Attached files

file filename
EX-31.1 - CEO CERTIFICATION - root9B Holdings, Inc.cert302ceo.htm
EX-31.2 - CFO CERTIFICATION - root9B Holdings, Inc.cert302cfo.htm
EX-32.1 - CEO CERTIFICATION - root9B Holdings, Inc.cert906ceo.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. 1

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 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)

Nevada
20-0443575
(State of other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
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: 7,398,220 shares of common stock were outstanding as of August 7, 2010.
 

 
 

 


 
EXPLANATORY NOTE

This Amendment No. 1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2010 (the “Form 10-Q”), as filed with the Securities and Exchange Commission on August 13, 2010­, is to file a corrected Statement of Operations for the three and six months ended June 30, 2010 for the recording of a Deemed Dividend on Preferred Stock in the proper quarter, a corrected Balance sheet as of June 30, 2010 to reflect the resulting reclassification between Additional Paid-in Capital and Accumulated Deficit, and additional information in Item 4T. Controls and Procedures.  This restatement 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.


 

 
 

 


 
 
Page
   
 
   
   
   
   
   
   
   
   
   
   
 
   
16
   
16
   
16
   
16
   
17
   
18
   
Certifications
 
 
 
 
 


FINANCIAL INFORMATION

Item 1. Condensed Financial Statements
 
BALANCE SHEETS


   
     (Unaudited)
 
   
June 30,
   
December 31,
 
   
2010
   
2009
 
ASSETS
           
             
CURRENT ASSETS:
           
  Cash
  $ 607,801     $ -  
  Accounts receivable
    1,908,247       1,121,186  
  Marketable securities
    29,511       30,918  
  Deferred income taxes
    28,000       15,000  
  Prepaid expenses
    71,377       37,216  
                 
                 
    Total current assets
    2,644,936       1,204,320  
                 
                 
                 
PROPERTY AND EQUIPMENT - at cost less
               
  accumulated depreciation
    28,718       11,728  
                 
                 
OTHER ASSETS:
               
  Goodwill
    2,363,578       1,450,578  
  Intangible assets - net
    138,400       79,800  
  Investment in equity-method investee
    182,265       190,432  
  Investment in cost-method investee
    100,000       100,000  
  Cash surrender value of officers’ life
  insurance
    334,930       370,032  
  Deferred income taxes
    52,000       46,000  
  Loan Fees - net
    35,185       0  
  Deposits and other assets
    6,100       6,100  
                 
      3,212,458       2,242,942  
                 
                 
                 
                 
                 
                 
    $ 5,886,112     $ 3,458,990  


See Notes to Financial Statements
 

 
1





   
     (Unaudited)
 
   
June 30,
   
December 31,
 
   
2010
   
2009
 
             
LIABILITIES AND STOCKHOLDERS' EQUITY
           
             
CURRENT LIABILITIES:
           
  Note payable
  $ 626,000     $ 211,000  
  Current portion of long-term debt
    122,611       133,152  
  Accounts payable
    417,143       320,152  
  Accrued expenses
    657,494       384,990  
  Income taxes payable
    22,827       33,086  
                 
                 
    Total current liabilities
    1,846,075       1,082,255  
                 
LONG-TERM DEBT
    152,998       114,606  
                 
COMMITMENTS AND CONTINGENCIES
    -       -  
                 
                 
STOCKHOLDERS' EQUITY:
               
  Class A convertible preferred stock, $.001
               
    par value, 5,000,000 shares authorized,
               
    69,772 Pref A shares issued and
    Outstanding,
    69       561  
  Class B convertible preferred stock, $.001
               
    par value, 2,000,000 shares authorized,
               
    960,000 Pref B shares issued and  
    Outstanding
    960          
  Common stock, $.001 par value, 45,000,000
               
    shares authorized, 7,398,220 shares
               
    issued and outstanding
    7,398       6,072  
  Additional paid-in capital
    5,350,464       3,414,635  
  Accumulated deficit
    (1,471,852 )     (1,159,139 )
                 
