant issued for credit facility
                                                                                                    71                       71  
Discount on senior secured notes payable
                                                                                                    180                       180  
Warrants issued for construction bond
                                                                                                    15                       15  
Placement agent warrants