root9B Holdings, Inc. - FORM 10-Q

Attached files

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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
EXCEL - IDEA: XBRL DOCUMENT - root9B Holdings, Inc.	Financial_Report.xls

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

[ ] 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)

Delaware	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 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: 24,440,762 shares of common stock were outstanding as of October 21, 2013.

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	Page
PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements	2

Consolidated Balance Sheets as of June 30, 2013 (Unaudited) and December 31, 2012	2

Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2013 and June 30, 2012	4

Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 2013 and June 30, 2012	5

Notes to Consolidated Financial Statements (Unaudited)	6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	21

Item 3. Quantitative and Qualitative Disclosures About Market Risk	38

Item 4. Controls and Procedures	38

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	41

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	41

Item 3. Defaults Upon Senior Securities	41

Item 4. Mine Safety Disclosures	41

Item 5. Other Information	41

Item 6. Exhibits	41

Signatures	42
Exhibits / Certifications
Exhibit 31.1 - CEO
Exhibit 31.2 - CFO
Exhibit 32.1 - CEO
Exhibit 32.2 - CFO
101.INS * - XBRL Instance Document.		.
101.SCH * - XBRL Taxonomy Extension Schema Document.
101.CAL * - XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF * - XBRL Taxonomy Extension Definition Linkbase Document.		.
101.LAB * - XBRL Taxonomy Extension Label Linkbase Document.
101.PRE * - XBRL Taxonomy Extension Presentation Linkbase Document.

* Furnished herewith. XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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PART I

FINANCIAL INFORMATION

Item	1. Consolidated Financial Statements

PREMIER ALLIANCE GROUP, INC.

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2013 AND DECEMBER 31, 2012

	(Unaudited)
	June 30,		December 31,
	2013		2012
ASSETS

CURRENT ASSETS:

Cash	$	8,738,890	$	4,471,102
Accounts receivable		2,293,447		2,689,724
Marketable securities		39,858		31,107
Cost and estimated earnings in excess of billings		1,090,737		361,858
Contract deposit		432,177		--
Prepaid expenses and other current assets		165,641		142,668

Total current assets		12,760,750		7,696,459

PROPERTY AND EQUIPMENT - at cost less
accumulated depreciation		542,093		540,570

OTHER ASSETS:

Goodwill		13,153,497		13,153,497
Intangible assets – net		1,006,814		1,155,949
Investment in cost-method investee		100,000		100,000
Cash surrender value of officers’ life insurance		382,479		365,830
Deferred tax asset		--		--
Deposits and other assets		60,137		62,032

Total other assets		14,702,927		14,837,308

TOTAL ASSETS	$	28,005,770	$	23,074,337

See Notes to Consolidated Financial Statements

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	(Unaudited) June 30, 2013			December 31, 2012
LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:

Note payable to bank		1,200,000		$	1,094,263
Current portion of long-term debt		11,773			175,785
Accounts payable		1,411,333			1,397,837
Billings in excess of costs and estimated earnings		1,119,898			165,865
Accrued expenses		919,731			1,235,259
Note payable – installment loan		112,097			--

Total current liabilities		4,774,832			4,069,009

NONCURRENT LIABILITIES:

Long term debt – net of current portion		3,112			--
Derivative liability		1,094,836			2,475,159
Deferred tax liability		85,000			85,000

Total noncurrent liabilities		1,182,948			2,560,159

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY:

Preferred stock, $.001 par value, 4,985,000 shares authorized, no shares issued or outstanding		--			--
Class B convertible preferred stock, $.001 par value, 2,500,000 shares authorized, 1,160,000 shares issued and outstanding		1,160			1,160
Class C convertible preferred stock, $.001 par value, 2,500,000 shares authorized, 2,380,952 shares issued and outstanding		2,381			2,381
Class D convertible preferred stock, $001 par value, 15,000 shares authorized, 13,876 and 7,796 issued and outstanding at June 30, 2013 and December 31, 2012, respectively		14			8
Common stock, $.001 par value, 90,000,000 shares authorized, 23,958,146 and 22,331,687 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively		23,960			22,332
Additional paid-in capital		37,090,866			30,805,827
Accumulated deficit		(15,070,391	)		(14,386,539	)

Total stockholders’ equity		22,047,990			16,445,169

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	28,005,770		$	23,074,337

See Notes to Consolidated Financial Statements

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PREMIER ALLIANCE GROUP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

THREE AND SIX MONTHS ENDED JUNE 30, 2013 AND 2012

	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
	Three months			Three months			Six months			Six months
	Ended			Ended			Ended			Ended
	June 30, 2013			June 30, 2012			June 30, 2013			June 30, 2012

NET REVENUE	$	4,970,837		$	5,494,238		$	10,624,016		$	10,280,028

OPERATING EXPENSES:

Cost of revenues		3,821,834			4,103,122			7,879,589			7,808,150
Selling, general & administrative		2,126,949			2,072,737			4,215,631			3,919,108
Depreciation and amortization		96,588			69,574			193,185			112,786

Total operating expenses		6,045,371			6,245,433			12,288,405			11,840,044

LOSS FROM OPERATIONS		(1,074,534	)		(751,195	)		(1,664,389	)		(1,560,016	)

OTHER INCOME (EXPENSE):
Interest expense, net		(8,354	)		(17,048	)		(20,397	)		(27,435	)
Officers’ life insurance		(6,975	)		(32,249	)		16,649			7,149
Derivative (expense) income		769,372			1,880,335			1,782,109			64,234
Gain (loss) on marketable securities		7,350			--			8,750			--
Adjust estimates recorded at acquisition		431,919			--			431,919			--
Other income		1,211			9,627			7,371			33,772

Total other (expense) income		1,194,523			1,840,665			2,226,401			77,720

INCOME (LOSS)BEFORE INCOME TAXES		119,989			1,089,470			562,012			(1,482,296	)

INCOME TAX BENEFIT (EXPENSE)		(2,000	)		(77,002	)		--			265,960

NET INCOME (LOSS)		117,989			1,012,468			562,012			(1,216,336	)

PREFERRED STOCK DIVIDENDS		(329,800	)		--			(736,640	)		(321,218	)
DEEMED DIVIDEND ON PREFERRED STOCK		--			--			(509,184	)		--

NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS	$	(211,811	)	$	1,012,468		$	(683,812	)	$	(1,537,554	)

Net income (loss) income per share:
Basic	$	(0.01	)	$	0.06		$	(0.03	)	$	(0.12	)
Diluted	$	(0.01	)	$	0.03		$	(0.03	)	$	(0.12	)

Weighted average number of shares:
Basic		23,442,622			15,782,071			23,136,358			13,063,933
Diluted		23,442,622			39,019,055			23,136,358			13,063,933

See Notes to Consolidated Financial Statements

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PREMIER ALLIANCE GROUP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JUNE 30, 2013 AND 2012

	(Unaudited)			(Unaudited)
	2013			2012
Cash flows from operating activities:
Net Income (loss)	$	562,012		$	(1,216,336	)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization		193,185			112,786
Increase in cash surrender value of officers’ life insurance		(16,649	)		(7,149	)
(Income) from change in value of derivatives		(1,782,109	)		(64,234	)
Deferred income taxes		2,000			(266,000	)
Stock option / warrant compensation expense		60,697			246,994
Adjust estimates recorded at acquisition		(431,919	)		--
Equity in loss of equity-method investee		--			58,842
Changes in operating assets and liabilities:		--			--
Decrease (increase) in accounts receivable		396,277			(212,714	)
Increase in marketable securities		(8,751	)		(3	)
Increase in costs and estimated earnings in excess of billings		(728,879	)		(589,517	)
(Increase) decrease in prepaid expenses		(22,973	)		1,426
Contract deposit – cash escrow account		(432,177	)
(Increase) decrease in deposits and other assets		1,895			(12,354	)
Increase (decrease) in accounts payable and accrued expenses		59,674			(47,763	)
Increase (decrease) in billings in excess of costs and estimated earnings		954,033			(255,247	)
Decrease in other taxes payable		(2,000	)		--
Net cash used in operating activities		(1,195,684	)		(2,251,269	)

Cash flows from investing activities:
Issuance of notes receivable		--			(195,229	)
Deferred stock issuance costs		--			(192,890	)
Cash acquired in GHH acquisition		--			106,641
Purchases of property and equipment, net		(45,573	)		(4,244	)
Net cash used in investing activities		(45,573	)		(285,722	)

Cash flows from financing activities:
Issuance of Class D Preferred stock		5,452,150			--
Payments on long-term debt		(48,842	)		(69,976	)
(Payments) proceeds on line of credit		105,737			613,966
Net cash provided by financing activities		5,509,045			543,990

Net increase (decrease) in cash		4,267,788			(1,993,001	)

Cash - beginning of period		4,471,102			3,051,407

Cash - end of period	$	8,738,890		$	1,058,406

See Notes to Consolidated Financial Statements

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PREMIER ALLIANCE GROUP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

THREE AND SIX MONTHS ENDED JUNE, 2013 AND 2012

(Unaudited)

Note 1 – Basis of Presentation:

The accompanying unaudited interim consolidated financial statements of Premier Alliance Group, Inc. (“Premier” or 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 on Form 10-K filed with the SEC on April 1, 2013 and as amended by the Company's Annual Report on Form 10-K/A filed with the SEC on October 18, 2013 (the "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 2012 as reported in the 10-K have been omitted. However, Notes which management believes are of particular significance to the Company’s financial statements and to the reader, have been included in Note 2 below.

The consolidated financial statements include historical Premier Alliance Group, Inc. and its acquisition of GreenHouse Holdings, Inc. (hereinafter “GHH”) effective March 5, 2012 – see Note 2 below. GHH has four wholly owned subsidiaries as follows: (i) Green House Holdings, Inc., a Nevada corporation, (ii) Control Engineering, Inc., a Delaware corporation, (iii) Green House Soluciones, S. A., incorporated under the laws of Mexico, and, (iv) R Squared Contracting, Inc., a California corporation. R Squared Contracting, involved in residential energy, ceased doing business in May 2011 and is a dormant corporation. See Note 2 below for further discussion of this business acquisition. On December 31, 2012, we acquired Ecological, LLC – see Note 2 below; hence, the balance sheet at December 31, 2012 includes the balance sheet of Ecological and the period from January through June 2013 includes their operations results.

Note 2 – Significant Accounting Policies:

These financial statements have been prepared in accordance with the U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amount of assets, liabilities, revenues, and expenses and related disclosures of contingent assets and liabilities. We evaluate our estimates, including those related to fair value of financial instruments, bad debts, intangible assets and contingencies on an ongoing basis. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies, in their entirety, are more fully described in our consolidated financial statements appearing in our 10-K, we believe that the following critical accounting policies involve the more significant judgments and estimates used in the preparation of our consolidated financial statements and are the most critical to aid you in fully understanding and evaluating our reported financial results.

