Attached files
| file | filename |
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| EXCEL - IDEA: XBRL DOCUMENT - root9B Holdings, Inc. | Financial_Report.xls |
| EX-32.1 - CEO CERTIFICATION - root9B Holdings, Inc. | cert906ceo.htm |
| EX-31.1 - CEO CERTIFICATION - root9B Holdings, Inc. | cert302ceo.htm |
| EX-31.2 - CFO CERTIFICATION - root9B Holdings, Inc. | cert302cfo.htm |
| EX-32.2 - CFO CERTIFICATION - root9B Holdings, Inc. | cert906cfo.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 3
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2011
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-50502
PREMIER ALLIANCE GROUP, INC
(Exact Name of registrant as Specified in Its Charter)
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Delaware
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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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.
[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: 8,106,325 shares of common stock were outstanding as of August 05, 2011.
EXPLANATORY NOTE
This Amendment No. 3 to our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2011 (the “Form 10-Q”), as filed with the Securities and Exchange Commission on August 15, 2011, restated and filed on January 5, 2012 and January 19, 2012, is to file a restated Balance Sheet, Statement of Operations, Statement of Cash Flows, footnote disclosures and Management’s Discussion and Analysis or Plan of Operation due to the compounding effect of a single error in the volatility and risk free interest estimates used in the underlying Black-Scholes formula the Company utilizes for its estimate of the valuation of the following non-cash items: i) the derivative liability valuation of detachable warrants at each balance sheet date, and the change thereto, which change directly impacts the statement of operations, and ii) the measurement of compensation expense associated with the issuance of stock options and stock warrants, which also directly impacts the statement of operations, to properly reclassify derivative liability from current to long-term liabilities, and for additional information in Item 4T Controls and Procedures. This restatement has no effect on our cash flow or liquidity.
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
BALANCE SHEETS
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(Unaudited)
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||||||||
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June 30,
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December 31,
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|||||||
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2011
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2010
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|||||||
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(restated)
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ASSETS
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CURRENT ASSETS:
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Cash
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$ | 3,975,571 | $ | 404,588 | ||||
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Accounts receivable
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2,347,803 | 2,279,952 | ||||||
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Marketable securities
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32,854 | 31,748 | ||||||
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Deferred tax asset – current portion
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68,000 | 39,000 | ||||||
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Income tax receivable
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185,301 | 0 | ||||||
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Prepaid expenses and other current assets
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157,882 | 61,420 | ||||||
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Total current assets
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6,767,411 | 2,816,708 | ||||||
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PROPERTY AND EQUIPMENT - at cost less
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accumulated depreciation
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87,570 | 83,827 | ||||||
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OTHER ASSETS:
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Goodwill
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2,894,075 | 2,894,075 | ||||||
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Intangible assets - net
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483,276 | 439,709 | ||||||
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Investment in equity-method investee
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174,161 | 177,762 | ||||||
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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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415,318 | 407,403 | ||||||
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Deferred tax asset
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820,000 | 0 | ||||||
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Deposits and other assets
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14,855 | 20,025 | ||||||
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Total other assets
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4,901,685 | 4,038,974 | ||||||
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TOTAL ASSETS
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$ | 11,756,666 | $ | 6,939,509 | ||||
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(Unaudited)
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||||||||
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June 30,
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December 31,
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|||||||
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2011
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2010
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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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$ | 195,000 | $ | 339,000 | ||||
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Current portion of long-term debt
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572,094 | 531,653 | ||||||
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Convertible debenture
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45,967 | 12,735 | ||||||
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Accounts payable
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634,605 | 450,084 | ||||||
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Accrued expenses
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863,897 | 779,536 | ||||||
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Income taxes payable
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0 | 0 | ||||||
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Total current liabilities
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2,311,563 | 2,113,008 | ||||||
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NONCURRENT LIABILITIES:
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Long term debt – net of current portion
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16,519 | 22,177 | ||||||
| Derivative liability | 2,129,702 | 71,650 | ||||||
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Deferred tax liability
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84,000 | 119,000 | ||||||
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Total noncurrent liabilities
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2,230,221 | 212,827 | ||||||
