ITEM 1. DESCRIPTION OF BUSINESS.
We are a provider of specialty services for the construction and maintenance of facilities-based communications systems in the United States. These services include engineering, construction, maintenance and installation services to telecommunications providers, underground facility locating services to various utilities including telecommunications providers, and other construction and maintenance services to electric and gas utilities and others. We also provide turn-key telecommunications infrastructure solutions. Our "one-stop" capabilities include project development, procurement, design, engineering, construction management, and on- going maintenance and operations services for telecommunications networks. The projects include the construction of fiber networks that provide advanced digital voice, data and video communications and wireless infrastructure deployment.
Specialty Contracting Services. Our turnkey operations in outside plant construction, voice-data network technologies, utilities infrastructure - water, sewer, electric, gas, fiber/copper buried and aerial cable. We offer a full package of infrastructure services as well as network operations and maintenance solutions.
We provide management solutions to firms including but not limited to:
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Central Office - (RBOC, CLEC, ILEC)
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Wireless and Cellular
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Voice and Data Enterprise
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Cable Television (CATV)
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Outside Plant (OSP)
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Government
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Healthcare
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Airport Authorities
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Security
We have established relationships with many leading telephone companies, cable television multiple system operators, utilities and others, including AT&T Inc., Comcast Corporation, Verizon Communications Inc. and Florida Power & Light Company. We are currently performing work with both AT&T and Verizon and expect to continue to provide these services for the foreseeable future.
We will provide comprehensive network solutions to customers in the telecommunications and cable television industries. Services performed generally include the design, installation, repair and maintenance of fiber optic, copper and coaxial cable networks used for video, data and voice transmission, as well as the design and installation of wireless communications towers and switching systems. Services include cable locating, splicing and testing of fiber optic networks and residential installation of fiber optic cabling.
There are times we work as a subcontractor to other general contractors and infrastructure service providers including; Danella Construction and Southern Technologies Services, Inc. We are currently performing work for these entities on a project and need basis.
Engineering. We provide outside plant engineers to telecommunication providers, together with services that include project development, procurement, design, engineering, construction management, and on-going maintenance.
Construction, Maintenance, and Installation. The inside plant services, also known as premise wiring; that we provide include design, engineering, installation and integration of telecommunications networks for voice, video and data inside customers' facilities. Additionally, we provide maintenance and installation of electric utility grids and water and sewer utilities. We provide outside plant telecommunications services primarily under hourly and per unit basis contracts to local telephone companies. We also provide these services to long distance telephone companies, electric utility companies, local municipalities and cable television multiple system operators.
Business Sector
We believe that several of the large telecommunications companies remain committed to their fiber to the premises (FTTP) and fiber to the node (FTTN) initiatives over the long-term. We believe the rate of growth in fiber network build-outs will continue to increase over the long-term as more Americans look to next-generation networks for faster internet and more robust video services. While not all of the spending in the FTTP and FTTN initiatives will be for services that we provide, we believe that we are well-positioned to furnish infrastructure solutions for these initiatives throughout the United States. We also anticipate increased long-term opportunities arising from plans by several wireless companies to transition to 4G technology, as well as the installation of fiber optic "backhaul" to provide links from wireless cell sites to broader voice, data and video networks. We believe that advances in Internet and wireless technologies will continue unabated. These trends, combined with other fast moving telecom innovations and technological enhancements, will continue to provide growth opportunities for our Company.
Our Position in the Marketplace.
While we are a small company, we are poised for rapid growth within the marketplace. We intend to maintain a decentralized operating structure. We believe that this structure and numerous points of contact within customer organizations position us favorably to win new opportunities with existing customers. Our access to capital could limited our growth and the projects we take on. We will continue to be selective in the work we pursue. We will pursue work that is not only profitable and within the areas of our expertise, but work that will not unnecessarily strain our cash flow requirements.
Growth Through Selective Acquisitions
We intend to pursue growth and market share through selective acquisitions. In particular, we will pursue those acquisitions that we believe will provide us with incremental revenue and diversification while complementing our existing operations. We intend to target companies for acquisition that are profitable, with proven operating histories and sound management. We expect to complete at least two acquisitions during the calendar year 2011. The Company may be required to raise capital in order to complete these acquisitions.
Master Contracts and Other Service Agreements
A portion of our services are performed under master service agreements and other arrangements with customers that extend for periods of one or more years. We are approved vendors for many telecommunication companies and utilities, including AT&T, Verizon and Florida Power & Light. Master Service agreements generally contain customer specified service requirements, such as discrete pricing for individual tasks. We also work with local government agencies. Whether in the public or private sectors, a customer’s decision to engage us with respect to a specific construction or maintenance project is often made by local customer management. Historically, most of our agreements have been awarded through a competitive bidding process; however, we may be able to extend some of these agreements on a negotiated basis.
Competition
The specialty contracting services industry in which we operate is highly fragmented and it is characterized by a large number of participants, including several large companies as well as a significant number of small, privately held, local competitors. A significant portion of our revenue is currently derived from master service agreements and price is often an important factor in awarding such agreements. Accordingly, we may be underbid by our competitors if they elect to price their services aggressively to procure such business. Our competitors may also develop the expertise, experience and resources to provide services that are equal or superior in both price and quality to our services, and we may not be able to maintain or enhance our competitive position. The principal competitive factors for our services include geographic presence, breadth of service offerings, worker and general public safety, price, quality of service, and industry reputation. We believe that we compete favorably with our competitors on the basis of these factors.
Materials and Subcontractors
For a majority of the contract services we perform, our customers provide all necessary materials and we provide the personnel, tools, and equipment necessary to perform installation and maintenance services. The customer determines the specifications of the materials and we are only responsible for the performance of the required services. Materials supplied by our customers, for whom the customer retains the financial and performance risk, are not included in our revenue or costs of sales. Under contracts where we are required to supply part or all of the materials, we are not dependent upon any one source for the materials that we customarily use to complete the job. We do not manufacture any significant amounts of material for resale. We are not presently experiencing, nor do we anticipate experiencing, any difficulties in procuring an adequate supply of materials.
We use independent contractors to perform portions of the services that we provide; however, we are not dependent on any single independent contractor. These independent contractors typically are small locally owned companies. Independent contractors provide their own employees, vehicles, tools, and insurance coverage. We use independent contractors to help manage our work flow and reduce the amount that we may otherwise be required to spend on fixed assets.
Seasonality
Some of our revenues are affected by seasonality as a portion of the work we perform is outdoors. Consequently, our outside operations are impacted by extended periods of inclement weather. Generally, inclement weather is more likely to occur during the winter season which falls during our second and third fiscal quarters. Holidays and access customer premises will have additional impact on our revenues.
Environmental Matters
A portion of our work is performed underground. As a result, we are potentially subject to material liabilities related to encountering underground objects which may cause the release of hazardous materials or substances. Additionally, the environmental laws and regulations which relate to our business include those regarding the removal and remediation of hazardous substances and waste. These laws and regulations can impose significant fines and criminal sanctions for violations. Costs associated with the discharge of hazardous materials or substances may include clean-up costs and related damages or liabilities. These costs could be significant and could adversely affect our results of operations and cash flows.
Government Regulations
We have no specific governmental regulations that we need to comply with, fines and risks are associated with the transport of equipment over highways to job sites. We also have certain local permitting requirements at those sites.
Consulting Agreement with Harpos Funding II, LLC.
In October, 2010 we entered into a Consulting Agreement with Harpos Funding II, LLC under which it was supposed to provide us with financial advisory services, investment banking and other strategic advice under the terms of an agreement. In December a principal of that company met with his untimely death and as a result the Consulting Agreement was cancelled upon notice to Harpos Funding II, LLC dated February 25, 2011.
Employees
As of February 15, 2011 we had 24 full time employees and one part-time employee.
Our History
We were incorporated under the name i-realtyauction.com, Inc. in the State of Delaware on November 22, 1999 as a subsidiary of i-Incubator.com, Inc. (OTCBB:INQU). We were initially incorporated to develop and operate an online auction web site that was dedicated to bringing together buyers and sellers of real estate. In January 2001, i-Incubator spun off our shares to its shareholders of record. On August 16, 2001, we changed our name to Genesis Realty Group, Inc. and began to focus our attention on the acquisition, development and management of real property. In August 2008 we changed our name to Genesis Group Holdings, Inc.
ITEM 1.A RISK FACTORS.
Before you invest in our securities, you should be aware that there are various risks. You should consider carefully these risk factors, together with all of the other information included in this annual report before you decide to purchase our securities. If any of the following risks and uncertainties develop into actual events, our business, financial condition or results of operations could be materially adversely affected.
Risks Relating to Our Business.
OUR PRIMARY ASSETS SERVE AS COLLATERAL UNDER THE NOTE AND WARRANT PURCHASE AGREEMENT WITH UTA CAPITAL. IF WE WERE TO DEFAULT ON THIS AGREEMENT, THE LENDER COULD FORECLOSE ON OUR ASSETS.
In August 2010, Digital Comm entered into a Note and Warrant Purchase Agreement with UTA Capital. The agreement calls for two senior bridge notes in the amount of $1 million each, for an aggregate principal amount of $2 million. The notes are each one year amortized term notes bearing interest at 10% per annum. To date one $1 million principal amount note has been funded.
In or about February 14, 2011, Digital Comm entered into a Loan Extension and Modification Agreement with UTA Capital, extending the maturity date to September 30, 2011. The revolving note continues to be collateralized by a blanket security interest in Digital Comm’s assets and the agreement contains certain covenants we must comply with. If we should default under the terms of this agreement, the lender could seek to foreclose on our primary assets. If the lender was successful, we would be unable to conduct our business as it is presently conducted and our ability to generate revenues and fund our ongoing operations would be materially adversely affected.
IF WE ARE UNABLE TO ACCURATELY ESTIMATE THE OVERALL RISKS OR COSTS WHEN WE BID ON A CONTRACT THAT IS ULTIMATELY AWARDED TO US, WE MAY ACHIEVE A LOWER THAN ANTICIPATED PROFIT OR INCUR A LOSS ON THE CONTRACT.