Fair Value of Financial Assets and Liabilities – Derivative Instruments:

We measure the fair value of financial assets and liabilities in accordance with GAAP, which defines fair value, establishes a framework for measuring fair value, and requires certain disclosures about fair value measurements.

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GAAP defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. GAAP describes three levels of inputs that may be used to measure fair value:

Level 1 – quoted prices in active markets for identical assets or liabilities.

Level 2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable.

Level 3 – inputs that are unobservable (for example the probability of a capital raise in a “binomial” methodology for valuation of a derivative liability directly related to the issuance of common stock warrants).

We do not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, we have entered into certain financial instruments and contracts, such as debt financing arrangements the issuance of preferred stock with detachable common stock warrants features that are either i) not afforded equity classification, ii) embody risks not clearly and closely related to host contracts, or iii) may be net-cash settled by the counterparty. These instruments are required to be carried as derivative liabilities, at fair value.

Our only derivative instruments are detachable (or “free-standing”) common stock purchase warrants issued in conjunction with debt or preferred stock. We estimate fair values of these derivatives (and related embedded beneficial conversion features) utilizing Level 2 inputs for all classes of warrants issued, other than one class, Series C Preferred Stock. Other than the Series C Preferred Stock warrants, we use the well accepted Black-Scholes option valuation technique as it embodies all of the requisite assumptions (including trading volatility, remaining term to maturity, market price, strike price, and risk free rates) necessary to fair value these instruments, for they do not contain material “down round protection” (otherwise referred to as “anti-dilution” and full ratchet provisions). For the warrants directly related to the Series C Preferred Stock, the warrant contracts do contain “Down Round Protections” and the “Black-Scholes” option valuation technique does not, in its valuation calculation, give effect for the additional value inherently attributable to the warrant having the “Down Round Protection” mechanisms in its contractual arrangement.

However, additional valuation models and techniques have been developed and are widely accepted that take into account the additional value inherent in “Down Round Protection.” These widely accepted techniques include “Modified Binomial”, “Monte Carlo Simulation” and the “Lattice Model.” The “core” assumptions and inputs to the “Binomial” model are the same as for “Black-Scholes”, such as trading volatility, remaining term to maturity, market price, strike price, and risk free rates; all Level 2 inputs. Fair value measurements are classified according to the lowest level input or value-driver that is significant to the valuation. A measurement may therefore be classified within Level 3 even though there may be significant inputs that are readily observable. However, a key input to a “Binomial” model (in our case, the “Monte Carlo Simulation”, for which we engage an independent valuation firm to perform) is the probability of a future capital raise. By definition, this input assumption does not meet the requirements for Level 1 or Level 2 outlined above; therefore, the entire fair value calculation is deemed to be Level 3 under accounting requirements due to this single Level 3 assumption. This input to the Monte Carlo Simulation model, was developed with significant input from management based on its knowledge of the business, current financial position and the strategic business plan with its best efforts.

However, estimating fair values of derivative financial instruments, including Level 2 instruments and those limited only to common stock purchase warrants, as that is the only derivative instruments the Company has, require the use of significant and subjective inputs that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques are volatile and sensitive to changes in our trading market price, the trading market price of various peer companies and other key assumptions such as the probability of a capital raise for the Monte Carlo Simulation described above. Since derivative financial instruments are initially and subsequently carried at fair value, our income will reflect this sensitivity of internal and external factors.

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As discussed above, financial liabilities are considered Level 3 when their fair values are determined using pricing models or similar techniques and at least one significant model assumption or input is unobservable. For the Company, the only Level 3 financial liability is the derivative liability related to the common stock purchase warrants directly related to the Series C Preferred Stock for the warrant contract includes “Down Round Protection” and they were valued using the “Monte Carlo Simulation” technique. This technique, while the majority of inputs are Level 2, necessarily incorporates a Capital Raise Assumption or Input which is unobservable and a Level 3 input.

Revenue Recognition:

We follow the guidance of the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104 for revenue recognition. In general, we record revenue when persuasive evidence of any agreement exists, services have been rendered, and collectability is reasonably assured, therefore, revenue is recognized when we invoice customers for completed services at contracted rates and terms. Therefore, revenue recognition may differ from the timing of cash receipts. In our Energy and Sustainability Segment, we often enter into contracts which require percentage of completion accounting in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 604-45.

Valuation of Goodwill and Intangible Assets:

Our intangible assets include goodwill, trademarks, non-compete agreements, patents and purchased customer relationships, all of which are accounted for based on ASC Topic 350 Intangibles-Goodwill and Other. As described below, goodwill and intangible assets that have indefinite useful lives are not amortized but are tested at least annually for impairment or more frequently if events or changes in circumstances indicate that the asset might be impaired. Intangible assets with limited useful lives are amortized using the straight-line method over their estimated period of benefit, ranging from two to eight years. Goodwill is tested for impairment by comparing the carrying value to the estimated fair value, in accordance with GAAP. Impairment exists if the carrying amount is greater than its estimated fair value, resulting in a write-down equal to the difference between the carry amount and the estimated fair value. The values recorded for goodwill and other intangible assets represent fair values calculated by accepted valuation methods. Such valuations require critical estimates and assumptions derived from and which include, but are not limited to: i) information included in our business plan, ii) estimated cash flows, and iii) discount rates.

Derivative Warrant Liability:

The Company evaluates it warrants issued in connection with debt and preferred stock issuances to determine if those contracts or any potential embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with in accordance with FASB ASC 810—10-05-4 and 815-40. This accounting treatment requires that the carrying amount of any embedded derivatives be marked-to-market at each balance sheet date and carried at fair value. In the event that the fair value is recorded as a liability, as is the case with the Company, as our only derivatives are related to common stock warrants issued in direct connection with debt and preferred stock issuances, the change in the fair value during the period is recorded in the Statement of Operations as either income or expense. Upon conversion, expiration, or exercise, the derivative liability is marked to fair value at the conversion date and then the related fair value is reclassified to equity. The fair value at each balance sheet date and the change in value for each class of warrant derivative is disclosed in detail in Notes 6-10 to the Financial Statements.

Impairment Testing:

Our goodwill impairment testing is calculated at the reporting or segment unit level. Our annual impairment test has two steps. The first identifies potential impairments by comparing the fair value of the reporting or segment unit with its carrying value. If the fair value exceeds the carrying amount, goodwill is not impaired and the second step is not necessary. If the carrying value exceeds the fair value, the second step calculates the possible impairment loss by comparing the implied fair value of goodwill with the carrying amount. If the implied fair value of goodwill is less than the carrying amount, a write-down is recorded.

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The impairment test for the other intangible assets is performed by comparing the carrying amount of the intangible assets to the sum of the undiscounted expected future cash flows. In accordance with GAAP, which relates to impairment of long-lived assets other than goodwill, impairment exists if the sum of the future undiscounted cash flows is less than the carrying amount of the intangible asset or to its related group of assets.

We predominately use discounted cash flow models derived from internal budgets in assessing fair values for our impairment testing. Factors that could change the result of our impairment test include, but are not limited to, different assumptions used to forecast future net sales, expenses, capital expenditures, and working capital requirements used in our cash flow models. In addition, selection of a risk-adjusted discount rate on the estimated undiscounted cash flows is susceptible to future changes in market conditions, and when unfavorable, can adversely affect our original estimates of fair values. In the event that our management determines that the value of intangible assets have become impaired using this approach, we will record an accounting charge for the amount of the impairment. We also engaged an independent valuation expert to assist us in performing the valuation and analysis of fair values of goodwill and intangibles.

Share-Based Compensation:

We account for stock-based compensation based on ASC Topic 718 – Stock Compensation which requires expensing of stock options and other share-based payments (i.e., stock warrant issuances) based on the fair value of each stock option/warrant awarded. The fair value of each stock option/warrant is estimated on the date of grant using the Black-Scholes valuation model. This model requires management to estimate the expected volatility, expected dividends, and expected term as inputs to the valuation model.

Income Taxes:

The Company accounts for income taxes under FASB ASC Topic 740 “Income Taxes”. Under FASB ASC Topic 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be removed or settled. The Company regularly assesses the likelihood that its deferred tax assets will be realized from recoverable income taxes or recovered from future taxable income. To the extent that the Company believes any amounts are not more likely than not to be realized through the reversal of the deferred tax liabilities and future income, the Company records a valuation allowance to reduce its deferred tax assets. In the event the Company determines that all or part of the net deferred tax assets are not realizable in the future, an adjustment to the valuation allowance would be charged to earnings in the period such determination is made. Similarly, if the Company subsequently realizes deferred tax assets that were previously determined to be unrealizable, the respective valuation allowance would be reversed, resulting in an adjustment to earnings in the period such determination is made.

FASB ASC Topic 740-10 clarifies the accounting for income taxes, by prescribing a minimum recognition threshold a tax position is required to meet before being recognized in the balance sheet. It also provides guidance on de-recognition, measurement and classification of amounts related to uncertain tax positions, accounting for and disclosure of interest and penalties, accounting in interim period disclosures and transition relating to the adoption of new accounting standards. Under FASB ASC Topic 740-10, the recognition for uncertain tax positions should be based on a more-likely-than-not threshold that the tax position will be sustained upon audit. The tax position is measured as the largest amount of benefit that has a greater than fifty percent probability of being realized upon settlement. Currently, the Company has taken the position that it is not, more likely than not, in accordance with the standards outlined in ASC 740, that its deferred tax assets will be realized under the thresholds set; therefore, other than offsetting deferred tax liabilities, the Company is not recognizing any tax benefits associated with its deferred tax assets.

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Note 3 – Business Combinations:

Greenhouse Holdings, Inc.

On March 5, 2012, the Company consummated its Agreement of Plan and Merger (“Merger Agreement”) with GHH. GHH is a provider of energy efficiency and sustainable facilities services and solutions and audits, designs, engineers and installs products and technologies that enable its clients to reduce their energy costs and carbon footprint. GHH has two “vertical operations,” energy efficiency solutions (“EES”) and sustainable facilities solutions (‘‘SFS’’). GHH is focused on industrial, commercial, government and military markets in the United States and abroad. Substantially all of GHH’s revenue has historically come from its EES business segment to this point. This acquisition has been described in detail in the 10-K and in each Quarterly Report as may be amended on Form 10-Q since the consummation. Reference is made to that disclosure.