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COMMITMENTS AND CONTINGENCIES
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0 | 0 | ||||||
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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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0 shares issued and outstanding
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0 | 0 | ||||||
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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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1,200,000 shares issued and outstanding
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1,200 | 1,200 | ||||||
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Class C convertible preferred stock, $.001
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par value, 2,500,000 shares authorized,
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2,380,952 shares issued and outstanding
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2,381 | 0 | ||||||
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Common stock, $.001 par value, 45,000,000
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shares authorized, 8,092,992 shares
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issued and outstanding
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8,093 | 7,968 | ||||||
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Additional paid-in capital
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11,100,163 | 5,888,399 | ||||||
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Accumulated deficit
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(3,896,955 | ) | (1,283,893 | ) | ||||
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Total stockholders’ equity
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7,214,882 | 4,613,674 | ||||||
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
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$ | 11,756,666 | $ | 6,939,509 | ||||
STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(Unaudited)
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Three months
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Three months
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Six months
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Six months
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|||||||||||||
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Ended
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Ended
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Ended
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Ended
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June 30, 2011
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June 30, 2010
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June 30, 2011
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June 30, 2010
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(Restated)
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(Restated)
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(Restated)
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(Restated)
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NET REVENUE
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$ | 4,213,681 | $ | 3,971,927 | $ | 9,047,451 | $ | 6,847,286 | ||||||||
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OPERATING EXPENSES:
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Cost of revenues
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3,065,949 | 3,082,290 | 6,753,065 | 5,359,023 | ||||||||||||
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Selling, general and administrative
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1,594,815 | 843,312 | 3,011,067 | 1,454,704 | ||||||||||||
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Depreciation
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6,311 | 1,818 | 12,075 | 3,010 | ||||||||||||
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Total operating expenses
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4,667,075 | 3,927,420 | 9,776,207 | 6,816,737 | ||||||||||||
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INCOME (LOSS) FROM OPERATIONS
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(453,394 | ) | 44,507 | (728,756 | ) | 30,549 | ||||||||||
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OTHER (EXPENSE) INCOME:
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Interest expense, net
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(33,589 | ) | (35,085 | ) | (105,895 | ) | (37,913 | ) | ||||||||
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Loss on extinguishment
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(80,316 | ) | 0 | (80,316 | ) | 0 | ||||||||||
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Officers’ life insurance
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(10,458 | ) | (52,182 | ) | 7,915 | (35,101 | ) | |||||||||
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Equity in net (loss) income of
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equity-method investee
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(2,884 | ) | (94 | ) | (3,601 | ) | (8,167 | ) | ||||||||
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Derivative (expense) income
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(317,826 | ) | 0 | (26,775 | ) | 0 | ||||||||||
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Other income
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954 | (1,763 | ) | 3,514 | 1,066 | |||||||||||
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Total other (expense) income
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(444,119 | ) | (89,124 | ) | (205,158 | ) | (80,115 | ) | ||||||||
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(LOSS) BEFORE INCOME TAXES
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( 897,513 | ) | (44,617 | ) | (933,914 | ) | (49,566 | ) | ||||||||
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INCOME TAX BENEFIT (EXPENSE)
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272,362 | (13,916 | ) | 278,872 | (2,918 | ) | ||||||||||
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NET INCOME (LOSS)
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(625,151 | ) | (58,533 | ) | (655,042 | ) | (52,484 | ) | ||||||||
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PREFERRED STOCK DIVIDENDS
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0 | 0 | (44,429 | ) | 0 | |||||||||||
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DEEMED DIVIDEND ON PREFERRED STOCK
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0 | (260,229 | ) | (1,913,592 | ) | (260,229 | ) | |||||||||
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NET INCOME (LOSS) AVAILABLE TO COMMON
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STOCKHOLDERS
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$ | (625,151 | ) | $ | (318,762 | ) | $ | (2,613,063 | ) | $ | (312,713 | ) | ||||
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Net income (loss) per share
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Basic
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$ | (0.08 | ) | $ | (0.05 | ) | $ | (0.33 | ) | $ | (0.04 | ) | ||||
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Diluted
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$ | (0.08 | ) | $ | (0.05 | ) | $ | ( 0.33 | ) | $ | (0.04 | ) | ||||
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Weighted average number of shares
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Basic
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8,041,618 | 6,628,820 | 8,005,009 | 7,111,009 | ||||||||||||
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Diluted