Substantially all of our revenues are typically derived from fixed unit price contracts. Fixed unit price contracts require us to perform the contract for a fixed unit price irrespective of our actual costs. As a result, we realize a profit on these contracts only if we successfully estimate our costs and then successfully control actual costs and avoid cost overruns. If our cost estimates for a contract are inaccurate, or if we do not execute the contract within our cost estimates, then cost overruns may cause us to incur losses or cause the contract not to be as profitable as we expected. This, in turn, could negatively affect our cash flow, earnings and financial position.
The costs incurred and gross profit realized on such contracts can vary, sometimes substantially, from the original projections due to a variety of factors, including, but not limited to:
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onsite conditions that differ from those assumed in the original bid;
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delays caused by weather conditions or project owners notice to proceed;
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contract modifications creating unanticipated costs not covered by change orders;
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changes in availability, proximity and costs of construction materials, as well as fuel and lubricants for our equipment;
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availability and skill level of workers in the geographic location of a project;
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our suppliers’ or subcontractors’ failure to perform due to various reasons including bankruptcy;
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fraud or theft committed by our employees;
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mechanical problems with our machinery or equipment;
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citations or fines issued by any governmental authority;
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difficulties in obtaining required governmental permits or approvals or performance bonds;
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changes in applicable laws and regulations; and
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claims or demands from third parties alleging damages arising from our work or from the project of which our work is part.
ECONOMIC DOWNTURNS OR REDUCTIONS IN GOVERNMENT FUNDING OF INFRASTRUCTURE PROJECTS COULD REDUCE OUR REVENUES AND PROFITS AND HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS.
Our business is highly dependent on the amount and timing of infrastructure work funded by various governmental entities, and which, in turn, depends on the overall condition of the economy, the need for new or replacement infrastructure, the priorities placed on various projects funded by governmental entities and federal, state or local government spending levels.
THE CANCELLATION OF SIGNIFICANT CONTRACTS OR OUR DISQUALIFICATION FROM BIDDING FOR NEW CONTRACTS COULD REDUCE OUR REVENUES AND PROFITS AND HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS.
Contracts that we enter into can usually be canceled at any time by the customer with payment only for the work already completed. In addition, we could be prohibited from bidding on certain governmental contracts if we fail to maintain qualifications required by those entities. A cancellation of an unfinished contract or our debarment from the bidding process could cause our equipment and work crews to be idled for a significant period of time until other comparable work became available, which could have a material adverse effect on our business and results of operations.
We operate in several states, including Ohio, Florida, Texas, Louisiana, and North Carolina any adverse change to the economy or business environment in any State that we perform work could significantly and adversely affect our operations, which would lead to lower revenues and reduced profitability.
OUR ACQUISITION STRATEGY INVOLVES A NUMBER OF RISKS.
In addition to organic growth of our business, we intend to continue pursuing growth through the acquisition of companies or assets that may enable us to expand our project skill-sets and capabilities, enlarge our geographic markets, add experienced management and increase critical mass to enable us to bid on larger contracts. However, we may be unable to implement this growth strategy if we cannot reach agreements for potential acquisitions on acceptable terms or for other reasons. Moreover, our acquisition strategy involves certain risks, including:
• difficulties in the integration of operations and systems;
• difficulties applying our expertise in one market into another market;
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the key personnel and customers of the acquired company may terminate their relationships with the acquired company;
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we may experience additional financial and accounting challenges and complexities in areas such as tax planning and financial reporting;
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we may assume or be held liable for risks and liabilities (including for environmental-related costs and liabilities) as a result of our acquisitions, some of which we may not discover during our due diligence;
• our ongoing business may be disrupted or receive insufficient management attention; and
• we may not be able to realize cost savings or other financial benefits we anticipated.
Future acquisitions may require us to obtain additional equity or debt financing, as well as additional surety bonding capacity, which may not be available on terms acceptable to us or at all. Moreover, to the extent that any acquisition results in additional goodwill, it will reduce our tangible net worth, which might have an adverse effect on our credit and bonding capacity.
OUR INDUSTRY IS HIGHLY COMPETITIVE, WITH A VARIETY OF LARGER COMPANIES WITH GREATER RESOURCES COMPETING WITH US, AND OUR FAILURE TO COMPETE EFFECTIVELY COULD REDUCE THE NUMBER OF NEW CONTRACTS AWARDED TO US OR ADVERSELY AFFECT OUR MARGINS ON CONTRACTS AWARDED.
Essentially all of the contracts on which we bid are awarded through a competitive bid process, with awards generally being made to the lowest bidder, but sometimes recognizing other factors, such as shorter contract schedules or prior experience with the customer. Within our markets, we compete with many national, regional and local construction firms. Some of these competitors have achieved greater market penetration than we have in the markets in which we compete, and some have greater financial and other resources than we do. In addition, there are a number of national companies in our industry that are larger than we are and that, if they so desire, could establish a presence in our markets and compete with us for contracts. As a result, we may need to accept lower contract margins in order to compete against competitors that have the ability to accept awards at lower prices or have a pre-existing relationship with a customer. If we are unable to compete successfully in our markets, our relative market share and profits could be reduced.
OUR DEPENDENCE ON SUBCONTRACTORS AND SUPPLIERS OF MATERIALS COULD INCREASE OUR COSTS AND IMPAIR OUR ABILITY TO COMPLETE CONTRACTS ON A TIMELY BASIS OR AT ALL, WHICH WOULD ADVERSELY AFFECT OUR PROFITS AND CASH FLOW.
We rely on third-party subcontractors to perform some of the work on many of our contracts. We generally do not bid on contracts unless we have the necessary subcontractors committed for the anticipated scope of the contract and at prices that we have included in our bid. Therefore, to the extent that we cannot engage subcontractors, our ability to bid for contracts may be impaired. In addition, if a subcontractor is unable to deliver its services according to the negotiated terms for any reason, including the deterioration of its financial condition, we may suffer delays and be required to purchase the services from another source at a higher price. This may reduce the profit to be realized, or result in a loss, on a contract.
We also rely on third-party suppliers to provide most of the materials for our contracts. We normally do not bid on contracts unless we have commitments from suppliers for the materials required to complete the contract and at prices that we have included in our bid. Thus, to the extent that we cannot obtain commitments from our suppliers for materials, our ability to bid for contracts may be impaired. In addition, if a supplier is unable to deliver materials according to the negotiated terms of a supply agreement for any reason, including the deterioration of its financial condition, we may suffer delays and be required to purchase the materials from another source at a higher price. This may reduce the profit to be realized, or result in a loss, on a contract.
IF WE ARE UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL AND SKILLED LABOR, OR IF WE ENCOUNTER LABOR DIFFICULTIES, OUR ABILITY TO BID FOR AND SUCCESSFULLY COMPLETE CONTRACTS MAY BE NEGATIVELY IMPACTED.
Our ability to attract and retain reliable, qualified personnel is a significant factor that enables us to successfully bid for and profitably complete our work. This includes members of our management, project managers, estimators, supervisors, foremen, equipment operators and laborers. The loss of the services of any of our management could have a material adverse effect on us. Our future success will also depend on our ability to hire and retain, or to attract when needed, highly-skilled personnel. Competition for these employees is intense, and we could experience difficulty hiring and retaining the personnel necessary to support our business. If we do not succeed in retaining our current employees and attracting, developing and retaining new highly-skilled employees, our reputation may be harmed and our future earnings may be negatively impacted.
OUR CONTRACTS MAY REQUIRE US TO PERFORM EXTRA OR CHANGE ORDER WORK, WHICH CAN RESULT IN DISPUTES AND ADVERSELY AFFECT OUR WORKING CAPITAL, PROFITS AND CASH FLOWS.
Our contracts generally require us to perform extra or change order work as directed by the customer even if the customer has not agreed in advance on the scope or price of the extra work to be performed. This process may result in disputes over whether the work performed is beyond the scope of the work included in the original project plans and specifications or, if the customer agrees that the work performed qualifies as extra work, the price that the customer is willing to pay for the extra work. These disputes may not be settled to our satisfaction. Even when the customer agrees to pay for the extra work, we may be required to fund the cost of such work for a lengthy period of time until the change order is approved by the customer and we are paid by the customer.
To the extent that actual recoveries with respect to change orders or amounts subject to contract disputes or claims are less than the estimates used in our financial statements, the amount of any shortfall will reduce our future revenues and profits, and this could have a material adverse effect on our reported working capital and results of operations. In addition, any delay caused by the extra work may adversely impact the timely scheduling of other project work and our ability to meet specified contract milestone dates.
OUR FAILURE TO MEET SCHEDULE OR PERFORMANCE REQUIREMENTS OF OUR CONTRACTS COULD ADVERSELY AFFECT US.
In most cases, our contracts require completion by a scheduled acceptance date. Failure to meet any such schedule could result in additional costs, penalties or liquidated damages being assessed against us, and these could exceed projected profit margins on the contract. Performance problems on existing and future contracts could cause actual results of operations to differ materially from those anticipated by us and could cause us to suffer damage to our reputation within the industry and among our customers.
UNANTICIPATED ADVERSE WEATHER CONDITIONS MAY CAUSE DELAYS, WHICH COULD SLOW COMPLETION OF OUR CONTRACTS AND NEGATIVELY AFFECT OUR REVENUES AND CASH FLOW.
Because much of our work is performed outdoors, work on our contracts is subject to unpredictable weather conditions, which could become more frequent or severe if general climatic changes occur.. While revenues can be recovered following a period of bad weather, it is generally impossible to recover the inefficiencies, and significant periods of bad weather typically reduce profitability of affected contracts both in the current period and during the future life of affected contracts. Such reductions in contract profitability negatively affect our results of operations in current and future periods until the affected contracts are completed.
TIMING OF THE AWARD AND PERFORMANCE OF NEW CONTRACTS COULD HAVE AN ADVERSE EFFECT ON OUR OPERATING RESULTS AND CASH FLOW.