Pursuant to the terms of the Merger Agreement, the Company agreed to issue a certain amount of common stock, on a fully diluted basis subject to adjustments provided in the Merger Agreement. As part of the stock consideration paid to GHH, 1,331,188 shares of common stock were placed in an escrow account. Such escrowed shares were to be released at a later date upon the achievement of certain revenue goals and the satisfaction of certain indemnification obligations. If the escrowed shares were released, GHH stockholders would own, in the aggregate, 17.1% of the combined company. The escrowed shares accrued quarterly, on a pro-rata basis, to the extent that GHH revenues, over a four calendar quarter measurement period exceeded $12 million. If these conditions were not met, the escrowed shares would be returned to the Company. Effective March 31, 2013, the four calendar quarter measurement period pursuant to the GHH aggregate revenue required in order to release the escrowed shares expired, and the minimum revenues were not attained. However, in spite of a number of non-controllable external factors arising, GHH made measurable progress on many fronts. The Board of Directors took all factors under immediate advisement to determine if an extension was warranted for the measurement period and the ultimate course of action for the Company.

As a result, effective June 30, 2013, a First Amendment to Escrow Agreement was executed by all parties whereby:

i.	The Measuring Period for achievement of the Revenue Targets was modified to the calendar year 2012,

ii.	The Escrow Shares were reduced by 20% from 1,331,188 to 1,064,950, meaning, 266,238 shares previously considered issued and outstanding were permanently retired, and,

iii.	The Indemnification Provisions remain in place.

Accordingly, pursuant to Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) “purchase accounting rules”, this transaction occurred outside of the twelve (12) month “window” immediately subsequent to the initial acquisition, and is not to be treated as an adjustment to the initial purchase price allocation. Therefore, the permanent retirement of common shares were recorded at the same value at which they were issued, common stock at par and additional paid in capital were removed from the balance sheet at $266 and $239,348, respectively, and the total of $239,614 was recorded in other income for the six months ended June 30, 2013 on the Statement of Operations, as an “adjustment to fair value of acquired assets“.

In addition, at the original acquisition, we assumed accounts payable of GHH and its subsidiaries, many of which were very dated. As discussed in our SEC Form 10-K for the year ended December 31, 2012 (both in Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 23 – Subsequent Events), a good deal of time as spent in calendar 2012, post March 5, 2012 acquisition in dealing with claims from GHH creditors, some of which were specifically recorded and or estimated liabilities provided for and some which were not. During the quarter ended June 30, 2013, management had determined that excess liabilities assumed, above and beyond those utilized to provide for the cases and claims settled, exist. Inasmuch as this determination could not made within the twelve (12) month “window” immediately subsequent to the initial acquisition (as one such matter, settled for approximately $100,000, was dismissed by the courts in 2012, but was raised again in 2013 and not settled until June 2013), this adjustment to assumed liabilities is not to be treated as an adjustment to the initial purchase price allocation, but rather is recorded in other income for the six months ended June 30, 2013 on the Statement of Operations, as an “adjustment to fair value of acquired assets“ in the amount of $192,305.

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Ecological, LLC

On December 31, 2012, through our wholly owned subsidiary, Ecological Partners, LLC, a New York limited liability company (“EPLLC”), created for the sole purpose of effectuating the acquisition, we purchased substantially all of the assets of Ecological LLC., (“Ecological”) a Delaware limited liability company, pursuant to an Asset Purchase Agreement dated November 15, 2012 (the “Agreement”). This acquisition has been described in detail in the Company’s SEC Form 10-K for the year ended December 31, 2012 and SEC Form 10-Q for the three months ended March 31, 2013, and reference is made to those filed documents for additional information.

Ecological develops and implements energy sustainability action plans for real estate portfolios, buildings, and tenants in order to reduce costs, improve efficiency, achieve regulatory compliance, and increase value. Ecological’s services range from metering and monitoring, to in-depth energy audits and analysis, to executing retrofit projects. By improving the efficiency of environmental systems, such as energy, water, and carbon, landlords can reduce costs, reposition client buildings as “green” and create higher value and yield for their real estate assets and portfolios.

Note 4 – Line of Credit Modification

Effective January 23, 2013, the Company and its financial institution entered into a loan modification under the current line of credit. The Company incurred $8,275 in deferred loan costs with this modification. All terms remain the same with the maturity date extended to July 19, 2013. The current line of credit is limited to a borrowing base of 75% of eligible receivables or $1,500,000. Outstanding borrowings at June 30, 2013 under the revolving line of credit, classified as note payable to bank on the balance sheet, were $1,200,000.

On July 5, 2013, the Company entered into a new asset based revolving line of credit arrangement with a different financial institution and paid off the prior line of credit. The new line of credit is limited to a borrowing base of 80% of eligible receivables or $3,000,000 and interest is at the one month LIBOR rate plus 225 basis points. The Company incurred total fees of $7,500 in deferred loan costs in conjunction with arranging this new facility. The facility and its terms are described in detail in Note 16 - Subsequent Events.

Note 5 – Pro-Forma Financial Information (unaudited):

The following unaudited pro-forma data summarizes the results of operations for the three and six months ended June 30, 2013, as if the purchase of Greenhouse Holdings, Inc. and Ecological, LLC had been completed January 1, 2012. 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 acquisitions had taken place on January 1, 2012.

	Three Months Ended			Three Months Ended
	June 30, 2013			June 30, 2012
Net revenues		N/A	*	$	5,261,040
Operating loss		N/A	*		(1,851,413	)
Net operating loss per share – basic and fully diluted		N/A	*	$	(0.10	)

	Six Months Ended			Six Months Ended
	June 30, 2013			June 30, 2012
Net revenues		N/A	*	$	10,520,097
Operating loss		N/A	*		(2,397,656	)
Net operating loss per share – basic and fully diluted		N/A	*	$	(0.12	)

* All entities were consolidated effective January 1, 2013; therefore; the results of operations are included in their totality in these financial statements.

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Note 6 – Series B Convertible Preferred Stock:

During 2010, we effectively issued three tranches of 7% Series B Convertible Preferred Stock (“Series B Preferred Stock”) in private placements, all tranches with identical terms for both the stock and related warrants. The first, May 7, 2010, we issued 960,000 shares, along with 720,000 detachable warrants. An additional 139,740 warrants were also issued to the placement agent with this issuance. The second, September 30, 2010, we issued 80,000 shares, along with 60,000 detachable warrants. Finally, on December 6, 2010, we issued 160,000 shares, along with 120,000 detachable warrants. An additional 19,200 warrants were also issued to the placement agent. The Company received net proceeds of $763,069, net of issuance costs of $76,931. The holders of shares of Series B Convertible Preferred Stock are entitled to receive a 7 percent annual dividend until the shares are converted to common stock. The warrants, immediately exercisable, are for a term of five years, and entitle the holder to purchase shares of common stock at an exercise price of $ 0.77 per share.

The total warrants issued, associated with the Series B Preferred Stock, are 1,058,940; the Series B Preferred Stockholders received 900,000 and the placement agent received 158,940. The total fair market value of the warrants at issue, totaling $332,431 was recorded as a derivative liability. The derivative liability is adjusted to fair market value through income on the statement of operations. At December 31, 2012, the fair market value of the warrants was $170,383 and the Company recognized $102,717 as derivative expense for the year ended December 31, 2012. At March 31, 2013, the fair value of the warrants was $106,000 and the Company recognized $64,383 in derivative income for the three months ended March 31, 2013. At June 30, 2013, the fair value of the warrants was $58,777 and the Company recognized an additional $47,123 in derivative income for the three months ended June 30, 2013; totaling $111,516 in derivative income for the six months ended June 30, 2013. The Series Preferred B Stock, upon issuance in 2010, contained an embedded beneficial conversion feature totaling $360,048, which was recorded as a deemed dividend to preferred shareholders during the year ended December 31, 2010. This beneficial conversion feature was recorded as a reduction to retained earnings/accumulated deficit and as an addition to Additional Paid in Capital, all entries within the Stockholders Equity section of the Balance Sheet.

As of June 30, 2013, 1,200,000 shares of the Series B Preferred Stock have been issued, 40,000 shares have been converted into common stock, leaving 1,160,000 shares outstanding. Dividends paid in the first quarter of 2012 on these preferred shares totaled $58,718 and were paid by issuing 61,340 shares of the Company’s common stock. Dividends paid in the first quarter of 2013 on these preferred shares totaled $56,840 and were paid by issuing 71,050 shares (based on the market price of the Company’s stock at the date of issuance) of the Company’s common stock.

Note 7 – Series C Convertible Preferred Stock:

On March 1, 2011, and as 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 a warrant to purchase 3 shares of common stock at an exercise price of $0.77 which expires 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 election and (c) is automatically converted into common stock if the price of the Company’s common stock exceed $2.50 for 30 consecutive trading days.

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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 warrants to purchase 7,142,856 shares of common stock, for gross proceeds of $5,000,000. In connection with the sale of these securities a registered securities broker was paid $650,000 and was issued warrants to purchase 714,285 shares of common stock (with an exercise price of $0.77), as an advisory fee. In addition, a registered securities broker was paid $100,000 and was issued warrants to purchase 360,000 shares of common stock (with an exercise price of $0.77) as an advisory/finder’s fee. The issuance of these preferred shares contained an embedded beneficial conversion feature the intrinsic value of which is $1,969,496 and was recorded as a deemed dividend to preferred shareholders during the three months ended March 31, 2011.

The aggregate number of warrants to purchase 8,217,141 shares of common stock, issued in connection with the Series C Preferred Stock, contains full-ratchet anti-dilution provisions (i.e., “down round protection”), requiring that they be recorded as a derivative instrument and that they be valued using a “Modified Binomial” methodology, which gives effect to the inherent additional value provided by the down round protection. Because one significant input to the “Modified Binomial” methodology (in our case, the “Monte Carlo Simulation” technique, for which we engage a 3rd party valuation specialist to perform), the capital raise input assumption is not “observable” (as defined in the “Fair Value Hierarchy”), this defaults the entire valuation of this derivative to a “Level 3” classification - See Note 2 - Fair Value of Financial Assets and Liabilities – Derivative Instruments. This derivative liability was adjusted to the fair market value of the warrants at June 30, 2013 of $565,569, with the change in value of $376,360 for the three months ended June 30, 2013 being recorded as derivative income on the statement of operations, combined with the change in valuation from December 31, 2012 ($1,491,601) to March 31, 2013 ($941,929) of $549,672 representing derivative income for the three months ended March 31, 2013, aggregating to $926,032 in derivative income being recognized for this Series C derivative for the six months ended June 30, 2013.

Dividends were declared and paid on the Series C Preferred Stock in February 2012 in the amount of $262,500 and were paid by the issuance 354,730 shares of Company common stock. Dividends were declared and paid on the Series C Preferred Stock in February 2013 in the amount of $350,000 and were paid by the issuance of 437,500 (based on the market price of the Company’s stock at the date of issuance) shares of Company common stock.

