Attached files
| file | filename |
|---|---|
| EX-31.2 - CFO CERTIFICATION - root9B Holdings, Inc. | cert302cfo.htm |
| EX-32.2 - CFO CERTIFICATION - root9B Holdings, Inc. | cert906cfo.htm |
| EX-32.1 - CEO CERTIFICATION - root9B Holdings, Inc. | cert906ceo.htm |
| EX-31.1 - CEO CERTIFICATION - root9B Holdings, Inc. | cert302ceo.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 2
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2010
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-50502
PREMIER ALLIANCE GROUP, INC
(Exact Name of registrant as Specified in Its Charter)
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Nevada
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20-0443575
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(State of other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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4521 Sharon Road
Suite 300
Charlotte, North Carolina 28211
(Address of principal executive offices)
(704) 521-8077
(Registrant’s telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, “non-accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
[ ] Yes [X] No
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 7,949,902 shares of common stock were outstanding as of November 7, 2010.
EXPLANATORY NOTE
This Amendment No. 2 to our Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2010 (the “Form 10-Q”), as filed with the Securities and Exchange Commission on November 15, 2010, is filed in response to comments from the Securities and Exchange Commission to amend Item 4T, Controls and Procedures and to add to the face of the respective financial statement for the respective periods that they have been restated. This Amendment has no effect on our cash flows or liquidity, nor effects our financial position at the end of the respective restated periods.
This Form 10-Q/A should be read in conjunction with the original Form 10-Q, which continues to speak as of the date of the Form 10-Q. Except as specifically noted above, this Form 10-Q/A does not modify or update disclosures in the original Form 10-Q. Accordingly, this Form 10-Q/A does not reflect events occurring after the filing of the Form 10-Q or modify or update any related or other disclosures.
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Page
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Certifications
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FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
BALANCE SHEETS
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(Unaudited)
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||||||||
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September 30,
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December 31,
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|||||||
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2010
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2009
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|||||||
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ASSETS
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(Restated)
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|||||||
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CURRENT ASSETS:
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Cash
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$ | 505,168 | $ | - | ||||
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Accounts receivable
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2,454,925 | 1,121,186 | ||||||
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Marketable securities
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28,326 | 30,918 | ||||||
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Deferred income taxes
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31,000 | 15,000 | ||||||
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Prepaid expenses
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150,833 | 37,216 | ||||||
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Total current assets
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3,170,252 | 1,204,320 | ||||||
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PROPERTY AND EQUIPMENT - at cost less
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accumulated depreciation
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51,092 | 11,728 | ||||||
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OTHER ASSETS:
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Goodwill
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3,193,553 | 1,450,578 | ||||||
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Intangible assets - net
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233,697 | 79,800 | ||||||
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Investment in equity-method investee
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181,767 | 190,432 | ||||||
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Investment in cost-method investee
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100,000 | 100,000 | ||||||
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Cash surrender value of officers’ life
insurance
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371,427 | 370,032 | ||||||
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Deferred income taxes
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29,000 | 46,000 | ||||||
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Loan Fees - net
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28,852 | 0 | ||||||
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Deposits and other assets
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16,308 | 6,100 | ||||||
| 4,154,604 | 2,242,942 | |||||||
| $ | 7,375,948 | $ | 3,458,990 | |||||
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(Unaudited)
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||||||||
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September 30,
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December 31,
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|||||||
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2010
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2009
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(Restated)
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LIABILITIES AND STOCKHOLDERS' EQUITY
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CURRENT LIABILITIES:
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Note payable
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$ | 626,000 | $ | 211,000 | ||||
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Current portion of long-term debt
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550,111 | 133,152 | ||||||
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Accounts payable
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586,488 | 320,027 | ||||||
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Accrued expenses
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803,499 | 384,990 | ||||||
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Income taxes payable
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20,135 | 33,086 | ||||||
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Total current liabilities
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2,586,233 | 1,082,255 | ||||||
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LONG-TERM DEBT
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158,482 | 114,606 | ||||||
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COMMITMENTS AND CONTINGENCIES
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- | - | ||||||
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STOCKHOLDERS' EQUITY:
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Class A convertible preferred stock, $.001
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par value, 5,000,000 shares authorized,
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18,090 Pref A shares issued and
Outstanding,
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18 | 561 | ||||||
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Class B convertible preferred stock, $.001
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par value, 2,000,000 shares authorized,
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1,040,000 Pref B shares issued and
Outstanding
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1,040 | |||||||
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Common stock, $.001 par value, 45,000,000
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shares authorized, 7,949,902 shares
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issued and outstanding