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8,041,618 | 6,628,820 | 8,005,009 | 7,111,009 | ||||||||||||
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(Unaudited)
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2011
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2010
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(Restated)
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Cash flows from operating activities:
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Net (loss) income
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$ | (655,042 | ) | $ | (52,484 | ) | ||
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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 and amortization
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173,823 | 39,996 | ||||||
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(Increase) Decrease of cash surrender value
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of officers’ life insurance
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(7,915 | ) | 35,101 | |||||
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Income from change in value of derivatives
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26,775 | 0 | ||||||
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Loss on extinguishment
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80,316 | 0 | ||||||
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Deferred income taxes
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(102,000 | ) | (19,000 | ) | ||||
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Stock option / warrant expense
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235,431 | 47,805 | ||||||
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Stock issued for services
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0 | 0 | ||||||
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Equity in loss(gain) of equity-method investee
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3,601 | 8,167 | ||||||
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Changes in operating assets and liabilities:
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(Increase) Decrease in accounts receivable
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(67,850 | ) | (787,061 | ) | ||||
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(Increase) Decrease in marketable securities
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(1,106 | ) | 1,408 | |||||
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(Increase) Decrease in prepaid expenses
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(96,462 | ) | (34,161 | ) | ||||
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Decrease in deposits and other assets
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5,170 | 0 | ||||||
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Increase (Decrease) in accounts payable
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184,521 | 97,116 | ||||||
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Increase (Decrease) in accrued expenses
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84,361 | 272,503 | ||||||
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(Decrease) Increase in income taxes receivable
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(185,301 | ) | 0 | |||||
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Increase (Decrease)in income taxes payable
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0 | (10,259 | ) | |||||
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Net cash provided by (used in) operating activity
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(321,678 | ) | (400,869 | ) | ||||
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Cash flows from investing activities:
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Acquisitions
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(60,000 | ) | (300,000 | ) | ||||
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Purchases of property and equipment
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(15,818 | ) | 0 | |||||
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Net cash used in investing activities
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(75,818 | ) | (300,000 | ) | ||||
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Cash flows from financing activities:
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Additional paid in Capital
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0 | 0 | ||||||
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Common Stock
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0 | 40 | ||||||
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Preferred stock
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4,215,065 | 609,630 | ||||||
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Dividends
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(44,429 | ) | 0 | |||||
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(Payments)/Issuance of convertible debentures
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(52,500 | ) | 284,000 | |||||
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Net (payments)/ proceeds from long-term debt
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(5,657 | ) | 0 | |||||
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Net (payments)/ proceeds on line of credit
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(144,000 | ) | 415,000 | |||||
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Net cash provided by (used in) financing activities
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3,968,479 | 1,308,670 | ||||||
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Net increase in cash
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3,570,983 | 607,801 | ||||||
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Cash - beginning of period
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404,588 | 0 | ||||||
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Cash - end of period
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$ | 3,975,571 | $ | 607,801 | ||||
NOTES TO FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 2011 AND 2010
(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 2010 as reported in the 10-K have been omitted.
The company has restated the Statement of Operations for the three and six months ended June 30, 2010 to record deemed dividends to preferred stockholders of $260,229. For the three months ended June 30, 2010, this changed reported net loss available to common stockholders from $58,533 to $318,762 and loss per share from ($.01) to ($.05). For the six months ended June 30, 2010, this changed reported net loss available to common stockholders of $52,484 to $312,713 and loss per share from ($.01) to ($.04). This restatement affects only Net Income (Loss) Available to Common Stockholders, and has no effect on cash flows or liquidity, nor effects our financial position at the end of the respective restated periods.
The financial statements as of June 30, 2011 and for the three and six months ended June 30, 2011 have been restated to give effect to a restatement of all financial statement line items impacted by the error in the valuation formula of derivatives, stock options and stock warrants issued. This restatement has no effect on cash flow or liquidity.
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 – Business Combinations:
On January 1, 2011, the Company purchased business from an individual and accounted for the transaction under the acquisition method. In consideration of the purchase, the Company agreed to pay (a) the sum of $90,000 in cash, and (b) 164,384 stock options with an exercise price of $1.00 and maturing in ten years. The Company paid $60,000 and delivered 82,192 options upon closing.