Note 8 – Series D Convertible Preferred Stock:

In October 2012, the Company designated up to 15,000 shares of Series D 8% Redeemable Convertible Preferred Stock (“Series D Preferred Stock”) and a warrant to purchase ¼ of the number of shares of the Company’s common stock issuable upon conversion of one share of the Preferred Stock. The purchase price of one share is $1,000. Dividends are 8% per annum, payable semi-annually in cash or shares of common stock at the Company’s option. The Series D Preferred Stock is convertible into common stock at the total purchase price divided by $0.75 (the “conversion rate”), and collectively, the “conversion price”. The warrants are for a term of five years and have a strike price of $1.125 per share. The Preferred Stock shall automatically convert into common stock, at the conversion rate, upon (i) the completion of a firm commitment underwritten public offering of the Company’s shares of common stock resulting in net proceeds to the Company of at least $10,000,000 and is offered at a price per share equal to at least 200% of the conversion price (subject to adjustment for any stock splits, stock dividends, etc.), (ii) upon the affirmative vote of the holders of a majority of the outstanding shares of Preferred Stock, or (iii) on the second anniversary of the issue date of the Preferred Stock. The Preferred Stock contains anti-dilution protection. Holders of the Preferred Stock shall vote together with the holders of common stock on an as-converted basis.

On December 26, 2012, the Company closed an offering of this Series D Preferred Stock to accredited investors. The Company sold 7,046 shares of Series D Preferred Stock and 2,348,685 warrants, with an exercise price of $1.125, for gross proceeds of $7,046,000. In connection with the sale of these securities, $704,600 was paid and 939,467 warrants were issued, with an exercise price of $1.125, to a registered broker. In addition, $100,000 and $6,500 in legal and escrow fees were paid. The Company received net proceeds of $6,234,900. The issuance of this Series D Preferred Stock contained an embedded beneficial conversion feature, the intrinsic value of which was $607,312 and was recorded as a deemed dividend to preferred shareholders during the year ended December 31, 2012.

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The combined 3,288,152 warrants issued in connection with the Series D Preferred Stock are required to be recorded as a derivative instrument. The fair value of these derivatives were valued at $496,840 and recorded as a derivative liability with a like adjustment to Additional Paid in Capital at December 31, 2012. See below for total fair value of all derivatives related to all Series D Preferred Stock issuances as of June 30, 2013, inclusive of the original Series D Preferred Stock issuance in December 2012, the additional Series D Preferred Stock issued in January and February 2013 and the mandatory conversion of the 7% Redeemable Convertible Promissory Notes into Series D Preferred Stock (described immediately below).

Additionally, the Company issued 7% Redeemable Convertible Promissory Notes and Warrants (“Promissory Notes”) on November 16, 2012. These Promissory Notes were mandatorily convertible into the “next round of financing” by the Company. The next round of financing was the Series D Preferred Stock described above. See 7% Redeemable Convertible Promissory Notes and Conversion into 8% Redeemable Convertible Series D Preferred Stock - Note 9 below for a detail description of the original issue of these Promissory Notes and their subsequent mandatory conversion into the Series D Preferred Stock.

On January 25, 2013, the Company closed an additional private placement financing from the sale of the Series D Preferred Stock under identical terms as described above to accredited investors. The Company sold 3,955 shares and 1,318,363 warrants, with an exercise price of $1.125, for gross proceeds of $3,955,001. In connection with the sale of this issuance of securities, $395,500 was paid in cash and 527,334 warrants were issued, with an exercise price of $1.125, to a registered broker. In addition, Blue Sky filing fees of $1,550 were incurred. The Company received net proceeds of $3,557,951. The issuance of this round of Series D Preferred Stock contained an embedded beneficial conversion feature, the intrinsic value of which was $509,184, and was recorded as a deemed dividend to preferred shareholders during the three months ended March 31, 2013. Also, the combined 1,845,697 warrants issued directly associated with this January 25, 2013 additional private placement are required to be recorded as a derivative liability. The fair value of these derivatives were valued at the January 25, 2013 date of issuance at $306,386 and were recorded as a derivative liability with a like adjustment to Additional Paid in Capital. The fair value of these derivatives at June 30, 2013 and the change in value since their January 25, 2013 issuance are addressed below in conjunction with the total fair value of all derivatives associated with the Series D Preferred Stock, and the valuation of the derivatives associated with the 7% Redeemable Convertible Promissory Notes and Warrants (“Promissory Notes”) on November 16, 2012.

On February 26, 2013, the Company closed the final private placement financing from the sale of the Series D Preferred Stock under identical terms as described above to accredited investors. The Company sold 1,125 shares and issued 708,344 warrants, with an exercise price of $1.125, for gross proceeds of $2,125,000. In connection with the sale of this issuance of securities, $212,500 was paid in cash and 283,334 warrants were issued, with an exercise price of $1.125, to a registered broker. In addition, legal fees of $18,300 were incurred. The Company received net proceeds of $1,894,200. This issuance of this final round of Series D Preferred Stock did not contain an embedded beneficial conversion feature. The combined 991,678 warrants issued directly associated with this February 26, 2013 additional private placement contain full-ratchet anti-dilution provisions that require them to be recorded as a derivative instrument. The fair value of these derivatives were valued at the February 26, 2013 date of issuance at $96,788 and were recorded as a derivative liability with a corresponding non-current deferred tax asset of $33,000 at that time. The fair value of these derivatives at June 30, 2013 and the change in value since their February 26, 2013 issuance are addressed below in conjunction with the total fair value of all derivatives associated with the Series D Preferred Stock, and the valuation of the derivatives associated with the 7% Redeemable Convertible Promissory Notes and Warrants (“Promissory Notes”) on November 16, 2012.

For all warrants directly associated with the three issuances of Series D Preferred Stock, the derivative liability for each of the December 26, 2012, January 25, 2013 and February 26, 2013 warrants was adjusted to the collective fair market value of all the warrants at June 30, 2013 of $335,066, with the collective change in value from either December 31, 2012, or their respective recording at issuance on January 25, 2013 or February 26, 2013, of $563,559 recorded as derivative income on the statement of operations for the six months ended June 30, 2013. The collective value at March 31, 2013 was $605,202, resulting in $293,423 in derivative income being recognized in the first three months ended March 31, 2013 alone.

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Note 9 – 7% Redeemable Convertible Promissory Notes and Conversion into 8% Redeemable

Convertible Series D Preferred Stock:

On November 16, 2012, the Company issued $750,000 of its 7% Redeemable Convertible Promissory Notes (“Promissory Notes”) to accredited investors with simple interest on a 365 day basis payable on the maturity date in cash or common stock, at the Company’s option. The Securities consist of 7% Convertible Notes with 50% warrant coverage. The Promissory Notes will convert at the earlier of 15 months or will automatically convert at the closing of the next round of financing by the Company into the same security as the next round of financing, at the lesser of $0.50 per share or at a 25% discount to the next round of financing and warrants to acquire 50% of the number of shares, with a strike price of the lesser of $0.65 per share or the strike price of the next warrants at such financing. The warrants have a four year term. The Company can call the warrants if: (i) the shares underlying the warrants are registered and; (ii) the stock, subsequent to registration, trades above $1.30 a day for 10 consecutive trading days and averages in excess of 50,000 shares a day in volume. Weighted average anti-dilution provisions are in place for one year on the stock after conversion and for three years on the warrants. The Company paid $29,614 in legal fees, $9,500 in diligence fees to the placement agent and a success fee of 10% or $75,000 to the placement agent. The Company received net proceeds of $635,886, issued 750,000 warrants to the note holders and 120,000 warrants to the registered placement agent.

The Company accounted for the initial issuance of these Notes 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 value of the warrants directly associated with the Promissory Notes at date of issuance of $117,825 was recorded as a derivative liability. Additionally, the fair value of the placement warrants, $18,852, associated with the issuance was also recorded as a derivative liability with a charge to deferred financing costs. In addition, the issuance of the Notes and warrants also included an embedded beneficial conversion feature of $251,828 which was recorded as a debt discount and as additional paid in capital in the fourth quarter of December 2012.

In accordance with the Securities Purchase Agreement and the terms of the Promissory Notes, the Promissory Notes were mandatorily convertible into the next round of financing by the Company into the same security as the next round of financing, the Series D Preferred Stock. As a result, in the fourth quarter of December 2012, the Company had to (i) write-off the unamortized portion of the debt discount and charge the statement of operations with $339,092 in interest expense-debt discount, (ii) write-off the face value of the $750,000 Notes and all of the deferred financing costs associated with the Notes of $132,966, (iii) record the intrinsic value of the embedded beneficial conversion feature associated with the issuance of the Series D Preferred Stock in this conversion of $552,966 by charging deemed dividend to preferred shareholders with an offset to additional paid in capital, and (iv) record the issuance of the Series D Preferred Stock for the par value of the 750 shares into which the Notes converted and record the additional paid in capital of $617,035.

Finally, as described above, all the warrants affiliated with the Notes are considered derivative instruments and were revalued at December 26, 2012. The increase in total derivative valuation from $136,677 at November 16, 2012 to $230,985 at December 26, 2012 of $94,308 was recorded as an increase in the derivative liability and as derivative expense in the statement of operations for the fourth quarter of 2012. There was no change in the liability amount from December 26, 2012 to year end. The derivative liability was adjusted to the fair market value of the warrants at June 30, 2013 of $108,924, with the change in value of $122,061 being recorded as derivative income on the statement of operations for the six months ended June 30, 2013, and with a valuation of $159,699 at March 31, 2013, $71,286 of this derivative income was recognized in the three months ended March 31, 2013.

Note 10 – 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”). The Debenture was paid in full in November 2011. The Debenture was also issued with detachable warrants to purchase 500,000 shares of common stock with an exercise price of $0.77, expiring in five years, which are required to be recorded as a derivative liability. .

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The derivative liability was adjusted to the fair market value of the warrants at both March 31 and June 30, 2013 of $51,377 and $26,400, respectively, with the changes in value of $33,973 and $24,977, respectively, being recorded as derivative income on the statement of operations for the three months ended March 31 and June 30, 2013; collectively representing a total of $58,950 of derivative income recognized in the six months ended June 30, 2013 for this security alone.