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7,949 | 6,072 | ||||||
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Additional paid-in capital
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6,022,298 | 3,414,635 | ||||||
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Accumulated deficit
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(1,400,072 | ) | (1,159,139 | ) | ||||
| 4,631,233 | 2,262,129 | |||||||
| $ | 7,375,948 | $ | 3,458,990 | |||||
STATEMENTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(Unaudited)
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Three months
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Three months
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Nine months
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Nine months
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ended
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ended
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ended
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ended
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Sept 30, 2010
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Sept 30, 2009
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Sept 30, 2010
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Sept 30, 2009
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(Restated)
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(Restated)
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NET REVENUE
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$ | 4,779,321 | $ | 2,134,719 | $ | 11,626,607 | $ | 6,620,738 | ||||||||
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OPERATING EXPENSES:
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Cost of revenues
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3,582,664 | 1,538,907 | 8,941,687 | 4,850,285 | ||||||||||||
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Selling, general and administrative
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1,055,785 | 510,668 | 2,510,489 | 1,550,749 | ||||||||||||
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Depreciation
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3,188 | 1,104 | 6,198 | 4,232 | ||||||||||||
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Total operating expenses
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4,641,637 | 2,050,679 | 11,458,374 | 6,405,266 | ||||||||||||
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INCOME FROM OPERATIONS
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137,684 | 84,040 | 168,233 | 215,472 | ||||||||||||
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OTHER (EXPENSE) INCOME:
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Interest expense, net
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(72,889 | ) | (996 | ) | (110,802 | ) | (7,232 | ) | ||||||||
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Gain (loss) on marketable securities
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(1,185 | ) | 40 | (2,593 | ) | 11,932 | ||||||||||
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Officers’ life insurance
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36,497 | 57,646 | 1,395 | 65,990 | ||||||||||||
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Equity in net (loss) income of
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equity-method investee
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(498 | ) | (1,774 | ) | (8,665 | ) | 346 | |||||||||
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Other income
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2,400 | 0 | 4,875 | 2,400 | ||||||||||||
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Total other (expense) income
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(35,675 | ) | 54,916 | (115,790 | ) | 73,436 | ||||||||||
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NET INCOME (LOSS) BEFORE INCOME TAXES
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102,009 | 138,956 | 52,443 | 288,908 | ||||||||||||
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INCOME TAX EXPENSE
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(16,796 | ) | (31,807 | ) | (19,714 | ) | (87,702 | ) | ||||||||
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NET INCOME (LOSS)
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85,213 | 107,149 | 32,729 | 201,206 | ||||||||||||
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PREFERRED STOCK DIVIDENDS EARNED
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- | - | - | - | ||||||||||||
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DEEMED DIVIDEND ON PREFERRED STOCK
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(13,434 | ) | - | (273,663 | ) | - | ||||||||||
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NET INCOME (LOSS) AVAILABLE TO COMMON
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STOCKHOLDERS
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$ | 71,779 | $ | 107,149 | $ | (240,934 | ) | $ | 201,206 | |||||||
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Net income (loss) income per share
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Basic
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$ | 0.01 | $ | 0.02 | $ | (0.03 | ) | $ | 0.03 | |||||||
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Diluted
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$ | 0.01 | $ | 0.02 | $ | (0.03 | ) | $ | 0.03 | |||||||
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Weighted average number of shares
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Basic
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6,949,359 | 5,897,836 | 7,579,984 | 5,878,018 | ||||||||||||
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Diluted
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8,162,408 | 6,458,582 | 7,579,984 | 6,438,764 | ||||||||||||
STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(Unaudited)
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2010
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2009
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Cash flows from operating activities:
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Net income (loss)
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$ | 32,729 | $ | 201,206 | ||||
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Adjustments to reconcile net income (loss)
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to net cash provided by operating activities:
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Depreciation
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35,749 | 4,232 | ||||||
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Amortization of debt discount
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83,755 | |||||||
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Decrease (increase) of cash surrender value
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of officers’ life insurance
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(1,395 | ) | (65,990 | ) | ||||
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(Increase) in Deferred income taxes
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1,000 | (4,000 | ) | |||||
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Consulting expense paid with warrants
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47,805 | - | ||||||
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Stock issues for services
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25,500 | |||||||
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Equity in (gain) loss of equity-method
investee
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8,665 | (346 | ) | |||||
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Changes in operating assets and liabilities:
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(Increase) Decrease in accounts receivable
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(970,901 | ) | 30,355 | |||||
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Decrease (Increase) in marketable securities
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2,591 | (11,932 | ) | |||||
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(Increase) Decrease in prepaid expenses
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(39,030 | ) | (6,442 | ) | ||||
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Decrease in deposits and other assets
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3,303 | 2,318 | ||||||
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Increase (Decrease)in accounts payable
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266,461 | (36,248 | ) | |||||
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Increase (Decrease) in accrued expenses