Additional consideration will be paid on January 15, 2012, subject to certain conditions, as follows: If the purchased Unit of Premier achieves $2,000,000 in gross revenue in 2011 and has a minimum gross margin of 30%, an additional 82,192 stock options and $30,000 of cash will be paid. The Company also entered into employment agreements with the principal which included $20,000 for execution of a non-competition agreement. The employment agreements contain cash and stock option bonuses, and stock option incentives based on achieving certain target revenues. The estimated fair value of the total options to be issued in the deal of $11,959 was calculated using the Black-Scholes option valuation method with the following assumptions: a risk free interest rate of 3.36% , an estimated volatility of 28.7% and no dividend yield. The total present value of all consideration expected to be paid as part of this agreement was $112,400 and has been recorded as a customer relationship intangible asset to be amortized over its expected useful life of four years.
Note 4– Pro-Forma Financial Information:
The following unaudited pro-forma data summarizes the results of operations for the three and six months ended June 30, 2011 and 2010, as if the purchase of Intronic Solutions Group, LLC and Q5Group, Inc. had all been completed January 1, 2010. The pro-forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place on January 1, 2010.
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Three months ended
June 30, 2010
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Six months ended
June 30, 2010
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|||||||
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Net revenues
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$ | 5,008,726 | $ | 9,858,626 | ||||
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Operating (loss) income
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(35,181 | ) | (23,383 | ) | ||||
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Net (loss) income per share - basic
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(0.04 | ) * | ( 0.04 | ) * | ||||
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Net (loss) income per share - diluted
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(0.04 | ) * | (0.04 | ) * | ||||
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Three months ended
June 30, 2011
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Six months ended
June 30, 2011
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|||||||
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Net revenues
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$ | 4,213,681 | $ | 9,047,451 | ||||
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Operating (loss) income
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(453,394 | ) | (728,756 | ) | ||||
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Net (loss) income per share – basic
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(0.08 | ) * | (0.33 | ) * | ||||
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Net (loss) income per share- diluted
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(0.08 | ) * | (0.33 | ) * | ||||
Revenue contributed for the three month period ended June 30, 2011 from the Intronic Solutions Group, LLC acquisition accounted for $582,643 with an operating loss before taxes of $182,707. Revenue contributed for the six month period ended June 30, 2011 from the Intronic Solutions Group, LLC acquisition accounted for $1,760,356 with an operating loss before taxes of $231,255.
Revenue contributed for the three month period ended June 30, 2011 from the Q5Group, Inc. acquisition accounted for $474,421 with an operating loss before taxes of $42,693. Revenue contributed for the six month period ended June 30, 2011 from the Q5Group, Inc. acquisition accounted for $1,050,691 with an operating loss before taxes of $160,282.
As disclosed in Note 3, the company acquired business from an individual and there is no discreet financial information to include in the proforma results
* - accounts for a deemed dividend related to preferred stock issuance, which increases the net loss.
Note 5 – Series B Convertible Preferred Stock:
On April 14, 2010, the Company designated 2,000,000 shares of its preferred stock as Series B Convertible Preferred Stock, $.001 par value per share (“Series B Preferred Stock”). The Series B Preferred Stock (a) is convertible into one share of common stock, subject to certain adjustments, (b) pays 7% dividends per annum, payable annually in cash or shares of common stock, at the Company’s option, (c) is automatically converted into common stock should the price of the Company’s common stock exceed $2.50, and (d) for a period of one year from the issuance date provides full-ratchet anti-dilution provisions on issuances of securities at a price less than $0.70 per share of common stock, subject to certain exceptions. The issuance of these preferred shares contained an embedded beneficial conversion feature and the intrinsic value of this feature of $260,229 was recorded as a deemed dividend to preferred shareholders during the second quarter ended June 30, 2010.
As of June 30, 2011, 1,200,000 shares of Series B Convertible Preferred stock have been issued. These shares of preferred stock were issued in conjunction with warrants. Dividends paid in the first quarter of 2011 on these shares totaled $44,429.
Note 6 – Series C Convertible Preferred Stock:
On March 1, 2011, and amended on March 3, 2011, the Company designated 2,500,000 shares of its preferred stock as Series C Convertible Preferred Stock, $.001 par value per share (“Series C Preferred Stock”), each share is priced at $2.10 and includes 3 warrants at an exercise price of $0.77 which expire in 5 years. The Series C Preferred Stock (a) is convertible into three shares of common stock, subject to certain adjustments, (b) pays 7% dividends per annum, payable annually in cash or shares of common stock, at the Company’s option, (c) is automatically converted into common stock should the price of the Company’s common stock exceed $2.50 for 30 consecutive trading days.