Note 11 – Stock Options and Warrants:

There were no options issued in the six months ended June 30, 2013 under the 2008 Stock Incentive Plan. The following table represents the activity under the stock incentive plan as of June 30, 2013 and changes during each period:

Options	Shares	Weighted Average Exercise Price
Outstanding at December 31, 2010	1,525,000	$0.90
Issued	532,192	1.03
Outstanding at December 31, 2011	2,057,192	0.93
Issued	3,307,192	0.79
Forfeitures	(249,520)	(1.00)
Outstanding at December 31, 2012	5,114,864	0.84
Activity – January – June 2013	--	--
Outstanding at June 30, 2013	5,114,864	$0.84

On March 5, 2012, contemporaneously with the acquisition of GHH (see Note 3 above), holders of GHH warrants received the immediate right to receive warrants of Premier. Each GHH warrant was replaced by a Premier warrant for the number of shares of Premier common stock that a GHH warrant holder would have received if the GHH warrant had been exercised in full to immediately prior to the merger, based on the exchange ratio calculated without regard to any warrants, and excluding any adjustment resulting from ‘‘price anti-dilution’’ provisions. The aggregate exercise price of the Premier warrant was the same as that of the GHH warrant being replaced. For example, a warrant to purchase 1,000 GHH shares of common stock at $2.00 per share would be converted into a warrant to purchase 140 Premier shares at approximately $14.33 per share. If the actual calculation would result in a fraction of a share, the same will be rounded up to a whole share. Pursuant to this provision of the Agreement and Plan of Merger, GHH warrants to purchase 1,822,567 shares of common stock were converted to Premier warrants to purchase 300,663 shares of common stock with an average exercise price of $14.65 with varying expiration dates. In November 2012, 44,911 (held by non-employees) of these warrants were cancelled and 13,301 shares of common stock were issued. The strike price for all these warrants is significantly in excess of the fair market price of the stock and such warrants were determined to have de-minimis value at the time of the merger.

The following warrants were issued in 2013 and valued using the Black-Scholes valuation method with the key inputs as follows:

Exercise price	$0.80
Risk free interest rate	.76%
Volatility	33.13%
Expected term	5 Years
Dividend yield	None

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On January 1, 2013, the Company issued warrants to purchase 25,000 shares of common stock to its investment relations firm as compensation. The warrants vest immediately, are exercisable at $0.80 and expire January 1, 2018. The grant date estimated fair value of the warrants is $5,788, and is included in selling, general and administrative expenses on the statement of operations.

In connection with the Series D 8% Redeemable Convertible Preferred Stock issued on January 25, 2013, the Company issued 1,318,363 detachable warrants and 527,334 warrants to the placement agent. These warrants were recorded at issuance as a derivative liability with an offsetting adjustment to additional paid in capital.

In connection with the Series D 8% Redeemable Convertible Preferred Stock issued on February 26, 2013, the Company issued 708,344 detachable warrants and 283,334 warrants to the placement agent. These warrants were recorded at issuance as a derivative liability with an offsetting adjustment to additional paid in capital.

The following table represents the activity of warrants as of June 30, 2013 (there were no exercises, forfeitures, or terminations):

Warrants	Shares	Weighted Average Exercise Price
Outstanding at December 31, 2010	1,778,940	$0.78
Issued	8,890,141	0.78
Outstanding at December 31, 2011	10,669,081	0.78
Issued	5,325,152	1.00
Issued pursuant to GHH acquisition	300,663	14.65
Cancelled	(44,911)	2.87
Outstanding at December 31, 2012	16,249,985	1.10
Issued	2,862,375	1.12
Outstanding at June 30, 2013	19,112,360	$1.11

Note 12 – Capital Stock Authorized:

In April 2012, the Company increased its authorized shares of capital stock. Total shares of preferred stock were increased from 5,000,000 to 10,000,000. During 2012, the Board of Directors designated 15,000 shares of preferred stock as Series D 8% Redeemable Convertible Preferred Stock, and as of December 31, 2012, the Company had issued 7,796 shares of this Preferred Stock. On January 25, 2013, the Company issued an additional 3,955 shares of Series D 8% Redeemable Convertible Preferred Stock, and on February 26, 2013 the Company issued an additional 2,125 shares. The remaining authorized but unissued shares totaling 4,985,000 have not been designated to a specific class. Total authorized shares of common stock were increased from 45,000,000 to 90,000,000. No shares of the additional authorized common shares have been issued.

During the six months ended June 30, 2013, we issued or retired, the following common stock:

242,000 shares valued at $0.70 per share in a settlement reached in a dispute between Greenhouse Holding, Inc. and its former financial advisor in October 2012. This settlement valued at $169,400 was accrued in other accrued expenses at December 31, 2012. The 242,000 shares were issued on January 31, 2013.

2)	On January 28, 2013 the Company declared dividends on its Series B Preferred Stock and the Company paid the dividends in Company common stock. On February 1, 2013, the Company issued 71,050 shares to the 7% Series B Convertible Preferred Stockholders.

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3)	On January 28, 2013 the Company declared dividends on its Series C Preferred Stock and the Company paid the dividends in Company common stock. On February 1, 2013, the Company issued 437,500 shares to the 7% Series C Convertible Preferred Stockholders.

4)	On May 15, 2013 the Company declared dividends on its Series D 8% Redeemable Convertible Preferred Stock and the Company paid the dividends in Company common stock. The Company issued 492,237 shares of common stock to the Series D Preferred Stockholders.

5)	Between June 4, 2013 and June 21, 2013, 325 shares of Series D 8% Redeemable Convertible Preferred Stock were converted to 650,000 Common Shares of stock.

On June 30, 2013, pursuant to the First Amendment to Escrow Agreement between the Company and certain former shareholders of GHH, 266,238 shares previously considered issued in the GHH acquisition, and held in Escrow, were permanently retired as certain earnings targets were not met. As a result, pursuant to Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) “purchase accounting rules”, this transaction occurred outside of the twelve (12) month “window” immediately subsequent to the initial acquisition, and is not to be treated as an adjustment to the initial purchase price allocation. Therefore, the permanent retirement of common shares were recorded at the same value at which they were issued, common stock at par and additional paid in capital were removed from the balance sheet at $266 and $239,348, respectively, and the total of $239,614 was recorded in other income on the Statement of Operations, as an “adjustment to fair value of acquired assets. “

Note 13 – Segment Information:

FASB ASC Topic 280, “Segment Reporting”, establishes standards for reporting information regarding operating segments in annual financial statements. The Company, effective with its acquisition of GHH on March 5, 2012, began operating in two business segments: the Risk/Compliance segment and the Energy and Sustainability Solutions segment. For the Risk Compliance segment, the business consists of providing business advisory, consulting and resource services to clients. Premier provides services through three primary delivery channels: GRC (Governance, Risk and Compliance), BP&T (Business Performance and Technology), and F&A (Finance and Accounting). GHH, a wholly owned subsidiary, operates as the Energy and Sustainability Solutions segment of Premier, and has two “vertical operations” consisting of Energy Efficiency and Sustainable Infrastructure. GHH’s primary focus is on energy related projects. Effective with our December 31, 2012 acquisition of Ecological, LLC, they also became part of the Energy and Sustainability Solutions segment.

The performance of the business is evaluated at the segment level. Cash, debt and financing matters are managed centrally. These segments operate as one from an accounting and overall executive management perspective, though each segment has senior management in place; however they are differentiated from a marketing and customer presentation perspective, though cross-selling opportunities exist and continue to be pursued. Condensed summary segment information follows for the three and six months ended June 30, 2013:

			Three Months Ended June 30, 2013			Six Months Ended June 30, 2013
Revenue:
Risk/Compliance Solutions			$	3,136,488		$	6,617,194
Energy and Sustainability Solutions				1,834,349			4,006,822

Loss from operations:
Risk/Compliance Solutions	(1	)		243,370			645,630
Energy and Sustainability Solutions				( 360,618	)		(465,019	)

Total Assets:
Risk/Compliance Solutions							13,713,438
Energy and Sustainability Solutions	(2	)					14,292,332

(1)	Note that Loss from operations – Risk/Compliance Solutions, excludes all corporate overhead costs for the enterprise. Total corporate enterprise wide overhead costs totaled approximately $956,000 and $1,845,000 for the three and six months ended June 30, 2013.

(2)	Total assets for the Energy and Sustainability Solutions segment include $4,772,610 in goodwill for GHH and $6,063,119 for Ecological, respectively at June 30, 2013.

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Note 14 – Commitments and Contingencies:

On May 20, 2013, the Company, having completed substantial due diligence, and in negotiations to participate in a significant role in a 7.4 million MegaWatt ("MW") solar generating facility project in Somers, Connecticut (the “Somers Project”), in conjunction with Prime Solutions, Inc. (“Prime”), agreed to provide a Co-Indemnitee on Prime’s Performance Bond, relative to its position as the primary Engineering Procurement and Construction ("EPC") Contractor on the Somers Project. The maximum exposure under this Performance Bond is $1 million, if Prime does not meet the terms and conditions of its contract. The Company entered into a Bond Agreement and Contract with Prime directly related to this Co-Indemnitee arrangement, dated of even date, providing, but not limited to:

1.	That an experienced Premier contractor would act at all times in a Senior Project Management role, overseeing all aspects of the project.

That Premier’s representative, in his Senior Project Management role will sign off on all contract matters, including other subcontractors, daily and weekly meetings and minutes, direct and unfettered communications with the counterparty, monitoring of the formal project schedules, any change orders and all contract draws.

In addition, the Premier Senior Project Manager has the unilateral authority, to engage additional qualified constructions crew members or an additional crew if, after consultation and coordination with Prime, he concludes that it is necessary to ensure milestones and/or the Substantial Completion Date are met, and these associated costs are borne by Prime.

4.	Prime shall pay the Company $10,000 for the “Co-Indemnitee”.

In addition, to secure this potential risk, Prime has executed a perfected Security (“Stock Pledge”) Agreement in favor of the Company, whereby Prime unconditionally and irrevocably, pledged, granted and hypothecated to the Company a majority equity interest in the fully diluted ownership of Prime, held in Escrow by our counsel. The Somers Project and the “Subcontract Agreement and Contract” (discussed immediately below) are anticipated to be completed on or before December 31, 2013. The Company is accounting for this performance Bond Co-Indemnitor arrangement in accordance with FASB ASC 460-10 – Guarantees. This “Co-Indemnitee” Agreement and Contract was at all times intended to be and in fact has become part of a larger contractual arrangement. See Note 16 – Subsequent Events for full discussion of the Subcontract Agreement and Contract entered into by and among Prime and the Company directly related to the Somers Project aforementioned.

Note 15 – Related Party Transactions:

On February 8, 2012, we paid dividends on our Series C Preferred Stock in Common Stock of the Company. Of this dividend, $105,000, equating to 141,893 shares was paid to River Charitable Remainder Unitrust f/b/o Isaac Blech, which is controlled by Isaac Blech, Vice Chairman of the Company’s Board of Directors. On February 1, 2013, we paid dividends on our Series C Preferred Stock in Common Stock of the Company. Of this dividend, $140,000, equating to 175,000, shares was paid to River Charitable Remainder Unitrust f/b/o Isaac Blech, which is controlled by Isaac Blech, Vice Chairman of the Company’s Board of Directors.

During the three months ended March 31, 2012, the Company engaged two board members to provide additional services as board members related to merger and acquisition and investment relations activity. These board members each received warrants to purchase 150,000 shares of common stock for these services. In addition each board member was to be compensated $20,000. On April 27, 2012, the Company paid $20,000 each to the two board members.