It is generally very difficult to predict whether and when new contracts will be offered for tender, as these contracts frequently involve a lengthy and complex design and bidding process, which is affected by a number of factors, such as market conditions, financing arrangements and governmental approvals. Because of these factors, our results of operations and cash flows may fluctuate from quarter to quarter and year to year, and the fluctuation may be substantial.
In addition, the timing of the revenues, earnings and cash flows from our contracts can be delayed by a number of factors, including adverse weather conditions such as prolonged or intense periods of rain, snow, storms or flooding, delays in receiving material and equipment from suppliers and changes in the scope of work to be performed. Such delays, if they occur, could have adverse effects on our operating results for current and future periods until the affected contracts are completed.
OUR DEPENDENCE ON A LIMITED NUMBER OF CUSTOMERS COULD ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS.
Due to the size and nature of our construction contracts, one or a few customers have in the past and may in the future represent a substantial portion of our consolidated revenues and gross profits in any one year or over a period of several consecutive years. One customer may comprise a significant percentage of revenues at a certain point in time. The loss of business from any one of such customers could have a material adverse effect on our business or results of operations. Because we do not maintain any reserves for payment defaults, a default or delay in payment on a significant scale could materially adversely affect our business, results of operations and financial condition.
WE MAY INCUR HIGHER COSTS TO LEASE, ACQUIRE AND MAINTAIN EQUIPMENT NECESSARY FOR OUR OPERATIONS, AND THE MARKET VALUE OF OUR OWNED EQUIPMENT MAY DECLINE.
We own most of the construction equipment used on our projects. However, to the extent that we are unable to buy construction equipment necessary for our needs, either due to a lack of available funding or equipment shortages in the marketplace, we may be forced to rent equipment on a short-term basis, which could increase the costs of performing our contracts.
The equipment that we own or lease requires continuous maintenance, for which we maintain our own repair facilities. If we are unable to continue to maintain the equipment in our fleet, we may be forced to obtain third-party repair services, which could increase our costs. In addition, the market value of our equipment may unexpectedly decline at a faster rate than anticipated.
AN INABILITY TO OBTAIN PERFORMANCE BONDING COULD LIMIT THE AGGREGATE DOLLAR AMOUNT OF CONTRACTS THAT WE ARE ABLE TO PURSUE.
As is customary in the construction business, we are required to provide surety bonds to secure our performance under certain construction contracts. Our ability to obtain surety bonds primarily depends upon our capitalization, working capital, past performance, management expertise and reputation and certain external factors, including the overall capacity of the surety market. Surety companies consider such factors in relationship to the amount of our backlog and their underwriting standards, which may change from time to time. Events that affect the insurance and bonding markets generally may result in bonding becoming more difficult to obtain in the future, or being available only at a significantly greater cost. Our inability to obtain adequate bonding, and, as a result, to bid on new contracts, could have a material adverse effect on our future revenues and business prospects.
OUR OPERATIONS ARE SUBJECT TO HAZARDS THAT MAY CAUSE PERSONAL INJURY OR PROPERTY DAMAGE, THEREBY SUBJECTING US TO LIABILITIES AND POSSIBLE LOSSES, WHICH MAY NOT BE COVERED BY INSURANCE.
Our workers are subject to the usual hazards associated with providing construction and related services on construction sites. Operating hazards can cause personal injury and loss of life, damage to or destruction of property, plant and equipment and environmental damage. We maintain insurance coverage in amounts and against the risks that we believe are consistent with industry practice, but this insurance may not be adequate to cover all losses or liabilities that we may incur in our operations.
Insurance liabilities are difficult to assess and quantify due to unknown factors, including the severity of an injury, the determination of our liability in proportion to other parties, the number of incidents not reported and the effectiveness of our safety program. If we were to experience insurance claims or costs above our estimates, we might also be required to use working capital to satisfy these claims rather than to maintain or expand our operations. To the extent that we experience a material increase in the frequency or severity of accidents or workers’ compensation claims, or unfavorable developments on existing claims, our operating results and financial condition could be materially and adversely affected.
ENVIRONMENTAL AND OTHER REGULATORY MATTERS COULD ADVERSELY AFFECT OUR ABILITY TO CONDUCT OUR BUSINESS AND COULD REQUIRE EXPENDITURES THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
Our operations are subject to laws and regulations relating to workplace safety and worker health, which, among other things, regulate employee exposure to hazardous substances. Immigration laws require us to take certain steps intended to confirm the legal status of our immigrant labor force, but we may nonetheless unknowingly employ illegal immigrants. Violations of such laws and regulations could subject us to substantial fines and penalties, cleanup costs, third-party property damage or personal injury claims. In addition, these laws and regulations have become, and enforcement practices and compliance standards are becoming, increasingly stringent. Moreover, we cannot predict the nature, scope or effect of legislation or regulatory requirements that could be imposed, or how existing or future laws or regulations will be administered or interpreted, with respect to products or activities to which they have not been previously applied. Compliance with more stringent laws or regulations, as well as more vigorous enforcement policies of the regulatory agencies, could require us to make substantial expenditures for, among other things, pollution control systems and other equipment that we do not currently possess, or the acquisition or modification of permits applicable to our activities.
Risks Related to Our Financial Results and Financing Plans
WE MAY NOT RECEIVE ADDITIONAL FUNDING UNDER THE UTA CAPITAL AGREEMENT.
Under the terms of the August 2010 Note and Warrant Purchase Agreement with UTA Capital, we have borrowed $1 million. The Note was amended and restated in February, 2011 and shall now mature on September 30, 2011. The principle balance owed under the Note as of February 14, 2011 was $775,000. The ability of the Company to borrow additional funds from UTA Capital is currently at the discretion of UTA Capital.
ACTUAL RESULTS COULD DIFFER FROM THE ESTIMATES AND ASSUMPTIONS THAT WE USE TO PREPARE OUR FINANCIAL STATEMENTS.
To prepare financial statements in conformity with generally accepted accounting principles (“GAAP”), management is required to make estimates and assumptions, as of the date of the financial statements, which affect the reported values of assets and liabilities, revenues and expenses, and disclosures of contingent assets and liabilities. Areas requiring significant estimates by our management include: contract costs and profits and application of percentage-of-completion accounting and revenue recognition of contract change order claims; provisions for uncollectible receivables and customer claims and recoveries of costs from subcontractors, suppliers and others; valuation of assets acquired and liabilities assumed in connection with business combinations; and accruals for estimated liabilities, including litigation and insurance reserves. Our actual results could differ from, and could require adjustments to, those estimates.
In particular we recognize contract revenue using the percentage-of-completion method. Under this method, estimated contract revenue is recognized by applying the percentage of completion of the contract for the period to the total estimated revenue for the contract. Estimated contract losses are recognized in full when determined. Contract revenue and total cost estimates are reviewed and revised on a continuous basis as the work progresses and as change orders are initiated or approved, and adjustments based upon the percentage of completion are reflected in contract revenue in the accounting period when these estimates are revised. To the extent that these adjustments result in an increase, a reduction or an elimination of previously reported contract profit, we recognize a credit or a charge against current earnings, which could be material.
WE MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE FOR WORKING CAPITAL, CAPITAL EXPENDITURES AND/OR ACQUISITIONS, AND WE MAY NOT BE ABLE TO DO SO ON FAVORABLE TERMS OR AT ALL, WHICH WOULD IMPAIR OUR ABILITY TO OPERATE OUR BUSINESS OR ACHIEVE OUR GROWTH OBJECTIVES.
Our ability to obtain additional financing in the future will depend in part upon prevailing credit and equity market conditions, as well as conditions in our business and our operating results; such factors may adversely affect our efforts to arrange additional financing on terms satisfactory to us. We have pledged substantially all of our other assets as collateral in connection with our credit. As a result, we may have difficulty in obtaining additional financing in the future if such financing requires us to pledge assets as collateral. In addition, under our credit facility, we must obtain the consent of our lenders to incur any amount of additional debt from other sources (subject to certain exceptions). If future financing is obtained by the issuance of additional shares of common stock, our stockholders may suffer dilution. If adequate funds are not available, or are not available on acceptable terms, we may not be able to make future investments, take advantage of acquisitions or other opportunities, or respond to competitive challenges.
Risks Related to our Common Stock
THE TERMS OF THE UTA CAPITAL WARRANTS WILL RESULT IN CONTINUED DILUTION TO OUR COMMON STOCKHOLDERS.
Under the terms of the five warrants we issued UTA Capital as part of the Note and Warrant Purchase Agreement, we agreed that if we should issue any shares of common stock, other than certain excepted issuances, without consideration or for a consideration per share less than the exercise price of $0.15 per share, then the exercise price is reduced in accordance with the formula set forth in the warrant and the number of shares underlying the warrant are concurrently increased so that the aggregate equity percentage represented by the warrant remains at 16%. In addition, so long as a note is outstanding and during the term of the warrants we agreed that we will not issue any shares of our common stock or securities convertible into or exercisable for shares of our common stock, or grant any option or warrant to acquire shares of our common stock, to any individual who prior to such issuance or grant is the beneficial owner of 5% or more of our common stock without UTA Capital’s prior consent. If we do not obtain such consent, we are required to issue UTA Capital an additional number of warrants so as to maintain their ownership interest (on an as converted basis) of 16% of our common stock on a fully diluted basis giving effect to such additional issuance or grant. These provisions could result in significant dilution to our existing stockholders without our receipt of any additional consideration and could inhibit our ability to raise additional capital as needed.
THE UTA CAPITAL WARRANTS CONTAIN A CASHLESS EXERCISE PROVISION WHICH MEANS WE MAY NOT RECEIVE ANY CASH PROCEEDS UPON THEIR EXERCISE.
In August 2010 under the terms of the Note and Warrant Purchase Agreement with UTA Capital we issued common stock purchase warrants to purchase an aggregate of 20,952,381 shares of our common stock with an exercise price of $0.15 per share. These five-year warrants are exercisable on a cashless basis which means that the holder, rather than paying the exercise price in cash, may surrender a number of warrants equal to the exercise price of the warrants being exercised. The utilization of this cashless exercise feature will deprive us of additional capital which might otherwise be obtained if the warrants did not contain a cashless feature.