On March 3, 2011, the Company closed an offering of its securities to accredited investors. The Company sold 2,380,952 shares of Series C Preferred Stock and 7,142,856 warrants for gross proceeds of $5,000,000. In connection with the sale of these securities $650,000 was paid and 714,285 warrants were issued, with an exercise price of $0.77, to a registered broker. In addition a $100,000 advisory fee was paid and 360,000 warrants, with an exercise price of $0.77 were paid to a registered broker. The issuance of these preferred shares contained an embedded beneficial conversion feature and the intrinsic value of this feature of $1,913,952 was recorded as a deemed dividend to preferred shareholders.
The 8,217,141 warrants issued in connection with the preferred stock contain full-ratchet anti-dilution provisions that require them to be recorded as a derivative instrument. The fair market value of the warrants at the issuance date of $2,031,277 was recorded as a derivative liability as a reduction to the additional paid in capital of $1,249,277 with a corresponding deferred tax asset of $782,000 . The derivative liability was adjusted to the fair market value of the warrants at June 30, 2011, of $2,018.952 , with the change in value during the three and six months ended June 30, 2011 of $299,926 and $(12,325), respectively, being recorded as derivative income (expense) on the statement of operations.
Note 7 –Convertible Debenture:
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”). Interest is payable monthly. Beginning January 2011, monthly principal payments of $17,500 are due. The remaining balance at November 2011 of $175,000 is due in full. The debenture is convertible at a conversion value of $0.70 per share. The Debenture was issued with 500,000 detachable warrants with an exercise price of $0.77 and expire in five years and contain full-ratchet and other standard anti-dilution protections. 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 issuance, the Company issued the debenture holder 40,000 shares of common stock for $40 and paid a commitment fee of $20,000. Legal fees associated with the transaction totaled $18,000.
The Company has accounted for these transactions in accordance with FASB ASC Topic 470-20 “Debt with Conversion and Other Options”. Due to the full-ratchet anti-dilution protection in the warrants, they are considered to be derivative instruments. As such, the fair market value of the warrants of $86,950 was recorded as a debt discount and as a derivative liability. Additional debt discounts included the original issue discount of $28,000, a commitment fee of $20,000, stock issue discount of $31,960, and a beneficial conversion feature of $183,090. 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 as stated in the debenture. The discounts totaling $350,000 are being amortized under the interest method over the term of the debenture and being recorded as interest expense. During the three months ended June 30, 2011, $34,560 of interest expense related to this convertible debenture has been recorded $92,915 of interest expense has been recorded for the six months ended June 30, 2011. During the three months ended June 30, 2011 the principal amount of the loan has been reduced through conversion of debt to common stock to $210,000. On these conversions, expenses totaling $80,316 for the three and six months ended June 30, 2011 were recorded in other income (expense).
The derivative liability was adjusted to the fair market value of the warrants at June 30, 2011, of $110,750 , with the change in value of $ 17,900 and $39,100 being recorded as derivative expense on the statement of operations for the three and six months ended June 30, 2011.
Note 8 – Stock Options and Warrants:
As discussed in Note 3, on January 1, 2011, the Board granted an aggregate of 82,192 incentive stock options under the 2008 Stock Incentive Plan to one employee. The options have no vesting schedule and are exercisable at $1.00 per share and the options expire in 2021. The options were granted as purchase of customer accounts related to the employment contract of the individual hired. The estimated fair value of the options of $11,959 was calculated using the Black-Scholes option valuation method with the following assumptions: a risk free interest rate of 3.36% , an estimated volatility of 28.7 % and no dividend yield.
On June 1, 2011, the Board granted an aggregate of 150,000 incentive stock options under the 2008 Stock Incentive Plan to one executive employee. The options have no vesting schedule and are exercisable at $1.10 per share and the options expire in 2021. The estimated fair value of the options of $63,645 was calculated using the Black-Scholes option valuation method with the following assumptions: a risk free interest rate of 2.96% , an estimated volatility of 28.0% and no dividend yield.