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281,589 | (4,062 | ) | |||||
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(Increase) in income taxes receivable
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(61,623 | ) | ||||||
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(Decrease) Increase in income taxes payable
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(31,889 | ) | (65,591 | ) | ||||
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Net cash (used in) provided by
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||||||||
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operating activities
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(341,191 | ) | 69,000 | |||||
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Cash flows from investing activities:
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Acquisitions
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(517,191 | ) | ||||||
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Purchases of property and equipment
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- | - | ||||||
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Net cash used in investing activities
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(517,191 | ) | - | |||||
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Cash flows from financing activities:
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Issuance of Common Stock
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40 | |||||||
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Issuance of Preferred Stock
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728,000 | |||||||
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Issue costs and commissions – preferred stock
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(63,490 | ) | ||||||
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Issuance of convertible debentures
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350,000 | |||||||
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Original issue discount - convertible debentures
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(28,000 | ) | ||||||
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Loan Fees – convertible debentures
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(38,000 | ) | - | |||||
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(Net payments)/Proceeds from line of credit
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415,000 | (69,000 | ) | |||||
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Net cash (used in) provided by
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||||||||
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financing activities
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1,363,550 | (69,000 | ) | |||||
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Net increase in cash
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505,168 | - | ||||||
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Cash - beginning of period
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- | - | ||||||
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Cash - end of period
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$ | 505,168 | $ | - | ||||
PREMIER ALLIANCE GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009
(Unaudited)
Note 1 – Basis of Presentation:
The accompanying unaudited interim financial statements of Premier Alliance Group, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Annual Report filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for fiscal year 2009 as reported in the 10-K have been omitted.
The company has restated the Statement of Operations for the three and nine months ended September 30, 2010 to record deemed dividends to preferred stockholders of $13,434 and $273,663, respectively. For the three months ended September 30, 2010, this changed reported net income available to common stockholders from $85,213 to $71,779and for the nine months ended September 30, 2010, this changed reported net income available to common stockholders from $32,729 to a net loss available to common stockholders of $240,934 and earnings per share from $.01 to ($.03). Also, fully diluted shares outstanding were adjusted from 8,746,120 as previously reported to 7,579,984 since the net loss created anti-dilution. The company also restated the Balance Sheet as of September 30, 2010 to reflect the resulting reclassification between Additional Paid-in Capital and Accumulated Deficit by the deemed dividend amount of $273,663. The company restated pro forma net loss per share for the nine months ended September 30, 2010 in footnote 4 from $(0.0) to a loss of $(.04) as a result of the deemed dividend. This restatement has no effect on our cash flows or liquidity, nor effects our financial position at the end of the respective restated periods.
Note 2 – Cash and Cash Equivalents:
Cash equivalents consist of all highly liquid investments with an original maturity of three months or less. As a result of the Company's cash management system, checks issued but not presented to the banks for payment may create negative book cash balances. Such negative balances are included in trade accounts payable.
Note 3 – Material Transactions:
On April 30, 2010, the Company purchased substantially all of the assets of Intronics Solutions, LLC, (Intronic) a privately held, Kansas-based technology consulting and staffing company. In consideration of the Purchased Assets (as defined), including intangible assets and office equipment, the Company paid to Intronic (a) the sum of $300,000 in cash, and (b) issued 795,455 shares of common stock, equal to $700,000 at a price per share of $0.88, which is based on the 5-day average closing price of the common stock for the five days prior to the Closing Date. The Company also entered into employment agreements with two of the principals of Intronic.
The following summarizes the fair values of the assets acquired:
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Current assets
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$ -
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Property and equipment
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20,000
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Intangible assets-customer relationships
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67,000
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Goodwill
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913,000
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Total assets acquired
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1,000,000
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Liabilities assumed
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-
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Net assets acquired
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$1,000,000
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On September 1, 2010, the Company acquired all of the capital stock of Q5Group, Inc., a privately held California business and financial consulting company (“Q5Group”), and merged with Q5Group whereby the Company is the surviving entity.
In consideration for all of Q5Group’s capital stock, the Company agreed to pay to Q5Group, subject to certain conditions (a) the sum of $200,000 in cash, and (b) 800,000 shares of common stock equal to $800,000 at a price per share of $1.00, which was based on the 5-day average closing price of the common stock for the five days prior to the Closing Date. The Company paid $125,000 and delivered 500,000 shares of stock upon closing. Additional consideration will be paid on September 30, 2011, subject to certain conditions, as follows: If the Q5 Unit of Premier achieves $4,000,000 in gross revenue in the previous twelve months, $150,000 in common stock will be issued and if the Q5 Unit achieves $4,000,000 in gross revenue and has a minimum gross margin of 30% for the previous twelve months, an additional $150,000 in common stock and $75,000 cash will be issued and paid on October 1, 2011. The Company also entered into employment agreements with three of the principals of Q5Group, which included an aggregate of $57,500 in sign on bonuses and $57,500 for execution of non-competition agreements. The employment agreements contain cash and stock option bonuses, and stock option incentives based on achieving certain target revenues. Additionally an aggregate of 250,000 stock options were issued to certain Q5Group affiliates, at an exercise price per share of $1.00 and expiring in ten years. These options were valued using the Black-Scholes option valuation method at $104,100.