OUR COMMON STOCK IS QUOTED IN THE OVER THE COUNTER MARKET ON THE BULLETIN BOARD.
Our common stock is now quoted on the OTC Bulletin Board (OTCBB). The OTCBB is an electronic quotation system that displays real-time quotes, last-sale prices, and volume information for many OTC securities that are not listed on the Nasdaq Stock Market or a national securities exchange. Because our common stock is quoted on the OTCBB, it is possible that fewer brokers or dealers would be interested in making a market in our common stock which may adversely impact its liquidity.
THE TRADABILITY OF OUR COMMON STOCK IS LIMITED UNDER THE PENNY STOCK REGULATIONS WHICH MAY CAUSE THE HOLDERS OF OUR COMMON STOCK DIFFICULTY SHOULD THEY WISH TO SELL THE SHARES.
Because the quoted price of our common stock is less than $5.00 per share, our common stock is considered a “penny stock,” and trading in our common stock is subject to the requirements of Rule 15g-9 under the Securities Exchange Act of 1934. Under this rule, broker/dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements. The broker/dealer must make an individualized written suitability determination for the purchaser and receive the purchaser’s written consent prior to the transaction.
SEC regulations also require additional disclosure in connection with any trades involving a “penny stock,” including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and its associated risks. These requirements severely limit the liquidity of securities in the secondary market because few broker or dealers are likely to undertake these compliance activities and this limited liquidity will make it more difficult for an investor to sell his shares of our common stock in the secondary market should the investor wish to liquidate the investment. In addition to the applicability of the penny stock rules, other risks associated with trading in penny stocks could also be price fluctuations and the lack of a liquid market.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
Not applicable to a smaller reporting company.
ITEM 2. DESCRIPTION OF PROPERTY.
Our principal executive offices are located at Digital Comm. The Company through Digital Comm has a lease on its office premises occupying approximately 1,000 square feet at 2500 N. Military Trail, Suite 275, Boca Raton, Florida 33431 with Crystal Investors Florida, LLC pursuant to the terms of a five year lease commencing in August 2010. Under the terms of the lease we pay an annual base rent of $21,155 for the first year escalating to $23,810 in the fifth year, together with additional annual rent of approximately $13,000.
ITEM 3. LEGAL PROCEEDINGS.
We are not a party to any pending or threatened litigation.
ITEM 4. (REMOVED AND RESERVED).
PART II
ITEM 5. MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
Market Price of and Dividends on Common Equity and Related Stockholder Matters
Our common stock is quoted in the over-the-counter market on the Pink Sheets under the symbol GGHO. The reported high and low last sale prices for the common stock are shown below for the periods indicated. The quotations reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not represent actual transactions.
The last sale price of our common stock as reported on the OTC Markets was $0.14 per share on April 8, 2011. As of March 31, 2011, there were approximately 108 record owners of our common stock.
Dividend Policy
We have never paid cash dividends on our common stock. Under Delaware law, we may declare and pay dividends on our capital stock either out of our surplus, as defined in the relevant Delaware statutes, or if there is no such surplus, out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. If, however, the capital of our company, computed in accordance with the relevant Delaware statutes, has been diminished by depreciation in the value of our property, or by losses, or otherwise, to an amount less than the aggregate amount of the capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets, we are prohibited from declaring and paying out of such net profits any dividends upon any shares of our capital stock until the deficiency in the amount of capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets shall have been repaired.
Recent Sales of Unregistered Securities
NONE
ITEM 6. SELECTED FINANCIAL DATA.
Not applicable to a smaller reporting company.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion of our financial condition and results of operation for 2010 and 2009 should be read in conjunction with the financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Item 1A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable for a smaller reporting company.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Please see our Financial Statements beginning on page of this annual report.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
On August 24, 2010, Li & Company, PC advised Genesis Group Holdings, Inc. that is terminating its engagement as our independent registered public accounting firm. Li & Company, PC served as our independent registered public accounting firm since October 8, 2009; however, during the course of its engagement by us, it never rendered a report on our financial statements and we have yet to file our Annual Report on Form 10-K for the year ended December 31, 2009.
During our two most recent fiscal years and the subsequent interim period preceding Li & Company, PC’s resignation we had no disagreements with the firm on any matter of accounting principles or practices, financial statement disclosure, or auditing scope of procedure which such disagreement if not resolved to the satisfaction of Li & Company, PC would have caused it to make reference to the subject matter of the disagreement in connection with its report.
On August 25, 2010 we engaged Sherb & Co. LLP as our independent registered public accounting firm. During our two most recent fiscal years and the subsequent interim period prior to retaining Sherb & Co. LLP (1) neither we nor anyone on our behalf consulted Sherb & Co. LLP regarding (a) either the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements or (b) any matter that was the subject of a disagreement or a reportable event as set forth in Item 304(a)(1)(iv) and (v), respectively, of Regulation S-K, and (2) Sherb & Co. LLP did not provide us with a written report or oral advice that they concluded was an important factor considered by us in reaching a decision as to accounting, auditing or financial reporting issue.
The decision to engage Sherb & Co. LLP as our independent registered public accounting firm was approved by our Board of Directors.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures. We maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based on his evaluation as of the end of the period covered by this Annual Report on Form 10-K, our Chief Executive Officer who also serves as our Chief Financial Officer has concluded that our disclosure controls and procedures were not effective such that the information relating to our company, required to be disclosed in our Securities and Exchange Commission reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) is accumulated and communicated to our management to allow timely decisions regarding required disclosure as a result of material weaknesses in our disclosure controls and procedures. The material weaknesses relate to our inability to timely file our reports and other information with the SEC as required under Section 13 of the Securities Exchange Act of 1934, together with the material weaknesses in our internal control over financial reporting as described later in this section. To remediate the material weaknesses in disclosure controls and procedures related to our inability to timely file reports and other information with the SEC, we have hired experienced accounting personnel to assist with filings and financial record keeping.
Management’s Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:
• pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
• provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2010. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Management's assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of these controls. Based on this assessment, our management has concluded that as of December 31, 2010, our internal control over financial reporting was not effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles as a result of the material weaknesses indentified in our disclosure controls and procedures as described earlier in this section as well as weaknesses in our internal control over financial reporting related to proper recording keeping of invoices for services and posting of equity issuances in accordance with generally accepted accounting principles. Subsequent to the 2009 year end, we hired an outside accountant and instituted policies which dictate the collection and retention of invoices for services as well as procedures to ensure that all equity issuances are properly and timely recorded. We believe that these remedial actions will be sufficient to correct the material weaknesses in internal control over financial reporting which existed at December 31, 2010.
Changes in Internal Control over Financial Reporting. There have been no changes in our internal control over financial reporting during our fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. Other Information.
N/A
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Executive officers and directors
Gideon Taylor. Mr. Taylor has been a member of our Board of Directors and an executive officer since July 2009. In 1987 Mr. Gideon founded what became Able Telcom Holding Corp., a Florida based telecommunications infrastructure provider, and in 1988 the company went public which grew to more than $400,000,000 in annual revenues in 11 years. Mr. Gideon served as President and Chief Executive Officer Able Telcom Holding Corp. from 1988 until August 1992, and Chairman of the Board of Directors from 1988 until 1995. Mr. Taylor came out of retirement in 2004 and became an independent consultant performing research and development, and miscellaneous assistance within the telecommunications industry. Mr. Taylor also served a total of 24 years in the United States Army; during much of that tenure he provided telecommunications engineering services for the US Government.
Billy B. Caudill. Mr. Caudill has served as our President and Chief Operating Officer since January 2010 and has been President of Digital Comm since 2005. Beginning his career in the Central Office division of GTE, Mr. Caudill has successfully started and managed several public and private telecommunication companies. Having over 30 years of significant Telecom Operational and Management experience has made Mr. Caudill knowledgeable in Central Office Engineering and Installation, the construction of Broadband Networks, Network Integration, Structured Cabling and Switching Equipment Installations, LAN/WAN applications and technician staffing and training.
Lawrence Sands. Mr. Sands has served as our Senior Vice President since January 2010 and in August 2010 became corporate secretary. Prior to joining our company, from January 2010 to September 2010 he was a finance manager at Vista BMW in Coconut Creek, Florida and from March 2010 until September 2010 he was Vice President, Secretary and a director of Omni Ventures, Inc. (OTCBB: OMVE), a development stage company that planned to provide equity funding for commercial and recreational projects in the Mid-west and Western areas of the United States. In 2009 he provided consulting services to Digital Comm. From January 2008 until December 2008 he was Chief Executive Officer of Paivis Corp., a public company engaged in long distance telecommunications. Prior thereto, from September 2003 until April 2008, Mr. Sands was a finance manager at JM Lexus in Margate, Florida. Mr. Sands received a B.S. in Technology and Industrial Arts from New York University and a J.D. from Whittier College, School of Law.
There are no family relationships between our officers and directors. Each director is elected at our annual meeting of stockholders and holds office until the next annual meeting of stockholders, or until his successor is elected and qualified.
Director Qualifications, Committees of our Board of Directors and the Role of our Board in Risk Oversight
Mr. Taylor, our sole director, has in excess of 10 years experience in our industry segment. We do not have any independent directors and the business and operations of our company is managed by Mr. Taylor, including oversight of various risks, such as operational and liquidity risks that our company faces.
We have not established any committees, including an Audit Committee, a Compensation Committee or a Nominating Committee, any committee performing a similar function. The functions of those committees are being undertaken by Board of Directors as a whole. Because we have only one director, we believe that the establishment of these committees would be more form over substance.
We do not have a policy regarding the consideration of any director candidates which may be recommended by our stockholders, including the minimum qualifications for director candidates, nor has our Board of Directors established a process for identifying and evaluating director nominees. We have not adopted a policy regarding the handling of any potential recommendation of director candidates by our stockholders, including the procedures to be followed. Our Board has not considered or adopted any of these policies as we have never received a recommendation from any stockholder for any candidate to serve on our Board of Directors. Given our relative size and lack of directors and officers insurance coverage, we do not anticipate that any of our stockholders will make such a recommendation in the near future. While there have been no nominations of additional directors proposed, in the event such a proposal is made, all members of our Board will participate in the consideration of director nominees. In considering a director nominee, it is likely that our Board will consider the professional and/or educational background of any nominee with a view towards how this person might bring a different viewpoint or experience to our Board.