The following represents the activity under the stock incentive plan as of June 30, 2011 and changes during the year:
|
Options
|
Shares
|
Weighted Average Exercise Price
|
|
Outstanding at January 1, 2009
|
889,291
|
$1.40
|
|
Expired
|
289,291
|
$2.75
|
|
Outstanding at January 1, 2010
|
600,000
|
$0.75
|
|
Issued
|
925,000
|
$1.00
|
|
Outstanding at December 31, 2010
|
1,525,000
|
$0.90
|
|
Issued
|
82,192
|
$1.00
|
|
Outstanding at March 31, 2011
|
1,607,192
|
$0.91
|
|
Issued
|
150,000
|
$1.10
|
|
Outstanding at June 30, 2011
|
1,757,192
|
$0.92
|
On March 3, 2011 the Board granted an aggregate of 240,000 warrants to a consultant for strategic consulting services. The warrants are exercisable at $0.77 and expire on March 3, 2016. The Company accounted for the issuance of the warrants in accordance with FASB ASC 718 “Compensation-Stock Compensation” that requires the recognition of compensation expense in the financial statements based on the grant date fair value of the warrants. The estimated fair value of the warrants of $59,328 was calculated using the Black-Scholes option valuation method with the following assumptions: a risk free interest rate of 2.3% , an estimated volatility of 28.4% and no dividend yield.
As discussed in Note 6, a total of 7,142,856 warrants were issued in the quarter ended March 31, 2011 directly associated with the Class C convertible preferred stock. Additionally, 1,074,285 warrants were issued as commission on the sale of these securities.
On May 2, 2011 the Board granted an aggregate of 50,000 warrants to an Investor Relations/Public Relations firm for strategic consulting services. The warrants are exercisable at $1.10 and expire on May 2, 2016. The Company accounted for the issuance of the warrants in accordance with FASB ASC 718 “Compensation-Stock Compensation” that requires the recognition of compensation expense in the financial statements based on the grant date fair value of the warrants. The estimated fair value of the warrants of $12,740 was calculated using the Black-Scholes option valuation method with the following assumptions: a risk free interest rate of 1.96%, an estimated volatility of 28.2 % and no dividend yield.
On June 1, 2011 the Board granted an aggregate of 33,000 warrants to a search firm for consulting services related to board members. The warrants are exercisable at $1.10 and expire on June 1, 2016. The Company accounted for the issuance of the warrants in accordance with FASB ASC 718 “Compensation-Stock Compensation” that requires the recognition of compensation expense in the financial statements based on the grant date fair value of the warrants. The estimated fair value of the warrants of $8,329 was calculated using the Black-Scholes option valuation method with the following assumptions: a risk free interest rate of 1.60 %, an estimated volatility of 28.0 % and no dividend yield.
On June 10, 2011 the independent Board Members were compensated with an aggregate of 250,000 warrants, 50,000 to each member for joining the board. The warrants are exercisable at $1.05 and expire on June 10, 2016. The Company accounted for the issuance of the warrants in accordance with FASB ASC 718 “Compensation-Stock Compensation” that requires the recognition of compensation expense in the financial statements based on the grant date fair value of the warrants. The estimated fair value of the warrants of $71,200 was calculated using the Black-Scholes option valuation method with the following assumptions: a risk free interest rate of 2.99 %, an estimated volatility of 28.0 % and no dividend yield.
The following represents the activity of warrants as of June 30, 2011 and changes during the year:
|
Warrants
|
Shares
|
Weighted Average Exercise Price
|
|
Outstanding at January 1, 2010
|
0
|
0
|
|
Issued
|
1,778,940
|
$0.78
|
|
Outstanding at December 31, 2010
|
1,778,940
|
$0.78
|
|
Issued
|
8,457,141
|
$0.77
|
|
Outstanding at March 31, 2011
|
10,236,081
|
$0.77
|
|
Issued
|
333,000
|
$1.06
|
|
Outstanding at June 30, 2011
|
10,569,081
|
$0.78
|
Note 9 - Subsequent events:
On July 7, 2011, the Company issued 13,333 shares of common stock to its legal counsel for services rendered.
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.
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, our Business Solutions and our Business Consulting 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) Accounting Standards Codification 280 “Segment Reporting” does not require separate financial reporting and the two channels are consolidated in all financial report presentations.
Business Solutions Division. This division provides Knowledge Based Expertise within focused areas of concentration. Our core areas of expertise in this group revolve around efforts in 1) Governance, Risk Management, and Compliance (GRC), 2) Business Performance & Technology (BP&T) and 3) Finance & Accounting (F&A). Types of engagements within this realm include: 1) GRC efforts with enterprise risk management, control and governance frameworks, internal audit services, regulatory and compliance, 2) BP&T efforts with systems planning, organizational effectiveness, business process re-engineering, workflow analysis, and 3) F&A efforts with financial reporting and financial advisory services. Engagements are typically structured in a Statement of Work and can be billed on fixed fee / delivery based arrangements or on a time-and-materials basis for all work performed. We are focused on providing Knowledge Based Expertise (KBE) and because of the expertise involved and the complexity of a typical initiative, customers seeking such services from us typically engage us on strategic or high priority initiatives.