                 
      3,887,039       2,262,129  
                 
                 
                 
                 
                 
                 
                 
    $ 5,886,112     $ 3,458,990  



See Notes to Financial Statements
 

 
2


STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(Unaudited)
   
Three months
   
Three months
   
Six months
   
Six months
 
   
Ended
   
Ended
   
Ended
   
Ended
 
   
June 30, 2010
   
June 30, 2009
   
June 30, 2010
   
June 30, 2009
 
                         
NET REVENUE
  $ 3,971,927     $ 2,045,699     $ 6,847,286     $ 4,486,019  
OPERATING EXPENSES:
                               
  Cost of revenues
    3,082,290       1,523,668       5,359,023       3,311,378  
  Selling, general and administrative
    843,312       498,289       1,454,704       1,040,081  
  Depreciation
    1,818       1,448       3,010       3,128  
   Total operating expenses
    3,927,420       2,023,405       6,816,737       4,354,587  
INCOME (LOSS) FROM OPERATIONS
    44,507       22,294       30,549       131,432  
                                 
OTHER (EXPENSE) INCOME:
                               
  Interest expense, net
    (35,085 )     (2,759 )     (37,913 )     (6,236 )
  Gain (loss) on marketable securities
    (1,763 )     7,947       (1,408 )     11,892  
  Officers’ life insurance
    (52,182 )     50,696       (35,101 )     8,344  
  Equity in net (loss) of
                               
   equity-method investee
    (94 )     2,120       (8,167 )     2,120  
  Other income
    0       2,400       2,474       2,400  
   Total other (expense) income
    (89,124 )     60,404       (80,115 )     18,520  
                                 
NET INCOME (LOSS) BEFORE INCOME TAXES
    (44,617 )     82,698       (49,566 )     149,952  
INCOME TAX (EXPENSE) BENEFIT
    (13,916 )     (12,814 )     (2,918 )     (55,895 )
                                 
NET (LOSS) INCOME
    (58,533 )     69,884       (52,484 )     94,057  
PREFERRED STOCK DIVIDENDS EARNED
    -       -       -       -  
DEEMED DIVIDEND ON PREFERRED STOCK
    (260,229 )     -       (260,229 )     -  
NET (LOSS) INCOME AVAILABLE TO COMMON
                               
  STOCKHOLDERS
  $ (318,762 )   $ 69,884     $ (312,713 )   $ 94,057  
Net income (loss) per share
                               
  Basic
  $   (0.05 )   $ 0.01     $ (0.04 )   $ 0.02  
  Diluted
  $ (0.05 )   $ 0.01     $ (0.04 )   $ 0.01  
Weighted average number of shares
                               
  Basic
    6,628,820       5,867,945       7,111,009       5,867,945  
  Diluted
    6,628,820       6,428,691       7,111,009       6,428,691  

See Notes to Financial Statements
 

 
3


STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2010 AND 2009
(Unaudited)
 
   
2010
   
2009
 
Cash flows from operating activities:
           
  Net income (loss)
  $ (52,484 )   $ 94,057  
  Adjustments to reconcile net income (loss)
               
    to net cash provided by operating activities:
               
      Depreciation
    14,225       3,128  
      Amortization of debt discount
    25,771          
      Decrease (increase) of cash surrender value
               
        of officers’ life insurance
    35,101       (8,343 )
      (Increase) in Deferred income taxes
    (19,000 )     (6,000 )
      Consulting expense paid with warrants
    47,805       -  
      Equity in (gain) loss of equity-method investee
    8,167       (2,120 )
    Changes in operating assets and liabilities:
               