Note 3 – Material Transactions: - continued
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Current assets
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$ 412,121
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Property and equipment
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25,562
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Intangible assets-non compete
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57,500
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Intangible assets – customer relationships
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49,800
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Goodwill
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829,974
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Total assets acquired
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1,374,957
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Liabilities assumed
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155,857
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Aggregate Purchase Price
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$1,219,100
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Note 4– Pro-Forma Financial Information:
The following unaudited pro-forma data summarizes the results of operations for the three and nine months ended September 30, 2009 and September 30, 2010 as if the purchase of Peoplesource, Inc., Intronic Solutions Group, and Q5Group had been completed January 1, 2009. The pro-forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place on January 1, 2009 or of results that may occur in the future.
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Three months ended September 30, 2009
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Nine months ended
September 30, 2009
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Net revenues
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$ | 3,516,100 | $ | 11,204,749 | ||||
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Operating income (loss)
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121,589 | 252,218 | ||||||
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Net income (loss) per share – basic
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0.02 | 0.03 | ||||||
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Net income (loss) per share- diluted
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0.02 | 0.03 | ||||||
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Three months ended September 30, 2010
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Nine months ended September 30, 2010
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Net revenues
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$ | 5,290,312 | $ | 15,148,937 | ||||
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Operating income (loss)
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71,747 | (35,569 | ) | |||||
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Net income (loss) per share – basic
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0.01 | * | (0.04 | ) * | ||||
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Net income (loss) per share- diluted
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0.01 | * | (0.04 | ) * | ||||
Revenue contributed for the three month period ending September 30, 2010 from the Peoplesource, Inc. acquisition accounted for $640,736 with income before taxes of $81,801. Revenue contributed for the nine month period ending September 30, 2010 from the Peoplesource, Inc. acquisition accounted for $1,786,835 with income before taxes of $283,795.
Revenue contributed for the three month period ending September 30, 2010 from the Intronic Solutions Group, LLC acquisition accounted for $1,029,468 with income before taxes of $30,409. Revenue contributed from May 1, 2010 (date of transaction) thru September 30, 2010 from the Intronic Solutions Group, LLC acquisition accounted for $1,880,855 with income before taxes of $97,002.
Revenue contributed from September 1, 2010 (date of transaction) thru September 30, 2010 from the Q5Group acquisition accounted for $231,433 with income before taxes of $4524.
* - accounts for a deemed dividend related to the preferred stock issuance, which decreases net income or increases the net loss.
Note 5 – Class A Convertible Preferred Stock:
During the quarter ended September 30, 2010, 51,682 Class A Convertible Preferred shares were converted to common shares on a one to one basis. The number of issued and outstanding shares of Class A Convertible Preferred Stock is 18,090.
Note 6 – Class B Convertible Preferred Stock:
On April 12, 2010, the Company commenced an offering of its securities to accredited investors. The Company offered 20 units, each unit consisting of 80,000 shares of Series B 7% convertible preferred stock and 60,000 warrants with an exercise price of $0.77. Each unit was priced at $56,000. During the quarter ended September 30, 2010, 1 unit was sold. As of September 30, 2010 13 units totaling 1,040,000 shares and 780,000 warrants have been sold during the year for gross proceeds of $728,000. In connection with the sale of these securities, the Company paid commissions of $53,760 and issued 139,740 warrants with an exercise price of $0.77 to a registered broker. The issuance of these preferred shares contained an embedded beneficial conversion feature and the intrinsic value of this feature of $13,434 and $273,663 for the three and nine months ended September 30, 2010, respectively, were recorded as a deemed dividend to preferred shareholders.
Note 7 –Convertible Debentures:
On May 21, 2010, the Company issued a 9% senior secured convertible debenture in the principal amount of $350,000 with an 8% original issue discount of $28,000 (the “Debenture”) to an accredited investor. Interest is payable monthly; beginning January 2011, monthly principal payments of $17,500 are due. The remaining balance of $175,000 is due in November 2011. The Debenture is convertible at a conversion value of $0.70 per share. The Debenture was issued with 500,000 warrants having an exercise price of $0.77 and expire in five years. The Debenture is subordinate to the Company’s line of credit, and is secured by all the Company’s assets. In connection with the Debenture, the Company issued 40,000 shares of common stock to the investor.