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Note 16 – Subsequent Events:

As disclosed in SEC Form 8-K, filed July 29, 2013, on July 25, 2013, the Company entered into a Subcontract Agreement and Contract by and among Prime Solutions, Inc. (“Prime”) and the Company, hereinafter referred to as the “Subcontract Agreement”, whereby the Company, for a negotiated price, will provide the following services: i) a Senior Project Management Consulting, Oversight and Advisory role, and ii) Materials Management, Procurement, and “Just-in-Time” delivery role (including negotiating with and managing vendors, including custom built products) for specific project key materials. The revenue from the Subcontract Agreement is estimated to be approximately $6.0 million, including the materials management, procurement, and delivery role. The Subcontract Agreement is directly in connection to the Company providing these duties and assisting Prime in their role as the EPC contractor pursuant to the ”Somers Project.” In consideration for the roles and responsibilities undertaken by the Company outlined above pursuant to the Subcontract Agreement, the Company shall receive a fee, subject to adjustment, of approximately $6.0 million. In addition, the Company agreed to sign as a Co-Indemnitor on Prime’s Performance Bond on the Somers Project. See Note 14 – Commitments and Contingencies for a discussion of this Co-Indemnitor arrangement.

On June 30, 2013, after a study and recommendation by the Compensation Committee, the Board of Directors approved a new director compensation plan. Pursuant to that new plan, stock options are to be issued annually upon election or reelection to the Board of Directors for another term at the same level for all directors, as well as standard compensation for Board and Committee meetings was established, as follows: 1) $10.000 retainer for each director, 2) options to purchase 75,000 shares of common stock to be delivered after election to an annual term, 3) $3,500 for Board of Directors meetings, and, 4) $1,500 for Committee meetings. Pursuant to the terms of the new plan, on July 1, 2013, the Company awarded 525,000 Stock Options (subject to its 2008 Stock Incentive Plan) to seven members of its Board of Directors. The Options, which all vest immediately, were valued under the Black-Scholes methodology, as they do not contain "down round protection", and resulted in a charge of $96,425 to the Statement of Operations. The key inputs for the Black-Scholes calculations, all considered "Level 2" in the fair value hierarchy, are as follows: strike price - $0.59; volatility -32.83%; risk free rate - 1.39%; Maturity - 5 years.

July 5, 2013, the Company entered into a new asset based revolving line of credit arrangement with a different financial institution. The new line of credit is limited to a borrowing base of 80% of eligible receivables or $3,000,000 and interest is at the one month LIBOR rate plus 225 basis points. The Company incurred total fees of $7,500 in deferred loan costs in conjunction with arranging this new facility. The line is renewable annually. The Company was required, as a first priority security interest, required to maintain a compensating balance of $3 million on account at this financial institution. However, the loan terms include a release provision on the compensating balance, reducing it as the Company meets net operating income thresholds set forth in the loan agreement.

Also on July 5, 2013, the Company paid in its entirety the amount shown as a current liability on the June 30, 2013 Balance Sheet as Note payable – installment loan in the amount of $112,097 concurrent with the closing of the new revolving line of credit described above.

On August 14, 2013, the Company filed a Form 8-K/A, providing notification that effective August 9, 2013, the Company entered into a new employment agreement (the “Elliott Employment Agreement”) with the Company’s Chief Executive Officer, Mark Elliott, pursuant to which Mr. Elliott will continue to serve as the Company’s Chief Executive Officer until December 01, 2015 (or such earlier date upon which Mr. Elliott’s employment may be terminated in accordance with the terms of the Elliott Employment Agreement). The new agreement is on substantially the same terms and conditions as Mr. Elliott’s prior employment agreement, which was replaced and superseded by the new agreement.

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Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

CAUTIONARY STATEMENT ON FORWARD-LOOKING INFORMATION

This Form 10-Q contains certain statements relating to future results of the Company that are considered “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those expressed or implied as a result of certain risks and uncertainties, including, but not limited to, changes in political and economic conditions; interest rate fluctuation; competitive pricing pressures within the Company’s market; equity and fixed income market fluctuation; technological change; changes in law; changes in fiscal, monetary regulatory and tax policies; monetary fluctuations as well as other risks and uncertainties detailed elsewhere in the Form 10-Q or from time-to-time in the filings of the Company with the Securities and Exchange Commission. Such forward-looking statements speak only as of the date on which such statements are made, and the Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of unanticipated events.

The following discussion should be read in conjunction with our financial statements and the related notes included in this Form 10-Q.

CERTAIN TERMS USED IN THIS REPORT

When this report uses the words “we,” “us,” “our,” “Premier,” and the “Company,” they refer to Premier Alliance Group, Inc. “SEC” refers to the Securities and Exchange Commission.

Company Summary

We are a service and solution delivery firm that provides integration and consulting expertise. Our team consists of senior individuals that are trained as engineers and technology specialists, business and project consultants and analysts – these are known as our Knowledge Based Experts (KBE). Our KBEs are versed in many areas of business and primarily focus on assisting and advising our clients in dealing with critical areas that impact their business.

Our primary focus is using our expertise on issues related to two key areas for customers; (i) energy usage and strategy and (ii) risk and compliance initiatives. We work with our customers to assess, design, and implement complete solutions.

Our key capabilities in the energy sector help customers manage their energy use and cost via automation, technology, utility incentive programs, and alternative energy solutions. Our solutions in relation to risk and compliance are in understanding the application of various regulations and deploying processes and automation to comply.

Company Overview

Our core business focus is to serve as a problem solver by providing subject matter expertise through our delivery teams - 360° Intelligence Delivery. We have a focus on building our knowledge practices with talent in key industries we feel offer opportunities including: financial services, utilities, life science, technology, government and health sectors. We currently have two major delivery verticals of Energy and Sustainable Solutions and Risk/Compliance capabilities, which are being driven by energy mandates and increased regulations crossing many industries. Our Energy and Sustainable Solutions capabilities position us as a provider of energy efficiency and sustainable facilities solutions. This includes the design, engineering and installation of solutions and technologies that enable clients to reduce their energy costs and carbon footprints. Our Risk/Compliance deliveries encompass Governance, Risk & Compliance (GRC) and Business Performance & Technology as we assist clients with Risk Management, Compliance, Organizational Effectiveness, and Information Management.

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Energy and Sustainability Solutions Overview

We acquired GreenHouse Holdings on March 5, 2012. Additionally, we acquired Ecological, LLC (“Ecological”), on December 31, 2012. GHH and Ecological form our Energy and Sustainability Solutions business segment, which consists of “vertical operations” including Energy and Sustainable Infrastructure. The Energy and Sustainability Solutions segment has as its primary focus, energy related solutions. Automated Demand Response (“ADR”) and Demand Side Management (“DSM”) are key focus points for energy efficiency today and are expected to be a substantial market within this decade. The Energy and Sustainability Solutions division is strategically positioned to take advantage of this growing sector as it currently leads ADR programs for utilities in California as a technical coordinator. Demand-Side Management refers to a vast suite of solutions all focused on promoting the optimized consumption of utility-delivered resources (electricity, water, gas etc.). These solutions range from high-level site assessments to the implementation of alternative or renewable on-site generation and everything in-between. Auto-Demand Response is a rapidly growing sub-set of DSM. ADR programs are offered in varying forms nation-wide as a means of curbing the need to build costly electric utility generation and transmission infrastructure. During conditions when a utility or independent grid operator forecasts supply shortages or congestion, utility customers can save money and in some cases earn revenue by reducing their consumption of electricity. Auto-DR takes utility customer participation to safer and more reliable levels, by the integration of automation into the load-shed process.

In addition, the distributed generation and renewable energy markets are also experiencing significant growth beyond the commercial sector, and have become a focus of military leaders looking for cost savings and revenue generation from these projects as a part of the Federal Leadership in Environmental, Energy and Economic Performance Act. The Energy and Sustainability Solutions division has expertise in this area and is currently engaged in the delivery of multiple distributed generation and renewable energy projects.

Energy Capabilities

· We support local utilities as a lead service provider for program management, installation and auditing.
· We assist with the expansion of Integrated Demand Side Management (IDSM) programs into new regions as incentive programs are created and launched.
· We are moving toward a “one stop shop” for energy efficiency solutions.
· We provide program management and turnkey integration to other energy related companies, organizations and aggregators.
· We cross sell our consulting services to existing and potential commercial, industrial and utility customers, offering services in support of all three “legs” of the utility stool:

(i) The demand side,

(ii) The production side, and

(iii) Operations, finance &accounting, business process & technology, and risk and compliance.

· We conduct fully-integrated energy audits in conjunction with local utilities and turnkey integration of energy efficiency upgrades.

· We develop and assist in executing alternative energy and energy efficiency projects to meet anticipated 2020 demands.

· We develop and assist in executing solar and co-generation projects.

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Risk/Compliance Service Overview

A typical customer of ours is an organization with complex business processes, large amounts of data to manage, and change driven by regulatory or market environments, or strategic, growth and profitability initiatives. Key areas of focus continue to be large, mandated regulatory efforts including complying with the Sarbanes-Oxley Act of 2002 (SOX), BASEL ACCORDS (for financial institutions), energy and environmental mandates, and the Dodd-Frank Wall Street Reform and Consumer Protection Act which can impact organizations across many aspects including risk assessment and management, business processes and work flow, as well as data management, data capture and reporting.

Risk/Compliance Service Capabilities

Risk/Compliance services are primarily provided by our KBEs within core areas of expertise: Governance, Risk & Compliance (GRC) and Business Performance & Technology (BP&T). Engagements within this realm include:

Governance Risk and Compliance

·	Enterprise risk management;
·	Control and governance frameworks;
·	Internal audit services; and
·	Regulatory and compliance efforts (i.e., BASEL ACCORDS, SOX).

Business Performance & Technology

·	Business process re-engineering and workflow analysis;
·	Business intelligence, data analytics;
·	Organizational effectiveness; and
·	System planning.

Premier Sample Customers

Premier’s typical customers have historically been Fortune companies; a sampling includes:

	Ally Financial Inc.		Honeywell, Inc.
	Anheuser Busch Companies		PepsiCo
	Bank of America Corporation		SAAB
	California Steel Industries, Inc.		Schneider Electric
	Duke Power Co.		Southern California Edison
	GMAC		Wells Fargo & Company
	Gulfstream Technologies, Inc.

Premier Acquisition Strategy

In the recent past, we have made several acquisitions seeking to expand the scope of our business and achieve growth in our revenues and profitability. Our task is to have the capability to help clients deal with external change driven by various factors including energy, regulatory or market environments or internal change driven by strategic, growth, and profitability initiatives. To compete more effectively, part of the strategic growth plan for us is to identify target firms to expand or enhance our 360° Intelligence Delivery capabilities. Identifying key expanded capabilities will be important as we must continue to display the knowledge, history, and experience - Knowledge Based Expertise - as a key to continued growth and opportunity. We have focused on expanding our Knowledge Based Expertise targeting expertise relating specifically to the energy and risk/compliance sectors which can cross many industries. We believe these sectors have significant converging and touch points and create many cross sell opportunities as we work with clients.