      (Increase) Decrease in accounts receivable
    (787,061 )     264,703  
      Decrease (Increase) in marketable securities
    1,408       (11,892 )
      (Increase) Decrease in prepaid expenses
    (34,161 )     (34,221 )
      Decrease in deposits and other assets
    -       2,318  
      Increase (Decrease)in accounts payable
    97,116       12,285  
      Increase (Decrease) in accrued expenses
    272,503       (47,517 )
      (Decrease) Increase in income taxes payable
    (10,259 )     (65,398 )
    Net cash (used in) provided by  
               
      operating activities
    (400,869 )     201,000  
                 
Cash flows from investing activities:
               
  Acquisitions
    (1,000,000 )        
  Purchases of property and equipment
    -       -  
    Net cash used in investing activities
    (1,000,000 )     -  
                 
Cash flows from financing activities:
               
  Issuance of Common Stock
    40          
  Issuance of Preferred Stock
    672,000          
  Issue costs and commissions – preferred stock
    (62,370 )        
  Issuance of convertible debentures
    350,000          
  Original issue discount - convertible debentures
    (28,000 )        
  Loan Fees – convertible debentures
    (38,000 )     -  
  (Net payments)/Proceeds from line of credit
    415,000       (201,000 )
    Net cash (used in) provided by
               
      financing activities
    2,008,670       (201,000 )
                 
Net increase in cash
    607,801       -  
                 
Cash - beginning of period
    -       -  
                 
Cash - end of period
  $ 607,801     $ -  
See Notes to Financial Statements



NOTES TO FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 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 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).  The company also restated the Balance Sheet as of June 30, 2010 to reflect the resulting reclassification between Additional Paid-in Capital and Accumulated Defict in the amount of $260,229.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 June 22, 2010, the Company entered into a Letter of Intent to purchase Q5Group, a privately held California business and financial consulting company. 

In consideration Premier will purchase all of the outstanding capital stock of Q5 and will pay to Q5 (a) the sum of $200,000 in cash, and (b) issue such number of shares equal to


$800,000 based on the 5-day average closing price of the common stock for the five days prior to the Closing Date.  The Registrant will also enter into employment agreements with key principals of Q5.  These employment agreements contain bonus and stock option incentives based on achieving certain target revenues.


On April 30, 2010, the Company purchased of 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:

Current assets
$               -
 
Property and equipment
20,000
 
Intangible assets-customer relationships
67,000
 
Goodwill
913,000
 
Total assets acquired
1,000,000
 
Liabilities assumed
-
 
Net assets acquired
$1,000,000
 

 
Note 4– Pro-Forma Financial Information:
 
 
The following unaudited pro-forma data summarizes the results of operations for the three months ended June 30, 2010 as if the purchase of Peoplesource, Inc. and Intronic Solutions Group 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.
 
   
Three months ended
June 30, 2009
 
   
six months ended
June 30, 2009
 
 
Net revenues
  $ 3,372,385     $ 7,688,649  
Operating income (loss)
    (73,998 )     130,629  
Net income (loss) per share – basic
    (0.01 )     0.02  
Net income (loss) per share- diluted
    (0.01 )     0.02  
 

 


 
Revenues contributed for the three month period ending June 30, 2010 from the Peoplesource, Inc. acquisition accounted for $614,250 with income before taxes of $119,979.  Revenue contributed for the six month period ending June 30, 2010 from the Peoplesource, Inc. acquisition accounted for $1,146,099 with income before taxes of $201,993.
 
 
Revenues contributed from May 1, 2010 (date of transaction) thru June 30, 2010 from the Intronic Solutions Group, LLC acquisition accounted for $851,387 with income before taxes of $66,593.
 
 
Note 5 – Class A Convertible Preferred Stock:
 
 
During the quarter ended June 30, 2010, 25,841 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 69,772.
 
 
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 June 30, 2010, 12 units totaling 960,000 shares and 720,000 warrants were sold for gross proceeds of $672,000. In connection with the sale of these securities $53,760 was paid and 139,740 options were issued, with an exercise price of $0.77, were issued to a registered broker.   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.
 