Business Consulting Division. This division provides consulting expertise across a broad range of knowledge, skills and expertise including project management, systems implementation and architecture, information management, business intelligence, business expertise and analysis. 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.
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 because of various change elements 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 June 30, 2011, was $4,214,000, an increase of 6.1%, compared to $3,972,000 for the same period in 2010. For the 2011 year-to-date period, revenue was $9,047,000 compared to $6,847,000 for the 2010 year-to-date period, an increase of 32.1%. The increase also reflects the addition of 3 months of revenue from the Q5 acquisition and 1 month of revenues from the ISG acquisition, as compared to last year. An increase in revenues attributed to the ISG and Q5 acquisitions accounts for $1,056,064 for the three months ended June 30, 2011 and $2,811,047 for the 2011 year-to-date period of the overall revenue. The overall revenue trend is primarily a result of 2 factors: a concentrated effort to not renew engagements that do not fall within our core delivery focus areas so that more energy is focused on strategic business development and a decline in business with 2 clients for external reasons.
Cost of revenues, defined as all costs for billable staff, were $3,066,000 or 72.7% of revenue for the three months ended June 30, 2011, as compared to $3,082,000 or 77.6% of revenue for the same period in 2010. For the 2011 year-to-date period costs were 74.6% of revenue and for the 2010 year-to-date period, costs were 78.3% of revenue. The decrease in cost of revenues as a percentage of revenue for this period is primarily a result of a focus on decreasing low level work that does not fit within our strategic focus.
General and administrative (G&A) expenses were $1,600,000 or 37.9 % of revenue for the three months ended in June 30, 2011, as compared to $845,000 or 21.3% for the same period in 2010. For the 2011 year-to-date period, it was 33.3 % as compared to 21.3% for the 2010 year-to-date, G&A expenses in 2011 include stock option expenses of $235,431 and expenses related to funding and M&A activity of $357,000. Other G&A expenses were mostly comparable after accounting for the additional overhead and infrastructure associated from the M&A activity, with increases in professional services (accounting, legal), overhead wages, corporate travel, and network/telephone expense. New expenses related to a branding/marketing effort across the enterprise as well as an investor relations and public relations initiative accounted for expenses of $65,000.
Operating loss for the three months ended in June 30, 2011, was $453,000 as compared to income of $44,000 for the same period in 2010. For the 2011 year-to-date period, the operating loss was $729,000 compared to operating income of $30,000 for the 2010 year-to-date period. For 2011, the operating income included a non-cash charge of $235,431 for stock option/warrant expense for Directors, consultants and employees as well as included one- time expenses related to funding and M&A activity that totaled approximately $357,000.
Other income and expense, net, consisted of a loss of $444,000 for the three months ended in June 30, 2011, compared to a loss of $89,000 for the same period in 2010. For the 2011 year-to-date period, the loss was $205,000 compared to a loss of $80,000 for the 2010 year-to-date period. The loss in 2011 is mostly attributable to: 1) recording of a non-cash charge of interest expense - debt discount, associated with a convertible debenture funding event of $35,000 for the three months ended June 30, 2011 and $93,000 for the 2011 year-to-date period and 2) Loss on Extinguishment expense related to
the conversion of convertible debt of $80,000 for the three months ended June 30, 2011 and for the year-to-date period.
The effective income tax benefit for the first six months of 2011 is 30% compared to an effective income tax expense of 6% for the same period in 2010. The change in rate is primarily the result of permanent differences of officer’s life insurance and the non-cash charges for interest expense – debt discount, stock options and warrants expense, derivative expense and loss on extinguishment expense.
Net Loss for the three months ended in June 30, 2011, was $625,200 or ($.08) per diluted share, compared with a net loss of $58,500 for the same period in 2010, or ($.05) per diluted share when accounting for the deemed dividend on preferred stock. For the 2011 year-to-date period, net loss was $655,000 compared to net loss of $52,500 for the 2010 year-to-date period.