The Company has accounted for these transactions in accordance with FASB ASC 470-20 “Debt with conversion and other options. As a result, the Company allocated the net proceeds of the debenture ($328,000) to additional paid - in capital for $89,000 for the fair value of the warrants issued and $31,960 to additional paid in capital for the discount to quoted market price for the stock issued to the debenture holder. The remaining $201,040 of net proceeds was allocated to the debt. Additionally, the Company recorded a discount of $198,960 for the beneficial conversion feature of the Debenture. The intrinsic value of the beneficial conversion feature was calculated as the difference between the fair value of the Debenture if converted on the commitment date and the effective conversion price a stated in the debenture. The discounts are being amortized over the term of the Debenture and being recorded as interest expense.
Note 8 – Stock Options and Warrants:
On June 1, 2010, the Board granted an aggregate of 325,000 incentive stock options under the 2008 Stock Incentive Plan to five employees. The options vest over one to four years and are exercisable at $1.00 per share and the options expire in 2020. Compensation expense related to these options will be recognized as vested totaling $20,700 in 2011, $12,420 in 2012, $12,420 in 2013, and $8,280 in 2014. The Company accounted for the issuance of the options in accordance with SFAS 123(R) "Share Based Payment" that requires the recognition of compensation expense in the financial statements based on the grant date fair value of the options. The compensation expense determined by the estimated fair value of the options of $53,820 was calculated using the Black-Scholes option valuation method with the following assumptions: a risk free interest rate of 3.91 percent, an estimated volatility of 10% percent and no dividend yield.
On September 1, 2010, the Board granted an aggregate of 250,000 incentive stock options under the 2008 Stock Incentive Plan to four Q5Group shareholders as discussed in Note 3. The options had no vesting schedule, are exercisable at $1.00 per share and expire in 2020. The estimated fair value of the options of $104,100 was calculated using the Black-Scholes option valuation method with the following assumptions: a risk free interest rate of 3.23 percent, an estimated volatility of 3.11% percent and no dividend yield. In addition, 25,000 incentive stock options were also granted to the president of Q5Group. These options vest after 1 year and
are exercisable at $1.00 per share and expire in 2020. The estimated fair value of the options using the Black-Scholes option valuation method and assumptions above was $10,410, which was recorded as compensation expense.
The following represents the activity under the stock incentive plan as of September 30, 2010 and changes during the year:
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Options
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Shares
|
Weighted Average Exercise Price
|
|
Outstanding at January 1, 2010
|
600,000
|
$0.75
|
|
Issued
|
325,000
|
$1.00
|
|
Outstanding at June 30, 2010
|
925,000
|
$0.84
|
|
Issued
|
275,000
|
$1.00
|
|
Outstanding at September 30, 2010
|
1,200,000
|
$0.88
|
On April 30, the Board granted an aggregate of 150,000 warrants to consultants. The warrants are exercisable at $0.77 and expire on April 30, 2015. The Company accounted for the issuance of the options in accordance with SFAS 123(R) "Share Based Payment" that requires the recognition of compensation expense in the financial statements based on the grant date fair value of the options. The estimated fair value of the options of $47,805 was calculated using the Black-Scholes option valuation method with the following assumptions: a risk free interest rate of 3.91 percent, an estimated volatility of 10 percent and no dividend yield.
As discussed in Note 6, a total of 780,000 warrants, including 60,000 in the quarter ended September 30, 2010, have been issued with Class B convertible preferred stock. Additionally, 139,740 warrants were issued as commission on the sale of these securities.
As discussed in Note 7, 500,000 warrants were issued with convertible debentures.
The following represents the activity of warrants as of June 30, 2010 and changes during the year:
|
Options
|
Shares
|
Weighted Average Exercise Price
|
|
Outstanding at January 1, 2010
|
-
|
-
|
|
Issued
|
1,509,740
|
$0.77
|
|
Outstanding at June 30, 2010
|
1,509,740
|
$0.77
|
|
Issued
|
60,000
|
$0.77
|
|
Outstanding at September 30, 2010
|
1,569,740
|
$0.77
|
Note 9 - Subsequent events:
There were no subsequent events.
Item 2. Management’s Discussion and Analysis or Plan of Operation
Certain information contained in this Form 10-Q includes forward-looking statements that reflect the Company’s current views with respect to future events and financial performance. Certain factors, such as unanticipated technological difficulties, changes in domestic and foreign economic, market and regulatory conditions, the inherent uncertainty of financial estimates and projections, instabilities arising from terrorist actions and responses thereto, and other considerations described in this report could cause actual results to differ materially from those in the forward-looking statements. We assume no obligation to update the matters discussed in this report.