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Acquisitions

GreenHouse Holdings, Inc.

On March 5, 2012, we consummated the Agreement of Plan and Merger (“Merger Agreement”) with GreenHouse Holdings, Inc. (“GHH”). GHH is a provider of energy efficiency and sustainable facilities services and solutions and audits, designs, engineers and installs products and technologies that enable its clients to reduce their energy costs and carbon footprint. GHH has two “vertical operations,” energy efficiency solutions (“EES”) and sustainable facilities solutions (‘‘SFS’’). GHH is focused on industrial, commercial, government and military markets in the United States and abroad. Substantially all of GHH’s revenue has historically come from its EES business segment to this point.

The purchase price for the GHH acquisition was determined by the total market value of the 7,114,482 newly-issued shares (including the escrowed shares) on March 5, 2012 ($6,403,293), plus the total loans outstanding made by us to GHH at the date of the acquisition ($1,030,407), for total consideration of $7,433,700. We incurred deferred financing costs associated with the issuance of the stock (including legal fees, accounting fees, printing fees, etc.) totaling $323,963, and paid a registered investment adviser a referral fee in stock (valued at $120,639) and $64,960 in cash. These costs were charged against additional paid in capital. During the Company’s annual goodwill testing for 2012, pursuant to ASC 350 and its requisite Step 1 and Step 2 tests, a goodwill impairment write down of $4,378,182 was recorded for the year ended December 31, 2012, adjusting the goodwill value above of $9,150,792, to the revalued amount at December 31, 2012 of $4,772,610.

Pursuant to the terms of the Merger Agreement, the Company agreed to issue a certain amount of common stock, on a fully diluted basis subject to adjustments provided in the Merger Agreement. As part of the stock consideration paid to GHH, 1,331,188 shares of common stock were placed in an escrow account. Such escrowed shares were to be released at a later date upon the achievement of certain revenue goals and the satisfaction of certain indemnification obligations. If the escrowed shares were released, GHH stockholders would own, in the aggregate, 30.2% of the combined company. The escrowed shares accrued quarterly, on a pro-rata basis, to the extent that GHH revenues, over a four calendar quarter measurement period exceeded $12 million. If these conditions were not met, the escrowed shares would be returned to the Company. Effective March 31, 2013, the four calendar quarter measurement period pursuant to the GHH aggregate revenue required in order to release the escrowed shares expired, and the minimum revenues were not attained. However, in spite of a number of non-controllable external factors arising, GHH made measurable progress on many fronts. The Board of Directors took all factors under immediate advisement to determine if an extension was warranted for the measurement period and the ultimate course of action for the Company.

As a result, effective June 30, 2013, a First Amendment to Escrow Agreement was executed by all parties whereby:

1.	The Measuring Period for achievement of the Revenue Targets was modified to the calendar year 2012,

2.	The Escrow Shares were reduced by 20% from 1,331,188 to 1,064,950, meaning, 266,238 shares previously considered issued and outstanding were permanently retired, and,

3.	The Indemnification Provisions remain in place.

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Ecological, LLC

On December 31, 2012, through our wholly owned subsidiary, Ecological Partners, LLC, a New York limited liability company (“EPLLC”), created for the sole purpose of effectuating the acquisition, we purchased substantially all of the assets of Ecological LLC., (“Ecological”) a Delaware limited liability company. Ecological develops and implements energy sustainability action plans for real estate portfolios, buildings, and tenants in order to reduce costs, improve efficiency, achieve regulatory compliance, and increase value. Ecological’s services range from metering and monitoring, to in-depth energy audits and analysis, to executing retrofit projects. By improving the efficiency of environmental systems, such as energy, water, and carbon, landlords can reduce costs, reposition client buildings as “green” and create higher value and yield for their real estate assets and portfolios.

Other Developments

Financings

On November 16, 2012, the Company issued $750,000 of its 7% Redeemable Convertible Promissory Notes to accredited investors. The securities consist of 7% Convertible Notes with 50% warrant coverage (the “Notes”). The Notes convert at the earlier of 15 months or automatically convert at the closing of the next round of financing into the same security as the next round of financing, at the lesser of $0.50 per share or at a 25% discount to the next round of financing. In addition, we have also agreed to issue warrants to acquire 50% of the number of shares sold at the next round of financing, with a strike price equal to the lesser of $0.65 per share or the strike price of the next warrants at such financing. The warrants have a four year term. Weighted average anti-dilution provisions are in place for one year on the stock after conversion and for three years on the warrants. We paid $29,614 in legal fees, $9,500 in diligence fees to the placement agent and a success fee of 10% or $75,000 to the placement agent. We received net proceeds of $635,886, issued 750,000 warrants to the note holders and 120,000 warrants to the placement agent. On December 26, 2012, upon the closing of a subsequent financing in which we issued our Series D 8% Redeemable Convertible Preferred Stock, the Notes were mandatorily converted into the shares of Series D Preferred Stock. We targeted these proceeds for working capital such that we could meet all of our working capital needs prior to a significant financing event.

Between December 26, 2012 and February 26, 2013, we closed three offerings of Series D Preferred Stock to accredited investors. We sold an aggregate of 13,126 shares of Series D Preferred Stock and issued warrants to purchase an aggregate of 4,375,392 shares of our common stock, with an exercise price of $1.125 per share, for gross proceeds of $13,126,001. In connection with the sale of these securities, $1,312,600 was paid and warrants to purchase an aggregate of 1,750,135 shares of our common stock were issued, with an exercise price of $1.125 per share, to a registered broker. In addition, $126,350 in fees relating to the offering was paid. We received net proceeds of $11,687,051. We used $2,000,000 of these net proceeds for the acquisition of Ecological, LLC, which closed on December 31, 2012. We targeted the balance of the proceeds for working capital and future mergers and acquisitions.

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Strategy

Our core business focus is to provide subject matter expertise through our delivery 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 and industries we feel offer opportunity including: energy planning and strategy, risk/compliance/regulatory, business performance and processes, all with a focus on increasing profit and mitigating risk. Our sales and delivery organization work with customers closely — a consultative approach — to understand the business direction, initiatives or issues they are dealing with. Our goal is to provide industry expertise as well as in our core disciplines to allow for successful efforts.

Our typical customers have historically been Fortune 500 companies (including AIG, Southern California Edison, Duke Power, Bank of America, and Wells Fargo), and they continually seek expertise and knowledge in areas such as project planning/management, business consulting, and business analysis, evidenced by repeat business with these clients exceeding 70%. With our recent acquisitions, we are better positioned to additionally service emerging business and the mid-market arena, especially as it relates to life sciences, biotech, real estate/facilities managers, utilities, and technology focused companies.

In providing services and solutions, we have five key functional areas or groups that ensure successful delivery and support to our customers:

(a)	Talent Acquisition — continuously sources and identifies the additional key resources we hire as we expand our business and capabilities;

(b)	Business Development — working with our customers in a consultative approach to understand the clients business and identify opportunities where we can assist and provide our services and solutions;

(c)	Service Leaders — our KBE’s work with customers on strategic and complex issues related to our core capabilities

(d)	Consultants/Engineers — these are KBE’s and professionals that ultimately deliver the services and solutions to our customers.

(e)	Operations – providing back office support and capability for the enterprise, including finance, HR and financial reporting.

Talent Acquisition

Our success depends on our ability to hire and retain qualified employees, specifically our KBE’s. Our Talent Acquisition team contacts prospective employment candidates by telephone, through postings on the internet, and by means of our internal recruiting software and databases. For internet postings, we maintain our own web page at www.premieralliance.com and use other internet job-posting bulletin board services as well as professional and social networking sites. We use a sophisticated computer application as our central repository to track applicants’ information, manage skills verification, and obtain background checks. We only hire candidates after they have gone through a rigorous qualification process involving multiple interviews and screening.

Business Development and Service Leaders

Our Business Development team and Service Leaders are our primary interface with the customer, prior to delivery of services or solutions and work together assessing profit and risk areas for clients. We develop and maintain business relationships by building knowledge on our clients businesses, environment and strategic direction as it relates to our core capabilities. Our Business Development team and Service Leaders access the same central repository system as our talent acquisition team — this allows us to link all information together to manage the process efficiently and effectively.

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Operations

Our operations team encompasses several core functions, such as human resources (“HR”) and finance (“Finance”). Encompassed in HR is our employee relations function, providing primary support and service for our delivery team on a daily basis. This support ensures regular interaction and information sharing leading to quality services, better retention, and successful delivery to our clients. Within HR, we perform standard functions, such as benefit administration, payroll, and background processing. Finance provides all financial processing — billing, accounts payable, accounts receivable, and SEC reporting. Our goal is to centralize all operational functions for mergers and acquisitions activity.

Competition

The market for professional services is highly competitive. It is also highly fragmented, with many providers and no single competitor maintaining clear market leadership. Our competition varies by location, type of service provided, and the customer to whom services are provided. Our competitors fall into four categories: (i) large national or international service firms; (ii) regional specialty firms (GRC, engineering, energy); (iii) software / hardware vendors and resellers; and (iv) internal staff of our customers and potential customers.

Contracts

Employees

As of October 22, 2013, we employed a total of 169 persons, as follows: 5 executive employees, 135 consultants and 29 administrative and operations personnel. We believe our employee relations are good.

Results of Operations

Results of Operations for the six months ended June 30, 2013 compared to the six months ended June 30, 2012.

The result of operations described below includes the Risk/Compliance Solutions segment for the six months ended June 30, 2013 and 2012. The Energy and Sustainability Solutions segment began with the acquisition of Greenhouse Holdings, Inc. on March 5, 2012; hence, operating results for this segment are only included from March 5, 2012 through June 30, 2012 and the entire six months ended June 30, 2013. We acquired Ecological, LLC (hereinafter “Ecological”), also part of our Energy and Sustainability Solutions segment (“ESS”), on December 31, 2012; therefore, their results of operations are only included in operating results for the six months ended June 30, 2013.