Mr. Taylor has determined that he is an “audit committee financial expert” within the meaning of Item 401(e) of Regulation S-K. In general, an “audit committee financial expert” is an individual member of the audit committee or Board of Directors who:
•
understands generally accepted accounting principles and financial statements,
•
is able to assess the general application of such principles in connection with accounting for estimates, accruals and reserves,
•
has experience preparing, auditing, analyzing or evaluating financial statements comparable to the breadth and complexity to our financial statements,
•
understands internal controls over financial reporting, and
•
understands audit committee functions.
Our securities are not quoted on an exchange, however, that has requirements that a majority of our Board members be independent and we are not currently otherwise subject to any law, rule or regulation requiring that all or any portion of our Board of Directors include “independent” directors, nor are we required to establish or maintain an Audit Committee or other committee of our Board of Directors.
Financial Code of Ethics
We have adopted a Financial Code of Ethics applicable to our chief executive officer, who is our principal executive officer, and our chief financial officer, who is our principal financial and accounting officer. We will provide a copy, without charge, to any person desiring a copy of the Financial Code of Ethics, by written request to, 2500 N. Military Trail, Suite 275, Boca Raton, FL 33431.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our executive officers and directors, and persons who beneficially own more than 10% of a registered class of our equity securities to file with the Securities and Exchange Commission initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common shares and other equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and greater than 10% stockholders are required by the Securities and Exchange Commission regulations to furnish us with copies of all Section 16(a) reports they file. Based on our review of the copies of such forms received by us, and to the best of our knowledge, all executive officers, directors and persons holding greater than 10% of our issued and outstanding stock have filed the required reports in a timely manner during 2010.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes all compensation recorded by us in 2010 for our executive officers, whose annual compensation exceeded $100,000, and up to two additional individuals for whom disclosure would have been made in this table but for the fact that the individual was not serving as an executive officer of our company at December 31, 2010. The value attributable to any option awards is computed in accordance with FASB ASC Topic 718.
1 Mr. Taylor has served as our Chief Executive Officer since July 2009. We have accrued the amount of compensation due Mr. Taylor which is included in our operating expenses for the year ended December 31, 2010. Mr. Taylor was not paid his annual salary totaling $200,000 and instead chose to waive receiving it. The company recorded this forgiveness as contributed capital and is reflected in the accompanying financial statements as additional paid-in capital.
2 Mr. Caudill served as our President since January 2010. We have accrued the amount of compensation due Mr. Caudill which is included in our operating expenses for the year ended December 31, 2010. Mr. Caudill was not paid his annual salary totaling $200,000 and instead chose to waive receiving it. The company recorded this forgiveness as contributed capital and is reflected in the accompanying financial statements as additional paid-in capital
3 Mr. Sands served as our Senior Vice President and Corporate Secretary since January 2010. He began receiving salary in August 2010.
How Mr. Taylor’s Compensation is Determined
In September 2009 we entered into a five year employment agreement with Gideon Taylor to serve as our Chief Executive Officer and a member of our Board of Directors. Unless earlier terminated, at the end of the initial term the agreement automatically renews for additional one year terms. Under the terms of the agreement, he is entitled to annual compensation of $200,000 payable in cash; if we do not have sufficient cash flow to pay the compensation he is entitled to receive equity in lieu of the cash. He is also entitled to receive a bonus at the discretion of the Board of Directors of which he is the sole member. He is entitled to participate in any equity incentive plan we may adopt, participate in employee benefits and reimbursement of expenses
The agreement may be terminated by us for “cause” at any time after the first year of the agreement upon two months notice to Mr. Taylor. Under the agreement “cause” includes:
• if he is convicted or pleads guilty to a felony or act of fraud, misappropriation or embezzlement, or
• if he had been negligent or dishonest to the detriment of the Company, or
• if he had engaged in actions amounting to misconduct or failed to perform his duties, or
• if he had died or is disabled.
In the event he is terminated for cause, he is not entitled to any severance or other benefits. The employment agreement may also be terminated by Mr. Taylor upon two months notice if there is a material and substantial reduction in his duties and the resignation is approved by the Board. In the event he should terminate the agreement during the second year of the term, he is entitled one year’s salary as severance; in the event he should terminate the agreement after the second anniversary of the agreement, he is entitled to two years salary as severance and he may exercise any vested options which may have been granted. The employment agreement contains customary confidentiality and non-compete provisions
At the time we entered into the agreement with Mr. Taylor, he was the sole member of our Board of Directors and we did not consult with any compensation consultant or other third parties in determining the terms of Mr. Taylor’s agreement.
Employment Agreement with Mr. Caudill
In January 2010 we entered into a five year employment agreement with Billy D. Caudill to serve as our Chief Operating Officer and Secretary. Unless earlier terminated, at the end of the initial term the agreement automatically renews for additional one year terms. Under the terms of the agreement, he is entitled to annual compensation of $200,000 payable in cash; if we do not have sufficient cash flow to pay the compensation he is entitled to receive equity in lieu of the cash. We have not yet issued these shares. He is also entitled to receive a bonus an annual bonus equal to 5% of our EBITDA for the 12 month period ending December 31, payable in cash or stock at the discretion of our Board of Directors. He is entitled to a $1,000 per month car allowance, participate in any equity incentive plan we may adopt, participate in employee benefits and reimbursement of expenses. He is also entitled to receive an additional 25,000,000 shares of our common stock if we record $20 million of contracts and new company acquisitions during the first year of the term of the agreement.
The agreement may be terminated by us for “cause” at any time after the first year of the agreement upon two months notice to Mr. Caudill. Under the agreement “cause” includes:
• if he is convicted or pleads guilty to a felony or act of fraud, misappropriation or embezzlement, or
• if he had been negligent or dishonest to the detriment of the Company, or
• if he had engaged in actions amounting to misconduct or failed to perform his duties, or
• if he had died or is disabled.
In the event he is terminated for cause, he is not entitled to any severance or other benefits. The employment agreement may also be terminated by Mr. Caudill upon two months notice if there is a material and substantial reduction in his duties and the resignation is approved by the Board. In the event he should terminate the agreement during the second year of the term, he is entitled one year’s salary as severance; in the event he should terminate the agreement after the second anniversary of the agreement, he is entitled to two years salary as severance and he may exercise any vested options which may have been granted. The employment agreement contains customary confidentiality and non-compete provisions
We did not consult with any compensation consultant or other third parties in determining the terms of Mr. Caudill’s agreement. Mr. Caudill did not receive any compensation for his services to us to date and has agreed to accrue his compensation or accept stock in lieu of cash compensation.
Employment Agreement with Mr. Sands
In January 2010 we entered into a three year employment agreement with Mr. Lawrence Sands to serve as our Vice President of Mergers and Acquisitions. Unless earlier terminated, at the end of the initial term the agreement automatically renews for additional one year terms. Under the terms of the agreement, he is entitled to annual compensation of $120,000 payable in cash; if we do not have sufficient cash flow to pay the compensation he is entitled to receive equity in lieu of the cash. He is also entitled to receive a bonus at the discretion of the Board of Directors, a $1,000 per month car allowance and to participate in any equity incentive plan we may adopt and to participate in employee benefits. As an incentive, we issued him 4,000,000 shares of our common stock valued at $2,400,000 of the agreement, and an additional 1,200,000 shares of common stock in satisfaction of accrued but unpaid salary totaling $72,000 for the period January 2010 to August 2010.
The agreement may be terminated by us for “cause” at any time after the first year of the agreement upon two months notice to Mr. Sands. Under the agreement “cause” includes:
• if he is convicted or pleads guilty to a felony or act of fraud, misappropriation or embezzlement, or
• if he had been negligent or dishonest to the detriment of the Company, or
• if he had engaged in actions amounting to misconduct or failed to perform his duties, or
• if he had died or is disabled.
In the event he is terminated for cause, he is not entitled to any severance or other benefits. The employment agreement may also be terminated by Mr. Sands upon notice if there is a material and substantial reduction in his duties and the resignation is approved by the Board. In the event he should terminate the agreement, he is entitled to severance benefits ranging from three month’s salary to one year’s salary based upon the date of termination and he is entitled to exercise any vested options. The employment agreement contains customary confidentiality and non-compete provisions
We did not consult with any compensation consultant or other third parties in determining the terms of Mr. Sands’ agreement. Mr. Sands began receiving salary in August, 2010
Outstanding Equity Awards at Fiscal Year-End
The following table provides information concerning unexercised options, stock that has not vested and equity incentive plan awards for each named executive officer outstanding as of December 31, 2010:
Compensation of Directors
We have not established standard compensation arrangements for our directors and the compensation payable to each individual for their service on our Board is determined from time to time by our Board of Directors based upon the amount of time expended by each of the directors on our behalf. Neither Mr. Taylor nor Mr. Glick, each of whom was an executive officer of our company during 2009, received any compensation specifically for his services as a director. Mr. Glick resigned as director in January 2010. The following table provides information concerning the compensation of Mr. Taylor for his services as a member of our Board of Directors for 2010. The value attributable to any option awards is computed in accordance with FASB ASC 718.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
At March 31, 2011, 2010 we had 149,881,070 shares of common stock issued and outstanding. The following table sets forth information known to us as of March 31, 2011 relating to the beneficial ownership of shares of our voting securities by:
▪ each person who is known by us to be the beneficial owner of more than 5% of our outstanding voting stock;
▪ each director;
▪ each named executive officer; and
▪ all named executive officers and directors as a group.