The following discussion should be read in conjunction with our financial statements and the related notes included in this Form 10-Q.
Operations
Our business consists of providing business consulting services to our customers. Our services began a transformation in 2005 from a pure technology focus to a business consulting focus which can encompass technology impact and effort. Our consulting team provides deep business knowledge which helps our customers drive key initiatives forward. Much of our expertise is focused on core areas of business processes used throughout the corporate world including: project management, business analysis, business consulting, and strategic consulting. Typical initiatives in which we provide expertise include compliance and regulatory, merger and acquisition, and business process reengineering efforts. With technology being such an integral part of business, many of our consultants possess solid knowledge and experience that encompasses technology and are typically well versed in the IT business-solution software development life cycle. The IT business-solution software development life cycle refers to industry standard steps typically followed in developing or creating software (the blueprint methodology), including phases for planning, developing, implementing, and managing the solution.
A typical customer is an organization with complex business processes, large amounts of data to manage, and changing business requirements. We promote our services through our two delivery channels, Business Consulting and Business Solution divisions. These divisions operate as one from an accounting and overall management perspective; however they are differentiated from a marketing and customer presentation perspective only. Management reviews and oversees the divisions as one combined entity, utilizes resources across both areas, and makes operational assessments and plans together. In light of this, Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 131 “Business segments” does not require separate financial reporting and the two channels are consolidated in all financial report presentations.
Business Consulting Division. This division provides consulting expertise across a broad range of knowledge, skills and expertise. We recruit, retain, manage, and provide to our clients skilled business, technical, financial and accounting expertise to help lead and train our customers or supplement their knowledge requirements. In these engagements we typically bill our customers on a time-and-materials basis for all work performed. Because of the expertise involved and the complexity of a typical initiative, many customers seeking such services from us commit to long-term engagements that are usually a minimum of 9 months in which our consultants work on site at customer facilities under the daily direction of the customer management. It is very common that we obtain contract extensions with our customers for our consulting resources.
Business Solutions Division. This division handles advanced solutions and technologies and provides expertise in business improvement, business process and systems, project advisory services (portfolio and project management), architecture, and project methodology. Its focus is to service customers typically with emphasis on a project or deliverable basis. The work can be performed at customer facilities or at our facilities. With this type of work the customer typically enters into a contract with us for a fixed price bid that provides for delivery of a given service or delivery at a stated time. Services provided by this group include helping customers assess their business needs and identifying the right business solution, helping customers select or integrate packaged software, business processes or controls. In a Solution based contract, we typically have complete control and accountability over the effort and delivery from a day to day perspective.
Summary
Our focus is to provide subject matter expertise through our consulting team in a variety of ways that continue to help our clients navigate the changing business climate they must deal with. Our approach is built 100% around our people - it is about knowledge, expertise and execution. We have a focus on building our knowledge practices with talent in core areas we feel offer opportunity: compliance and regulatory, mergers and acquisitions, business process reengineering/analysis, and finance & accounting. Our recruiting and sales organization work with customers closely - a consultative approach - to understand the business direction, initiatives or issues they are dealing with. It is our focus to then provide subject matter experts that can bring the expertise and knowledge to the client to allow for successful efforts. If, as we expect, we continue to grow and attract specialized expertise in our focused areas of discipline, we will continue to be recognized as a value add partner for existing customers, add new customers, and will identify new opportunities to provide additional value add services to our customers.
Our typical customers cross many spectrums, including Fortune 500 companies (including AIG, Lincoln Financial Group, Duke Power, Bank of America, and Wells Fargo), biotech early stage companies, established software and technology based firms. They all share a trait where they continually seek expertise and knowledge in areas such as GRC, project management, business process and improvement, business consulting, finance and accounting.
Results of Operations
Net revenue for the three months ended September 30, 2010 was $4,779,000, an increase of 123.8%, compared to $2,135,000 for the same period in 2009. For the 2010 year-to-date period revenue was $11,626,000 compared to $6,621,000 for the 2009 year-to-date period, an increase of 75.6%. The increase also reflects the addition of two months of revenue from the PeopleSource acquisition, three months of revenues from the ISG acquisition, and one month of revenues from the Q5Group acquisition, as compared to last year.
Cost of revenues, defined as all costs for billable staff were $3,582,000 or 74.9% of revenue for the three months ended September 30, 2010, as compared to $1,539,000 or 72.1% of revenue for the same period in 2009. For the 2010 year-to-date period costs were 76.9% of revenue, and for the 2009 year-to-date period costs were 73.2% of revenue.