Dividend
No dividend for common stock has been declared as of June 30, 2011, 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 collectibility 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 June 30, 2011, 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 June 30, 2011, we had cash and cash equivalents of $3,975,571 representing an increase of $3,570,983 from December 31, 2010 . Net working capital at June 30, 2011, was $4,455,848 , as compared to $703,700 on December 31, 2010 . Current assets at June 30, 2011, were $6,767,411 . We had noncurrent liabilities of $2,230,221 comprised primarily of a derivative liablity of $2,129,702 representing the current fair value of oustanding detachable stock warrants . Shareholders’ equity as of June 30, 2011, was $7,214,882 , which represented 61% of total assets.
During the six months ended June 30, 2011, the net cash used by operating activities was $321,678 and was primarily a result of increases in accounts receivable of $68,000, net deferred tax assets of $102,000 , prepaid expenses and other current assets of $96,000, income taxes receivable of $185,000 and an increase in cash surrender value of officers’ life of $7,900 offset by depreciation and amortization of $174,000, issuance of stock warrants of $235,000 , decreases in equity loss of equity-method investee of $3,600, decreases in deposits of $5,200 and increases of accounts payable of $185,000, accrued expenses of $84,000 and a change in value of derivatives of $ 27,000 and loss on extinguishment of $80,000.
Cash flows from investing activities used $75,818 and were primarily a result of upfront cash of $60,000 for the purchase of business from an individual and purchase of fixed assets for $15,818.
Financing activities provided $3,968,479 of cash for the six months ended June 30, 2011. Of that increase, $4,200,000 was the net result of shares of Series C Preferred Stock sold. This was offset by the repayment of our revolving line of credit of $144,000, payment of dividends of $44,000, payment of $52,500 toward principal of the convertible debentures, and payment of $5,700 toward capital lease obligations.
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 two 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.
Off-Balance-Sheet Arrangements
As of June 30, 2011, and during the prior three months then ended, there were no other transactions, agreements or other contractual arrangements to which an unconsolidated entity was a party under which we (1) had any direct or contingent obligation under a guarantee contract, derivative instrument, or variable interest in the unconsolidated entity, or (2) had a retained or contingent interest in assets transferred to the unconsolidated entity.
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 June 30, 2011, the Company had an outstanding balance of $195,000 under its revolving credit agreement. Interest on borrowings under the facilities are based on the daily LIBOR rate plus a 2.75% margin, and no less than 4%. Daily average borrowings for the 2011 second quarter were $91,141.
Market fluctuation impact on assets
For the three months ending June 30, 2011, the valuation of the Variable Life Insurance policies had an investment loss of $10,458.
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 in 2010, thus requiring restatement of previously issued financial statements. Management has determined that errors existed in key inputs to the Black Scholes model, the key valuation tool for our derivatives and stock warrants and stock options issued, 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 June 30, 2011 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 June 30, 2011.
OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Other than those previously reported on Form 8-K, the following unregistered securities were sold during the period ended June 30, 2011:
On January 1, 2011, the Company issued 82,192 incentive stock options under the 2008 Stock Incentive Plan to one employee. The options have no vesting schedule, are exercisable at $1.00 per share, and expire in 2021. The options were granted pursuant to the purchase of customer accounts relating to the employment contract of the individual hired.
On May 2, 2011 the Company issued an aggregate of 50,000 warrants to an IR/PR firm for strategic consulting services. The warrants are exercisable at $1.10 and expire on May 2, 2016.
On June 1, 2011, the Company issued an aggregate of 150,000 incentive stock options under the 2008 Stock Incentive Plan to one executive employee. The options have no vesting schedule, are exercisable at $1.10 per share, and expire in 2021.
On June 1, 2011 the Company issued an aggregate of 33,000 warrants to a search firm for consulting services related to board members. The warrants are exercisable at $1.10 and expire on June 1, 2016.
On June 10, 2011 the Company issued an aggregate of 250,000 warrants to independent board members. Each independent director received 50,000 warrants for joining the board. The warrants are exercisable at $1.05 and expire on June 10, 2016.
All of the foregoing transactions were conducted pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933.
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).
|
|
32.1
|
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: May 15, 2012
|
By:
|
/s/ Mark S. Elliott
|
|
|
Mark S. Elliott
|
|||
|
President (Chief Executive Officer)
|
|||
|
DATE: May 15, 2012
|
By:
|
/s/ Larry W. Brumfield
|
|
|
Larry W. Brumfield
|
|||
|
Chief Financial Officer and
|
|||
|
Principal Financial Officer
|
21