Unless otherwise indicated, the business address of each person listed is in care of 2500 N. Military Trail, Suite 275, Boca Raton, FL 33431. The percentages in the table have been calculated on the basis of treating as outstanding for a particular person, all shares of our common stock outstanding on that date and all shares of our common stock issuable to that holder in the event of exercise of outstanding options, warrants, rights or conversion privileges owned by that person at that date which are exercisable within 60 days of that date. Except as otherwise indicated, the persons listed below have sole voting and investment power with respect to all shares of our common stock owned by them, except to the extent that power may be shared with a spouse.
1 The number of shares owned by UTA Capital LLC includes shares of our common stock issuable upon the exercise of outstanding warrants expiring in August 2015 with an exercise price of $0.15 per share. UTA Capital LLC’s address is 100 Executive Drive, Suite 330, West Orange, NJ 07052.
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth securities authorized for issuance under any equity compensation plans approved by our shareholders as well as any equity compensation plans not approved by our shareholders as of December 31, 2010.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
During 2010, the principal shareholders of the Company Mr. Gideon Taylor and Mr. Billy Caudill provided loans totaling $348,471 and $4,000 at December 31, 2010. These loans are unsecured, non-interest bearing with maturities less than one year.
Director Independence
Mr. Taylor is not considered “independent” within the meaning of meaning of Rule 5605 of the NASDAQ Marketplace Rules.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The following table shows the fees that were billed for the audit and other services provided by Sherb & Co., LLP.
Audit Fees - This category includes the audit of our annual financial statements, review of financial statements included in our Quarterly Reports on Form 10-Q and services that are normally provided by the independent registered public accounting firm in connection with engagements for those fiscal years. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements.
Audit-Related Fees - This category consists of assurance and related services by the independent registered public accounting firm that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under “Audit Fees.” The services for the fees disclosed under this category include consultation regarding our correspondence with the Securities and Exchange Commission and other accounting consulting.
Tax Fees - This category consists of professional services rendered by our independent registered public accounting firm for tax compliance and tax advice. The services for the fees disclosed under this category include tax return preparation and technical tax advice.
All Other Fees - This category consists of fees for other miscellaneous items.
Our Board of Directors has adopted a procedure for pre-approval of all fees charged by the our independent registered public accounting firm. Under the procedure, the Board approves the engagement letter with respect to audit, tax and review services. Other fees are subject to pre-approval by the Board, or, in the period between meetings, by a designated member of Board. Any such approval by the designated member is disclosed to the entire Board at the next meeting. The audit and tax fees paid to the auditors with respect to 2010 were pre-approved by the entire Board of Directors.
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
* filed herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
7900 Glades Road, Suite 540
Boca Raton, FL 33434
Tel: 561.886.4200
Fax: 561.886.3330
e-mail: info@sherbcpa.com
SHERB & CO., LLP
Offices in New York and Florida
Certified Public Accountants
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Genesis Group Holdings, Inc.
We have audited the accompanying consolidated balance sheets of Genesis Group Holdings, Inc. and Subsidiary as of December 31, 2010 and 2009, respectively, and the related consolidated statements of operations, changes in stockholders' deficit and cash flows for the years ended December 31, 2010 and 2009, respectively. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 audit 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 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company and its subsidiaries as of December 31, 2010 and 2009, respectively, and the results of their operations and cash flows for the years ended December 31, 2010, and 2009, respectively, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 12 to the consolidated financial statements, the Company has suffered losses from operations, and has an accumulated deficit and net cash used in operations of $1,142,543 for the year ended December 31, 2010. This raises substantial doubt about its ability to continue as a going concern. Management's plans in regards to these matters are described in Note 12 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Sherb & Co., LLP
Certified Public Accountants
Boca Raton, Florida
April 11, 2011
GENESIS GROUP HOLDINGS, INC.
Consolidated Balance Sheets
December 31,
GENESIS GROUP HOLDINGS, INC. Consolidated Statements of Operations
GENESIS GROUP HOLDINGS, INC.
Consolidated Statements of Cash Flow
GENESIS GROUP HOLDINGS, INC.
Consolidated Statement of Changes in Stockholders' Equity
For the Years Ended December 31, 2009 and 2010
GENESIS GROUP HOLDINGS, INC.
[FORMERLY GENESIS REALTY GROUP, INC.]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
DESCRIPTION OF BUSINESS
DESCRIPTION OF BUSINESS
Genesis Group Holdings, Inc. (formerly known as Genesis Realty Group, Inc.) (“Genesis” or “the Company”) was incorporated on November 22, 1999 under the laws of the State of Delaware. Prior to December 31, 2009 the Company was a development stage company and had limited activity. The Company’s initial activities were been devoted to developing a business plan, structuring and positioning itself to take advantage of available opportunities and raising capital for future operations and administrative functions.
On August 1, 2008 the Company authorized and approved a 1-for-20 reverse share split of the common stock of the Corporation. The Company also authorized an increase in the number of shares of stock to 500,000,000 shares of common stock and created a new class of stock entitled blank check preferred stock at par value of $.0001 for 50,000,000 authorized shares.
The 1-for-20 reverse stock split has been applied to the financial statements retroactively.
On January 14, 2010 Genesis Group Holdings, Inc. (“Genesis” and “the Company”) acquired all the outstanding shares of Digital Comm, Inc. (“Digital”), a Florida Corporation, in exchange for 50,000,000 shares of Genesis. Digital was originally formed on September 13, 2006 and, on January 14, 2010 was reorganized as a wholly owned subsidiary of Genesis. Digital is a provider of specialty contracting services, primarily in the installation of fiber optic telephone cable. These services are provided throughout the United States and include engineering, construction, maintenance and installation services to telecommunications providers, underground facility locating services to various utilities including telecommunications providers, and other construction and maintenance services to electric and gas utilities and others.
For financial accounting purposes, the merger was treated as a recapitalization of Genesis Group Holdings, Inc with the former stockholders of Genesis Group Holdings, Inc retaining approximately 20% of the outstanding stock. This transaction has been accounted for as a reverse acquisition and accordingly the transaction has been treated as a recapitalization of Digital Comm, Inc., with Digital Comm, Inc. as the accounting acquirer. The historical financial statements are a continuation of the financial statements of the accounting acquirer, and any difference of the capital structure of the merged entity as compared to the accounting acquirer’s historical capital structure is due to the recapitalization of the acquired entity.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with generally accepted accounting principles. In the opinion of management, all adjustments consisting of normal recurring accruals considered necessary in order to prepare the financial statements have been included.
The consolidated balance sheet as of December 31, 2009 and the consolidated statement of operations and cash flows for the year ended December 31, 2009, are derived from the historical financial statements of the Company and Digital and have been prepared to give effect to the reverse acquisition of the Company and Digital as at December 31, 2009.
GENESIS GROUP HOLDINGS, INC.
[FORMERLY GENESIS REALTY GROUP, INC.]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES- (continued)
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Genesis and its wholly owned subsidiary Digital. All significant inter-company accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and reporting period. Accordingly, actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, the company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
REVENUE RECOGNITION
The Company recognizes revenues under the percentage of completion method of accounting using the cost-to-cost measures. Revenues from contracts using the cost-to-cost measures of completion are recognized based on the ratio of contract costs incurred to date to total estimated contract costs.
Application of the percentage of completion method of accounting requires the use of estimates of costs to be incurred for the performance of the contract. This estimation process is based upon the knowledge and experience of the Company’s project managers and financial personnel. Factors that the Company considers in estimating the work to be completed and ultimate contract recovery include the availability and productivity of labor, the nature and complexity of the work to be performed, the effect of change orders, the availability of materials, the effect of any delays in performance and the recoverability of any claims. Changes in job performance, job conditions, estimated profitability and final contract settlements may result in revisions to costs and income and their effects are recognized in the period in which the revisions are determined. At the time a loss on a contract becomes known, the amount of the estimated loss expected to be incurred is accrued.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. Estimates of uncollectible amounts are reviewed each period, and changes are recorded in the period they become known. Management analyzes the collectability of accounts receivable balances each period. This review considers the aging of account balances, historical bad debt experience, and changes in customer creditworthiness, current economic trends, customer payment activity and other relevant factors. Should any of these factors change, the estimate made by management may also change, which could affect the level of the Company’s provision for doubtful accounts.
GENESIS GROUP HOLDINGS, INC.
[FORMERLY GENESIS REALTY GROUP, INC.]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES- (continued)
ADVERTISING
The Company’s policy for reporting advertising expenditures is to expense them as they are incurred. Advertising expense has not been material to date.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated on a straight-line basis over their estimated useful lives. Useful lives range from: vehicles - 3- 7 years; equipment and machinery - 5-7 years; small tools - 5 years: and furniture, fixtures, computer equipment - 5 years. Maintenance and repairs are expensed as incurred and major improvements are capitalized. When assets are sold or retired, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in other income.
COMMON STOCK PURCHASE WARRANTS
The Company accounts for the issuance of common stock purchase warrants issued in connection with capital financing transactions in accordance with professional standards for "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock".
The Company assessed the classification of its derivative financial instruments as of December 31, 2010, which consist of common stock purchase warrants, and determined that such derivatives are accounted for in accordance with professional standards.
INCOME TAXES
The Company accounts for income taxes under the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. In June 2006, the FASB issued ASC Topic 740, Income Taxes (“ASC Topic 740”) (formerly FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109 ), which prescribes a two-step process for the financial statement recognition and measurement of income tax positions taken or expected to be taken in an income tax return. The first step evaluates an income tax position in order to determine whether it is more likely than not that the position will be sustained upon examination, based on the technical merits of the position. The second step measures the benefit to be recognized in the financial statements for those income tax positions that meet the more likely than not recognition threshold. ASC Topic 740 also provides guidance on de-recognition, classification, recognition and classification of interest and penalties, accounting in interim periods, disclosure and transition. In May 2007, the FASB issued an amendment of ASC Topic 740 to provide guidance that a Company may recognize a previously unrecognized tax benefit if the tax position is effectively (as opposed to “ultimately”) settled through examination, negotiation, or litigation.
STOCK-BASED COMPENSATION
The Company grants stock options, time-based and performance-based restricted share units to certain employees and officers. The fair value of stock option grants is estimated on the date of grant using the Black-Scholes option pricing model based on certain assumptions. The fair value of restricted share units is estimated on the date of grant and is generally equal to the closing stock price on the date of grant. In accordance with ASC Topic 718,
GENESIS GROUP HOLDINGS, INC.