General and administrative (G&A) expenses were $1,059,000 or 22.1% of revenue for the three months ended in September 30, 2010, as compared to $511,000 or 23.9% for the same period in 2009. For the 2010 year-to-date period it was 21.6% as compared to 23.5% for the 2009 year-to-date period mostly reflected because of the increase in revenues attributed to the acquisitions. For 2009 a non cash charge of $25,500 for a grant of stock was issued to a firm for strategic business consulting services. For 2010 a non-cash charge for stock option (warrants) expenses, issued to a firm for M&A consulting services, of $47,850 was incurred. Both of these charges were an increase to G&A expenses. Other G&A expenses were mostly comparable as costs were managed effectively on many items including rent, travel, recruiting, and professional services (accounting, legal, consulting), meals and entertainment, and business insurance. Redundant duplicate charges from the acquisitions are being eliminated or phased out while cost controls have been put in place for new parts of the organization.
Operating income for the three months ended in September 30, 2010, was $137,000 as compared to income of $84,000 for the same period in 2009. For the 2010 year-to-date period, the operating income was $168,233 compared to income of $215,000 for the 2009 year-to-date period. The decrease in operating income is attributed to one time merger costs associated with the ISG and Q5Group acquisitions: including legal, accounting, funding, and consulting costs exceeding $230,000 thru September 30, 2010.
Other income and expense, net, consisted of a loss of $35,674 for the three months ended in September 30, 2010, compared to a gain of $55,000 for the same period in 2009. For the 2010 year-to-date period, the loss was $115,790 compared to a gain of $73,000 for the 2009 year-to-date period. The loss in 2010 is mostly attributable to a book charge of $83,755 recorded as interest expense–debt discount related to convertible debenture from additional funding.
The effective income tax expense for the first nine months of 2010 is 38% compared to an effective income tax expense of 30% for the same period in 2009. The change in rate is a direct result of permanent differences of officer’s life insurance and the non-cash charge for stock option grants.
Net income for the three months ended in September 30, 2010, was $85,213 or $.01 per diluted share when accounting for the deemed dividend on preferred stock of $13,434, compared with net income of $107,149 for the same period in 2009, or $.02 per diluted share. For the 2010 year-to-date period net income was $32,729 or ($.03) per diluted share when accounting for the deemed dividend on preferred stock of $273,663, compared to net income of $201,206 or $.03 for the 2009 year-to-date period.
Dividend
No Dividend has been declared as of September 30, 2010, and the Company does not anticipate declaring dividends in the future.
Critical Accounting Policies
Revenue Recognition
The Company follows the guidance of the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104 for revenue recognition. In general, the Company records revenue when persuasive evidence of any agreement exists, services have been rendered, and collectability is reasonably assured, therefore, revenue is recognized when the Company invoices customers for completed services at contracted rates and terms.
Income Taxes
We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in calculating tax credits, tax benefits, and deductions that arise from differences in the timing of recognition of revenue and expense for tax and financial-statement purposes.
We assess the likelihood that we will be able to recover deferred tax assets. If recovery is unlikely, we must increase the provision for taxes by recording a valuation allowance against the estimated deferred tax assets that will not ultimately be recoverable. As of September 30, 2010, we believed that all of the deferred tax assets recorded on our balance sheet would ultimately be recovered. However, should there be a change in our ability to recover our deferred tax assets, our tax provision would increase in the period in which we determine that the recovery is unlikely.
Financial Condition and Liquidity
As of September 30, 2010, we had cash and cash equivalents of $505,168 representing an increase of $505,168 from September 30, 2009. Net working capital at September 30, 2010, was $584,000 as compared to $342,000 on September 30, 2009. Current assets at September 30, 2010 were $3,170,253. We had long-term debt of $158,482. Shareholders’ equity as of September 30, 2010 was $4,631,233, which represented 63% of total assets.
During the nine months ended September 30, 2010, the net cash used by operating activities was $341,191 and was primarily a result of increases in accounts receivable of $970,901, prepaid expenses of $39,030, and income taxes receivable of $61,623 and a decrease in income taxes payable of $31,889, offset by depreciation and amortization of $119,504, issuance of stock warrants of $48,000, equity loss of equity-method investee of $8,200, increases in accounts payable of $216,461 and accrued expenses of $281,589.
Cash flows from investing totaled $517,191 and was a result of cash used in the acquisition of Intronic Solutions Group of $300,000 and cash used for the acquisition of Q5Group of $217,191.
Financing activities provided $1,363,550 of cash for the nine months ended September 30, 2010. Of that increase, $728,000 was related to the issuance of Series B Preferred Stock, $350,000 was related to issuance of the Debenture and was offset by issue costs of $129,490. In addition, a $415,000 increase in cash was due to borrowing on our revolving line of credit. We borrow or repay this revolving debt as needed based upon our working capital obligations. We believe that internally generated funds, current cash on hand, and available borrowings under our revolving credit line will be adequate to meet foreseeable liquidity needs.