 
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. 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 debentures were issued with 500,000 detachable warrants with 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 issuance the Company issued the debenture holder 40,000 shares of common stock for $40.
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.

The following represents the activity under the stock incentive plan as of June 30, 2010 and changes during the year:

Options
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

On April 30, the Board granted an aggregate of 150,000 warrants to consultants.  The warrants are exercisable at $0.77, and expire on 4/30/2015.  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.
 
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

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 and technical 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, customers seeking such services from us typically 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 technologies and solutions and provides expertise in project management, architecture, and project methodology. Its focus is to service customers 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 technology solution, helping customers select and implement packaged software, designing, constructing, and testing new systems and integrating them with the customer’s existing technology.  Our core expertise is in creating customized applications or systems that are web enabled and transaction based systems.  Typically the technology is based in the Object Oriented architecture.  Because applications are customized specifically for individual customers (research and development is not a part of our process), we architect a system to meet a specific business need.  In a Solution based contract, we typically have complete control and accountability over the effort and delivery from a day to day perspective by picking resources, managing and directing them.
 
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/regulatory, merger and acquisition, and business process reengineering/analysis.  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 opportunities to provide additional value add services to our customers.

Our typical customers are Fortune 500 companies (including AIG, Lincoln Financial Group, Duke Power, Bank of America, and Wells Fargo), and they continually seek expertise and knowledge in areas such as project management, business consulting, and business analysis.



Results of Operations
 
Net revenue for the three months ended June 30, 2010, was $3,972,000, an increase of 94.2%, compared to $2,045,000 for the same period in 2009.  For the 2010 year-to-date period, revenue was $6,847,000 compared to $4,486,000 for the 2009 year-to-date period, an increase of 52.6%.  The increase also reflects the addition of 3 months of revenue from the PeopleSource acquisition and 2 months of revenues from the ISG acquisition, as compared to last year.
 
Cost of revenues, defined as all costs for billable staff, were $3,082,000 or 77.6% of revenue for the three months ended June 30, 2010, as compared to $1,523,000 or 74.5% of revenue for the same period in 2009. For the 2010 year-to-date period costs were 78.3% of revenue and for the 2009 year-to-date period, costs were 73.8% of revenue.
 
General and administrative (G&A) expenses were $845,000 or 21.3% of revenue for the three months ended in June 30, 2010, as compared to $499,000 or 24.4% for the same period in 2009. For the 2010 year-to-date period, it was 21.3% as compared to 23.2% for the 2009 year-to-date mostly reflected because of the increase in revenues attributed to the acquisitions. A non cash charge for Stock option (warrants) expenses of $47,850 was incurred in the three months ending June 30, 2010 providing 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 have been 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 June 30, 2010, was $44,000 as compared to income of $22,000 for the same period in 2009.  For the 2010 year-to-date period, the operating income was $30,000 compared to operating income of $131,000 for the 2009 year-to-date period. For 2010, the Operating income included a non cash charge of $47,850 for Warrants issued.
 
Other income and expense, net, consisted of a loss of $89,000 for the three months ended in June 30, 2010, compared to income of $60,700 for the same period in 2009.  For the 2010 year-to-date period, the loss was $80,000 compared to income of $18,500 for the 2009 year-to-date period.  The loss in 2010 is mostly attributable to: 1) recording of a non cash charge of interest expense - debt discount, associated with a convertible debenture funding event and, 2) a net decrease in cash surrender value over premiums of variable executive life insurance (due to market fluctuation), we did not have this type of effect in the first half of 2009 as we had slight increases in the cash surrender value of these policies.
 
The effective income tax expense for the first six months of 2010 is 6% compared to an effective income tax expense of 37.3% 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 interest expense – debt discount.
 
Net Loss for the three months ended in June 30, 2010, was $58,500 or ( $.05) per diluted share when accounting for the deemed dividend on preferred stock of $260,229 , compared with net income of $69,900 for the same period in 2009, or $.01 per diluted share. For
 


the 2010 year-to-date period, net loss was $52,500 or ( $.04) per diluted share when accounting for the deemed dividend on preferred stock of $260,229 , compared to net income of $94,000 for the 2009 year-to-date period.
 