[FORMERLY GENESIS REALTY GROUP, INC.]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES- (continued)
Compensation - Stock Compensation , compensation costs for performance-based awards are recognized by the Company over the requisite service period if it is probable that the performance goal will be satisfied. The Company uses its best judgment to determine probability of achieving the performance goals at each reporting period and recognizes compensation costs based on the estimate of the shares that are expected to vest.
NET LOSS PER SHARE
Basic loss per common share is computed based on the weighted average number of shares outstanding during the period. Diluted loss per share is computed in a manner similar to the basic loss per share, except that the weighted-average number of shares outstanding is increased to include all common shares, including those with the potential to be issued by virtue of warrants, options, convertible debt and other such convertible instruments. A diluted earnings per share contemplates a complete conversion to common shares of all convertible instruments only if they are dilutive in nature with regards to earnings per share. Since the Company has incurred net losses for all periods, and since there are no convertible instruments, basic loss per share and diluted loss per share are the same. ASC Topic 260, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“ASC Topic 260”), addresses whether unvested share-based payment awards with rights to receive dividends or dividend equivalents should be considered as participating securities for the purposes of applying the two-class method of calculating earnings (loss) per share. Unvested share-based payment awards that contain rights to receive non-forfeitable dividends or dividend equivalents are participating securities, and thus, should be included in the two-class method of computing earnings (loss) per share. The Company adopted this standard in the first quarter of fiscal 2010 and the adoption did not change the Company’s earnings (loss) per share calculation for any prior period presented.
FAIR VALUE OF FINANCIAL INSTRUMENTS
ASC Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”), defines fair value, establishes a measurement framework and expands disclosure requirements. The Company adopted ASC Topic 820 for financial assets and liabilities on the first day of fiscal 2009 and adopted non-recurring measurements for non-financial assets and liabilities on the first day of fiscal 2010. The adoption of ASC Topic 820 did not have an impact on the Company’s financial statements. ASC Topic 820 requires that assets and liabilities carried at fair value will be
classified and disclosed in one of the following three categories: (1) Level 1 - Quoted market prices in active markets for identical assets or liabilities; (2) Level 2 - Observable market based inputs or unobservable inputs that are corroborated by market data; and (3) Level 3 - Unobservable inputs not corroborated by market data which require the reporting entity’s own assumptions. The Company’s financial instruments consist primarily of cash and equivalents, restricted cash, accounts receivable, income taxes receivable and payable, accounts payable and accrued expenses, and long-term debt. The carrying amounts of these instruments approximate their fair value due to the short maturity of these items.
The fair value of our financial instruments at December 31, 2010 and 2009 are as follows:
GENESIS GROUP HOLDINGS, INC.
[FORMERLY GENESIS REALTY GROUP, INC.]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES- (continued)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
ASC Topic 855, Subsequent Events (“ASC Topic 855”), establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before the date the financial statements are issued or available to be issued. ASC Topic 855 requires companies to reflect in their financial statements the effects of subsequent events that provide additional evidence about conditions at the balance sheet date. In February 2010, the FASB issued Accounting Standards Update No. 2010-09 - Subsequent Events (Topic 855) - Amendments to Certain Recognition and Disclosure Requirements (“ASU 2010-09”). ASU 2010-09 provides amendments which clarify that SEC filers are not required to disclose the date through which subsequent events have been evaluated. The adoption of this guidance had no impact on the Company’s consolidated financial statements.
In April 2010, the FASB issued Accounting Standards Update No. 2010-12, Income Taxes (Topic 740) - Accounting for Certain Tax Effects of the 2010 Health Care Reform Acts (“ASU 2010-12”). ASU 2010-12 addresses changes in accounting for income taxes resulting from the recently issued Health Care and Education Reconciliation Act of 2010 and the Patient Protection and Affordable Care Act. The adoption of this guidance is not expected to have a material effect on the Company’s consolidated financial statements.
In December 2010, the FASB issued Accounting Standards Update No. 2010-29, Business Combinations (Topic 805) (“ASU 2010-29”). ASU 2010-29 is intended to address diversity in practice regarding pro-forma revenue and earnings disclosure requirements for business combinations. ASU 2010-29 specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments also expand the supplemental pro-forma disclosures to include a description of the nature and amount of material, non-recurring pro-forma adjustments directly attributable to the business combination included in the reported pro-forma revenue and earnings. The amendments affect any public entity as defined by ASU 2010-29 that enters into business combinations that are material on an individual or aggregate basis. ASU 2010-29 is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period after December 15, 2010. The adoption of this guidance is not expected to have a material effect on the Company’s condensed consolidated financial statements.
GENESIS GROUP HOLDINGS, INC.
[FORMERLY GENESIS REALTY GROUP, INC.]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following:
Depreciation expense for the years ended December 31, 2010 and 2009 was $ 26,191 and $ 16,578, respectively.
4. BANK DEBT
Bank debt consists of the following:
5. DUE TO RELATED PARTY
On February 20, 2007, the Company entered into an agreement with Michael Farkas and two of his companies in which he is a beneficial owner (Atlas Equity Group, Inc. and The Atlas Group of Companies, LLC) to grant him the right to convert any or all debt into fully paid and non-assessable shares of Common Stock. Through December 31, 2010 and 2009 the Company executed notes aggregating a total of $ -0- and $241,808, respectively with Atlas Equity. These unsecured notes are short-term borrowings with maturities of less then one year with an interest rate of 10%. During 2009 the Company converted the total notes and accrued interest through the issuance of 15,391,438 common shares of the Company at a conversion price of $.01 per share pursuant to the agreement with Atlas Equity.
During 2010, the principal shareholders of the Company provided loans totaling $348,471 at December 31, 2010. These loans are unsecured, non-interest bearing with maturities less than one year.
GENESIS GROUP HOLDINGS, INC.
[FORMERLY GENESIS REALTY GROUP, INC.]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. NOTES PAYABLE - UTA
On August 6, 2010, UTA Capital LLC provided a working capital loan to Genesis Group Holdings, Inc., the parent company of Digital, with Digital also as an additional borrower. The loan is evidenced by a Note and Warrant Purchase Agreement between Digital and Genesis and UTA Capital, LLC dated August 6, 2010. The Agreement calls for two senior bridge notes in the amount of $1 million each, for an aggregate principal amount of $2 million. The notes are each one year amortized term notes bearing interest at 10% per annum. The Company received an initial draw from the first $1 million note $960,000 net of fees which was recorded as a capital contribution by Genesis in Digital.
Additionally, the parent company issued to UTA Capital, LLC warrants purchasing 20,952,381 shares of common stock in Genesis exercisable at $0.15 per share which provide for a cashless exercise. Using professional standards, the relative fair value of the warrant was calculated using the Black-Scholes Option Valuation Model. This amount,
totaling approximately $455,540, has been recorded as a debt discount that will be charged to interest expense over the life of the promissory note.
The loan was subsequently modified and extended as further explained in Note 14.
7. DERIVATIVE LIABILITY
The Company analyzed the Note and Purchase Warrant Agreement referred to in Note 6 based on the provisions of ASC 815-15 and determined that the conversion option of the loan agreement qualifies as an embedded derivative.
The fair value upon inception of the embedded derivative was determined to be $836,685 and was recorded as an embedded derivative liability. The embedded derivative is revalued at the end of each reporting period and any resulting gain or loss is recognized as a current period charge to the statement of operations. Upon issuance the fair value was calculated using the Black-Scholes option pricing model with the following factors, assumptions, and methodologies:
· The fair value of the Company’s common stock was calculated to be $0.10 per share.
· A volatility of 60.2% was calculated by using the closing stock prices of three comparable public companies.
· The exercise price was $0.15. This amount is as stated in the loan agreement.
· The estimated life was determined to be 5 years, which is equal to the contractual life of the embedded derivative.
· The risk free interest rate was determined to be .15% based on the 1-year treasury rate.
The Company accounts for the embedded conversion features included in its common stock as well as the related warrants as derivative liabilities. The aggregate fair value of derivative liabilities as of August 6, 2010 and December 31, 2010 amounted to $836,685 and $459,897, respectively. The decrease of $376,788 in the fair value of the derivative liability between their respective date of issuance and December 31, 2010 is included in other income.
8. INCOME TAXES
No provisions for income taxes have been made because the Company has a current year loss and has sustained cumulative losses since the commencement of operations. As of December 31, 2010 and December 31, 2009 the Company had net operating loss carryforwards (“NOL’s”) of $1,219,000 and $84,190, respectively, which will be
GENESIS GROUP HOLDINGS, INC.
[FORMERLY GENESIS REALTY GROUP, INC.]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES -(continued)
available to reduce future taxable income and expense through 2030, subject to limitations pursuant to IRC Section 382 in the event of a more than fifty percent change of ownership.
In accordance with ASC Topic 740 the Company has computed the components or deferred income taxes as follows.
At December 31, 2010 and December 31, 2009, a full valuation allowance has been provided as realization of the deferred tax benefit is not likely. The valuation allowance increased approximately $433,000 in 2010.
The effective tax rate varies from the U.S. Federal statutory tax rate are as follows:
9. CONCENTRATIONS OF CREDIT RISK
The Company is subject to concentrations of credit risk relating primarily to its cash and equivalents due to deposits in financial institutions which exceed the amount insured by the Federal Deposit Insurance Corporation, and trade accounts receivable. The Company grants credit under normal payment terms, generally without collateral, to its customers. These customers primarily consist of telephone companies, cable television multiple system operators and electric and gas utilities. With respect to a portion of the services provided to these customers, the Company has certain statutory lien rights which may in certain circumstances enhance the Company’s collection efforts. Adverse changes in overall business and economic factors may impact the Company’s customers and increase credit risks. These risks may be heightened as a result of the current economic developments and market volatility. In the past, some of the Company’s customers have experienced significant financial difficulties and likewise, some may experience financial difficulties in the future. These difficulties expose the Company to increased risks related to the collectability of amounts due for services performed. The Company believes that none of its significant customers were experiencing financial difficulties that would impact the collectability of the Company’s trade accounts receivable as of December 31, 2010 and 2009.