Outlook
Major trends that we must deal with involve the following: 1) consolidation of customer’s primary vendor lists for all types of professional services and 2) customers are differentiating between the service firms that provide commodity based services and those that provide value added services. Premier must ensure our services are focused and delivered as knowledge based expertise, hence recognized as value add capabilities versus a commodity service where price is the only differentiator.
Premier Alliance Group is addressing these trends from 2 perspectives. First we have laid the foundation and made a shift of our core services from a pure technology focus to a complete business consulting focus. This shift is focused on specific areas where we believe Knowledge Based Expertise is, and will be, a key driver for customers. By building our capabilities, expertise and knowledge in these focused areas customers will engage us on strategic and key initiatives. Secondly we are working to diversify and enhance our business model geographically as well as in our service offerings. This will allow us to expand our internal skills and capabilities as well as reach other markets more effectively.
By providing key business consulting skills and establishing internal “subject matter groups of knowledge” we will be better positioned to advise and consult with customers on a strategic basis. Our growth focus encompasses organic growth as well as merger and acquisition strategies. We have retooled our sales and recruiting efforts to increase our focus on key business consulting services. Key initiatives have been to attract specific talent to our consulting team and to target efforts that require (1) more specialized process skills: project management, business analysis, and process reengineering and (2) specialized business skills such as: regulatory and compliance, merger knowledge, and financial expertise. We see these areas as growth areas in the future. These types of customer based initiatives will allow us to separate ourselves from the “general” vendor perspective and allow us to be a strategic partner, increasing opportunity and long term viability.
Our top priority is to broaden the range of services and capabilities we offer by building “areas of business expertise” and at the same time build a more geographically diverse client base. We believe that achieving this goal will continue to require a combination of merger activity and organic growth. This will in part depend on continued improvement in the U.S. business market.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company’s primary market risk exposures consist of interest rate risk associated with variable rate borrowings and investment market fluctuation impact on long term assets. Management believes that interest rate fluctuations will not have a material impact on Premier’s results of operations. Market fluctuation provides investment gain or loss on variable life insurance policies (managed by Metropolitan Life). The policies are long term assets which contribute to the financial stability of the company and can impact funding and loan capability.
Interest Rate Risks
At September 30, 2010, the Company had an outstanding balance of $626,000 under its revolving credit agreement. Interest on borrowings under the facilities are based on the daily LIBOR rate plus a 3.7% margin. Daily average borrowings for the 2010 third quarter were $573,391.
Market fluctuation impact on assets
For the nine months ending September 30, 2010, the valuation of the Variable Life Insurance policies had an investment gain of $1,395.
Equity Market Risks
The trading price of our common stock has been and is likely to continue to be volatile and could be subject to wide fluctuations. Such fluctuations could impact our decision or ability to utilize the equity markets as a potential source of our funding needs in the future.
Item 4T. Controls and Procedures
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the" Exchange Act"), the Company's management, with the participation of the Company's Chief Executive Officer ("CEO") and Principal Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report in reaching a reasonable level of assurance that the information required to be disclosed by the Company in the reports that it files with the Securities and Exchange Commission (“SEC”) is recorded, processed, summarized and reported within the time period specified in the SEC's rules and forms and that such information is accumulated and communicated to this company’s management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. It has been determined that deemed dividends on preferred stock were not recorded in the proper interim period, thus requiring restatement of previously issued financial statements. In light of the weakness in internal controls over financial reporting giving rise to this error, the CEO and Principal Financial Officer concluded that the Company's disclosure controls and procedures were not effective as of the end of the period covered by this report.
As required by Exchange Act Rule 13a-15(d), the Company's management, including the Chief Executive Officer and Principal Financial Officer, conducted an evaluation of the Company's internal control over financial reporting to determine whether any changes occurred during the fiscal quarter ended September 30, 2010 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Based on that evaluation, there has been no change in our internal control over financial reporting during the quarter ended September 30, 2010.
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None.
Item 4. [Removed and Reserved.]
Item 5. Other Information
None
Item 6. Exhibits
|
31.1
|
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Sec. 1350).
|
|
31.2
|
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Sec. 1350).
|
|
32.1
|
Written Statement of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
|
|
32.2
|
Written Statement of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
|
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
PREMIER ALLIANCE GROUP, INC.
|
|||
|
(Registrant)
|
|||
|
DATE: January 19, 2012
|
By:
|
/s/ Mark S. Elliott
|
|
|
Mark S. Elliott
|
|||
|
President (Chief Executive Officer)
|
|||
|
DATE: January 19, 2012
|
By:
|
/s/ Larry W. Brumfield
|
|
|
Larry W. Brumfield
|
|||
|
Chief Financial Officer and
|
|||
|
Principal Financial Officer
|
21