Dividend
 
No Dividend has been declared as of June 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 June 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 June 30, 2010, we had cash and cash equivalents of $608,800 representing an increase of $608,800 from June 30, 2009. Net working capital at June 30, 2010, was $798,861, as compared to $264,918 on June 30, 2009. Current assets at June 30, 2010, were $2,644,936.  We had long-term debt of $152,998. Shareholders’ equity as of June 30, 2010, was $3,887,039, which represented 66% of total assets.
 
During the six months ended June 30, 2010, the net cash used by operating activities was $401,000 and was primarily a result of increases in accounts receivable of $787,000, net deferred tax assets of $19,000, prepaid expenses of $34,000 and a decrease in income taxes payable of $10,000 offset by depreciation and amortization of $40,000, issuance of stock warrants of $48,000, equity loss of equity-method investee of $8,200 increases of accounts payable of


$97,000, accrued expenses of $273,000 and a decrease of cash surrender value of officers’ life insurance of $35,000.

Cash flows from investing used $1,000,000 for acquisition of Intronic.
 
Financing activities provided $2,008,670 of cash for the three months ended March 31, 2010. Of that increase, $415,000 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 and 2) surge in off-shore and outsourced development work for technology resources.   These trends have altered the competitive landscape and viability of a domestic focused technology consulting firm, which has caused us to shift our focus.
 
Customers are consolidating their primary vendor lists to much smaller numbers and/or primary vendors with a subset of sub vendors that are approved to provide technology based work for the client.  In addition the surge to off-shore work has shifted the competitive landscape for technology based resources to more of a commodity driven process.  These trends have altered the industry and opportunity level hence affecting the viability of a domestic focused technology consulting firm, which has caused us to shift our focus.  Premier Alliance Group is addressing this shift 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 will move us away from a commodity to a value add focus.  Secondly we are working to diversify and enhance our business model geographically as well as in our service offerings.
 
By providing key business consulting skills and establishing internal “subject matter groups of knowledge” we can expand into other geographic markets easier, diversify our customer base and increase our overall presence.  To accomplish this we are looking at organic growth as well as merger and acquisition strategies.  We have retooled our sales and recruiting efforts to increase our focus on higher end business consulting services.  This is a growing area of need amongst clients as they place more and more value on business knowledge and business process capability.  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 value added partner, increasing opportunity and long term viability.
 
Our top priority is to broaden the range of services 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 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 June 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 second quarter were $535,438.

Market fluctuation impact on assets

For the six months ending June 30, 2010, the valuation of the Variable Life Insurance policies had an investment loss of $35,101.

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 .  Based upon that evaluation, the CEO and Principal Financial Officer concluded that the Company's disclosure controls and procedures are 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, 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 June 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. Other Information
 
On June 22, 2010, the Company entered into a Letter of Intent to purchase Q5Group, a privately held California business and financial consulting company.  Pending results of due diligence, an anticipated transaction date is August 31, 2010. 

On June 1, 2010, the Board granted an aggregate of 325,000 incentive stock options under the 2008 Stock Incentive Plan to five employees. Vesting varies for each individual with a minimum of 1 year and a maximum of 4 years.  The options are exercisable at $1.00, and expire in 2020.
 
On April 30, 2010 the Board granted an aggregate of 150,000 warrants to consultant’s.   The warrants are exercisable at $0.77, and expire in 2015.
 





 
Item 5. 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: January 04, 2012
By:
/s/ Mark S. Elliott
 
   
Mark S. Elliott
 
   
President (Chief Executive Officer)
 
       
       
DATE: January 04, 2012
By:
/s/ Larry W. Brumfield
 
   
Larry W. Brumfield
 
   
Chief Financial Officer and
 
   
Principal Financial Officer
 

 



 
18