GENESIS GROUP HOLDINGS, INC.
[FORMERLY GENESIS REALTY GROUP, INC.]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. CONCENTRATIONS OF CREDIT RISK (continued)
For the years ended December 31, 2010 and 2009, concentrations of significant customers were as follows:
10. COMMITMENTS AND CONTINGENCIES
Rental
In July 2010 the Company entered into a rental operating lease covering its primary office facility, including corporate, in Boca Raton, Florida that has an original non-cancelable term of 5 years with a provision for early termination after 3 years. The lease contains renewal provisions and generally requires the Company to pay insurance, maintenance, and other operating expenses. The future minimum obligation during each year through fiscal 2014 and thereafter under the leases with non-cancelable terms in excess of one year is as follows:
Employment Agreement
In September 2009 the Company entered into a five year employment agreement with Mr. Gideon Taylor to serve as the Company’s Chief Executive Officer and a member of its Board of Directors. The terms of the agreement provides for automatic one year renewals after the initial term, annual compensation of $200,000 payable in cash; if the Company does not have sufficient cash flow to pay the compensation he is entitled to receive equity in lieu of the cash. He is also entitled to receive a bonus at the discretion of the Board of Directors of which he is the sole member and entitled to participate in any equity incentive plan that may be adopted, as well as participate in employee benefits and reimbursement of expenses. For the year ended December 31, 2010 Mr. Taylor was not paid his annual salary totaling $200,000 and instead chose to waive receiving it. The company recorded this forgiveness as contributed capital and is reflected in the accompanying financial statements as additional paid-in capital
GENESIS GROUP HOLDINGS, INC.
[FORMERLY GENESIS REALTY GROUP, INC.]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. COMMITMENTS AND CONTINGENCIES-(continued)
In January 2010 the Company entered into a five year employment agreement with Mr. Billy D. Caudill to serve as the Company’s Chief Operating Officer and Secretary. The terms of the agreement provides for automatic one year renewals after the initial term, annual compensation of $200,000 payable in cash; if the Company does not have sufficient cash flow to pay the compensation he is entitled to receive equity in lieu of the cash. He is also entitled to receive a bonus an annual bonus equal to 5% of our EBITDA for the 12 month period ending December 31, payable in cash or stock at the discretion of our Board of Directors. He is entitled to a $1,000 per month car allowance, participate in any equity incentive plan we may adopt, participate in employee benefits and reimbursement of expenses. He is also entitled to receive an additional 25,000,000 shares of our common stock if we record $20 million of contracts and new company acquisitions during the first year of the term of the agreement.
For the year ended December 31, 2010 Mr. Taylor was not paid his annual salary totaling $200,000 and instead chose to waive receiving it. The company recorded this forgiveness as contributed capital and is reflected in the accompanying financial statements as additional paid-in capital
In January 2010 the Company entered into a three year employment agreement with Mr. Lawrence Sands to serve as its Vice President of Mergers and Acquisitions. The terms of the agreement provides for automatic one year renewals after the initial term, annual compensation of $120,000 payable in cash; if the Company does not have sufficient cash flow to pay the compensation he is entitled to receive equity in lieu of the cash. Mr. Sands is also entitled to receive a bonus at the discretion of the Board of Directors, a $1,000 per month car allowance and to participate in any equity incentive plan the Company may adopt and to participate in employee benefits.
On August 30, 2010 Mr. Sands was issued 5,200,000 shares of its common stock that had been due to Mr. Sands, as compensation, both pursuant to the terms of his employment agreement and accrued salary. This issuance included 4,000,000 shares of the Company’s common stock valued at fair market value of the per share price totaling $2,400,000 as an incentive bonus at the time he entered into the agreement and an additional 1,200,000 shares of common stock issued in satisfaction of accrued but unpaid compensation totaling $72,000 due Mr. Sands under the terms of the agreement from the date of the agreement through August 2010. In connection with the incentive bonus shares $1,600,000 was deferred and will be charged as stock compensation expense over the remaining term of the employment contract.
11. STOCKHOLDERS’ EQUITY
In August 2009 the Company converted total notes payable and accrued interest of $241,808 into 15,391,438 shares of common of the Company at a carrying value of $.01 per share pursuant to the agreement.
On July 2, 2009, the Company issued 25,500,000 shares of common stock to Mr. Gideon Taylor in exchange for $100 in the private sale.
On August 7, 2009, the Company issued 50,000,000 shares of common stock to Mr. Billy Caudill in exchange for all of the issued and outstanding stock of Digital Comm Inc. in a reverse merger that closed on January 14, 2010 as described in further in Note 8. The stock was valued at its fair market value of $.08 per share and recorded as a stock subscription pending closure of the merger.
On August 7, 2009, an aggregate of 60,000,000 shares of our common stock were issued by the Company to three individuals in anticipation of the closing of a transaction which never occurred. The stock was valued at its fair market value of $.08 per share and recorded as a stock subscription. These shares were cancelled and returned to the status of authorized but unissued shares of our common stock in July 2010.
GENESIS GROUP HOLDINGS, INC.
[FORMERLY GENESIS REALTY GROUP, INC.]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCKHOLDERS’ EQUITY (continued)
On September 3, 2009, the Company issued an aggregate of 8,700,000 shares of common stock valued to two entities as a fee under the terms of the stock purchase agreement with Mr. Taylor. The Company is presently in the process of cancelling 3,500,000 of these shares which were issued to one entity. The remaining shares were valued at $400,000. The stock was valued at its fair market value of $.08 per share.
On August 30, 2010 Mr. Sands was issued 5,200,000 shares of its common stock that had been due to Mr. Sands, as compensation, both pursuant to the terms of his employment agreement and accrued salary. This issuance included 4,000,000 shares of the Company’s common stock valued at fair market value of the per share price totaling $2,400,000 as an incentive bonus at the time he entered into the agreement and an additional 1,200,000 shares of common stock issued in satisfaction of $60,000 of accrued but unpaid compensation due Mr. Sands under the terms of the agreement from the date of the agreement through August 2010.
12. GOING CONCERN
The Company has suffered losses from operations that may raise doubt about the Company's ability to continue as a going concern. As of December 31, 2010, the Company has both negative working capital and continued net losses. The Company may raise capital through the sale of its equity securities, through debt securities, or through borrowings from principals and/or financial institutions. Management believes that actions presently being taken to obtain additional funding provide the opportunity for the Company to continue as a going concern. There can be no assurance that additional financing which is necessary for the Company to continue its business will be available to the Company on acceptable terms, or at all. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
13. RISKS AND UNCERTAINTIES
The Company is subject to risk and uncertainty common to start-up companies including, but not limited to, successful development, promotion, and sale of services, and expansion of market coverage.
As reflected in the accompanying financial statements, the Company has incurred significant losses from operations and negative operating cash flows, which have been financed primarily by proceeds from stock and debt issuance.
As a result the Company had accumulated deficits of $2,219,482 and $77,887 at December 31, 2010 and December 31, 2009 respectively.
Management plans to raise additional working capital and funds for the continued development of its contracts for services through public sale of the Company's common stock, debt securities or borrowing from financial institutions. Management is also attempting to expand the number of job contracts which could increase cash flow during early stages of sales growth. No assurance can be given that the Company will successfully expand its number of third party jobs or that sufficient capital can be raised to support those contracts.
GENESIS GROUP HOLDINGS, INC.
[FORMERLY GENESIS REALTY GROUP, INC.]
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SUBSEQUENT EVENTS
The Company has evaluated subsequent events through April 11, 2011, which is the date the financial statements were issued, and has concluded that no such events or transactions took place which would require disclosure herein, except for the following disclosures:
Debt
On February 3, 2011 the Company entered into a Securities Purchase Agreement with Asher Enterprises, Inc. for the issuance of 40,625,000 of the Company’s common stock to be reserved pursuant to an 8% Convertible Promissory Note of $32,500.
On February 14, 2011 the Company and lender UTA Capital LLC, entered into a Loan Extension and Modification Agreement (“Modification Agreement”) in connection with their existing note payable with a balance of $775,000 at December 31, 2010. The Modification Agreement provided for:
a)
An extension of the original maturity date of the note from August 6, 2011 to September 30, 2011,
b)
A continuation in interest rate of 10% for the remainder of the loan,
c)
For the period commencing on January 1, 2011 through March 31, 2011, the loan shall bear interest only, and
d)
For the period commencing on April 1, 2011 through September 30, 201, the loan shall bear interest at the stated rate and the borrower shall repay the $775,000 balance in five (5) equal monthly principal payments of $75,000 each due on the first of each month
The Modification Agreement also provided for certain repayments of the loan in the event the Company secures additional equity and/or financing. Additionally in exchange for consenting to the Modification Agreement the lender was issued 1,282,094 shares of the Company’s common stock; and a continuing provision of additional shares to be issued to the lender to maintain ownership of 1% of the company’s total outstanding shares until the loan is repaid.
Equity
On February 22, 2011, the Company issued 2,000,000 shares to consultant Birbragher in exchange for consulting services relating to corporate matters.
Proposed Acquisition
On February 25, 2011, Genesis Group Holdings, Inc. (the “Company”) entered into a Memorandum of Understanding with Premier Cable Designs, Inc.(“PCD”) of Valrico, Florida for the purchase by the Company of the business of PCD. Under the terms of the parties understanding, and subject to more formal documentation and due diligence , the Company would acquire PCD for 1,000,000 shares of the Company’s common stock, plus a note payable to the principal shareholder of PCD in the amount of $150,000. The terms of the Note are yet to be agreed upon.
In addition to the foregoing, the selling shareholders will receive additional shares of stock based upon 50% of the net income realized by the Company from PCD over a thirty month period following closing, as well as certain cashless warrants. The warrants will be to purchase an additional 1,000,000 shares priced at .20 a share for each $300,000 in EBITDA, computed and vested on an annual