Total revenue for the six months ended June 30, 2013 was $10,624,000 as compared to $10,280,000 for the six months ended June 30, 2012, a net increase of $344,000, or 3.3%. This net increase is the result of several factors. During the six months ended June 30, 2013, our EES segment generated revenue of $4,007,000 compared to $1,496,000 for the same period during the prior year, an increase of $2,511,000 over the prior year amount. This is largely, but not solely, attributable to the fact that for the six months ended June 30, 2012, our EES segment was then comprised only of GHH, and only for the period from the March 5, 2012 acquisition date through June 30, 2012. Of the $4,007,000 generated by the ESS segment for the six months ended June 30, 2013, GHH accounted for $3,328,000 and Ecological for $679,000. For the six months ended June 30, 2013, excluding the ESS segment, total revenues for the Risk/Compliance segment were $6,617,000, compared to $8,784,000 for six months ended June 30, 2012, a decrease of $2,167,000 or 24.7%. An overview of each of our segments is necessary to understand the dynamic of the net increase in revenue:

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I.	Risk/Compliance Solutions Segment

We experienced several unanticipated losses of revenue in the first six months ended June 30, 2013 in this business segment. First, a significant bank client, cancelled a large Basel III project that was planned and booked as they were no longer required to be Basel compliant because of corporate changes. This created a number of internal displacements as well as the cancelling of a substantial long-term project and revenue stream for us, which we have not yet replaced. Second, we experienced a significant retraction in a large project through our existing Statements of Work (SOW’s) at another large financial client, as a result of more stringent controls introduced by the Bank’s Global Sourcing Group to reduce overall Bank spend. Next, we experienced a number of clients deferring Sarbanes-Oxley compliance projects to the 3rd and 4th quarters due to scheduling and timing. Finally, anticipated revenue growth from the addition of new business development resources did not occur as anticipated.

II.	Energy and Sustainability Solutions Segment

As aforementioned, this segment is now comprised of GHH and Ecological, with GHH beginning the segment effective upon its acquisition March 5, 2012 and Ecological added upon its acquisition on December 31, 2012.

GHH – As discussed in our Annual Report on Form 10-K, much of 2012 with GHH was spent integrating the company, evaluating and focusing its revenue targets, narrowing its strategic plan, evaluating operations and key personnel. Given the date of acquisition, its revenue contribution for the six months ended June 30, 2012 was $1,496,000; as importantly, GHH’s revenue contribution for the entire year ended December 31, 2012 was only $2,947,000, as the integration and business evaluation and refinement process described above was occurring. GHH’s recognized revenue for the six months ended June 30, 2013 was $3,328,000 or 113% of last year’s annual total. In addition, GHH’s business plan refinement is taking root and we believe its business model is now aligned for optimal growth. They have been engaged as the sole source provider for a solar solution for the YMCA’s of San Diego County representing approximately $16.5 million in revenue in the next 18 months and are the provider of the recently executed contract on the Prime agreement described in the Notes to the Financial Statements, representing approximately $6.0 million, to be completed on or before December 31, 2013. GHH is a platform for our EES business and we are committed to this platform, as they now have projects in the alternative energy space (i.e., solar, cogeneration, etc.), which are now just beginning to reach the stage of revenue recognition, as well as continuing to sign new contracts for Demand Response based projects.

Ecological - Ecological’ s total revenue for the six months ended June 30, 2013 was $679,000, and comprised of i) benchmarking revenue of $317,000, ii) audit and retro-commissioning of $334,000 and LEED certification services of $28,000. The nature of the benchmarking and audit and retro-commissioning services are such that the testing must encompass two seasons (heating and cooling); hence, the contracts are spread over a minimum of a six month period. While cash is generally received 50% upon signing of the contract and 50% upon completion, revenue is recognized on the percentage of completion basis, primarily as a % of total engineering labor hours incurred to the total engineering labor hours expected. Our synergistic opportunities with Ecological will be Retro-Fit opportunities that will naturally evolve as an outcome of the energy audits and our ability to leverage GHH’s capabilities in providing creative energy efficiency solutions to these opportunities.

Gross margin (revenue less cost of revenues, defined as all costs for billable staff for the Risk/Compliance Solutions segment and cost of goods for the ESS Solutions segment) increased from $2,472,000 for the six months ended June 30, 2012 to $2,744,000 for the six months ended June 30, 2013, increasing $272,000 and increased on a percentage basis, from 24.0% in 2012 to 25.8% in 2013 on a consolidated basis. Gross margins achieved at the Risk/Compliance segment, GHH and Ecological for the six months ended June 30, 2013 were 28.4%, 29.8% and 24.1%, respectively.

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Selling, general and administrative (“SG&A”) expenses increased from $3,919,000 and 38.1% of revenue for the six months ended June 30, 2012 to $4,216,000 and 39.7% of revenue for the six months ended June 30, 2013. To evaluate SG&A expenses, an analysis of i) Risk/Compliance Solutions segment SG&A expenses, ii) “corporate” level SG&A expenses, and iii) ESS segment SG&A expenses must be separately examined:

Risk/Compliance SG&A - On a combined basis, the Risk/Compliance regions reduced SG&A expenses from $1,124,000 for the six months ended June 30, 2012 to $832,000, a reduction of $292,000. The Risk/Compliance regions managed to maintain control over costs - by keeping the percentage of SG&A as a percentage of revenue at a consistent 13.4%, in spite of declining revenues.

b. Energy & Sustainability SG&A

GHH – GHH’s SG&A expenses were $799,000 or 53.4% of its consolidated revenue for the six months ended June 30, 2012 (as they were only included in results of operations from March 5, 2012 to March 31, 2012) and increased to $1,026,000 or 30.8% of consolidated revenue for the six months ended June 30, 2013. Management believes the fixed and semi-fixed cost base is now in place allowing for GHH to realize substantial revenue growth without substantial increases in these SG&A costs.

Ecological SG&A – Ecological’s SG&A was $457,000 for the six months ended June 30, 2013, representing 67.3% of revenues. However, as with GHH, management believes the fixed and semi-fixed cost base is in place allowing for Ecological to realize substantial revenue growth without substantial increases in these costs.

Corporate SG&A - Corporate SG&A expenses for the six months ended June 30, 2013 were $1,845,000 or 17.4% of revenue compared to $1,997,000 or 19.4% of revenue for the six months ended June 30, 2012. This decrease of $152,000 is primarily comprised of: i) a reduction in non-cash charges for issuances of stock options and stock warrants of $186,000, ii) a reduction in public relations/branding charges of $57,000, iii) a reduction in professional services- accounting of $45,000 as we have now brought substantially all accounting functions in-house, partially offset by increases in: a) corporate office rent of $26,000, b) professional services legal of $32,000, as we completed a Registration Statement on Form S-1 during the six months ended June 30, 2013 associated with our issuance of the 7% Promissory Notes and Series D Preferred Stock in the 4th quarter of 2012 and the 1st quarter of 2013, and, c) a provision for doubtful accounts to ensure the Company was adequately reserved for any potential losses of $74,000.

Loss from operations was $1,664,000 or 15.7% of total revenue for the six months ended June 30, 2013 compared to $1,560,000 or 15.2% of total revenue for the six months ended June 30, 2012. This slight decline of $104,000 is primarily attributable to the unanticipated decline in business in the Risk/Compliance segment in the six months ended June 30, 2013. These losses include corporate SG&A of $1,845,000 and $1,997,000, for the respective periods above. Excluding corporate SG&A, “loss from operations” would actually have been income from operations of $181,000 for the six months ended June 30, 2013 and $437,000 or the six months ended June 30, 2012. Over the past 18 plus months we have invested in building an infrastructure and management platform to support continued growth and believe that substantially all fixed and semi-fixed corporate overhead costs (with the exception of non-cash grants of stock options and warrants) are in place to support that growth and we will be able to achieve the desired scale as revenues continue to grow.

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Other income (expense) for the six months ended June 30, 2013 resulted in income of $2,226,000 compared to income of $78,000 for the six months ended June 30, 2012, and is comprised of the following items:

From 2010 through the 1st quarter of 2013, the Company issued 7% Series B Convertible Preferred Stock, Debentures, 7% Series C Convertible Preferred Stock, 7% Convertible Redeemable Promissory Notes, and 8% Series D Preferred Stock, all with detachable common stock purchase warrants deemed to be derivative instruments. Accounting requirement mandate that these warrants be recorded as a Derivative Liability and “marked-to-market” based on fair value estimates at each reporting date. Collectively, these derivatives were valued at an estimated fair value of $1,094,836 at June 30, 2013, with the change (decline) in value since December 31, 2012 of $1,782,000, being recognized as derivative (non-cash) income on the statement of operations comprising the majority of other income for the six months ended June 30, 2013. For the six months ended June 30, 2012, the change in valuation for the like period was only $64,000.

We recorded an “adjustment to estimates recorded at acquisition” of $432,000 (a non-cash item) related to the GHH acquisition (described in detail in Note 3 to the Financial Statements included elsewhere herein) and not present in the same period in the prior year, to record the retirement of certain escrow shares, recorded as part of the consideration given, in the initial purchase price allocation and removed liabilities assumed which management determined no longer met the required test for recording an obligation on the books and records of the Company.

As a cumulative result of the above, income before income taxes for the six months ended June 30, 2013 was $562,000, compared to a loss before income taxes of $1,216,000 for the six months ended June 30, 2012.

There was no income tax expense for the six months ended June 30, 2013 versus a tax benefit of $266,000 the six months ended June 30, 2012. We account for income taxes under FASB ASC Topic 740 “Income Taxes”. Under FASB ASC Topic 740-10-30, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. We regularly assess the likelihood that our deferred tax assets will be realized from recoverable income taxes or recovered from future taxable income. To the extent that we believe any amounts are not more likely than not to be realized through the reversal of the deferred tax liabilities and future income, we record a valuation allowance to reduce the deferred tax assets. We made the assessment in the fourth quarter of 2012, and again as of March 31, 2013 and June 30, 2013, that a full valuation allowance for the deferred tax assets (other than those that could definitively offset reversing deferred tax liabilities) should be provided based on consideration of the net operating losses for the past two years and six months, and the uncertainty still surrounding the integration of expenses associated with the acquisition of Ecological, LLC, that it was no longer, at this time, more likely than not that the deferred tax assets would be recoverable. In accordance with FASB ASC 740, management will continue to monitor the status of the recoverability of deferred tax assets.

There was no effective income tax rate for the six months ended June 30, 2013, for there is no income tax expense. The deferred tax benefit of $266,000 for the six months ended June 30, 2012 yielded an effective tax rate of 17.9%. The effective tax rate is impacted by “permanent” differences between “book” taxable income and “tax” taxable income, and for the six months ended June 30, 2013, is primarily due to: i) the book recording of the noncash derivative income, ii) the book recording of noncash income from the increase in cash surrender value of life insurance policies, and iii) state taxes, net of federal benefit,

As a result of the above, we recorded net income of $562,000 for the six months ended June 30, 2013, compared to a net loss of $1,216,000 for the six months ended June 30, 2012.

Net loss available for common stockholders’ for the six months ended June 30, 2013 was $684,000, or $(0.03) per share, as compared to $1,538,000, or $(0.12) per share for the six months ended June 30, 2012. Net income (loss) available for common stockholders’ is a function of net income (loss), less actual dividends paid on preferred stock, less “deemed dividends to preferred stockholders’” (or the “embedded beneficial conversion feature”).” Deemed dividend to preferred stockholders’ is the result of the FASB ASC 470-20-25, whereby the proceeds from the issuance of convertible preferred stock, issued with detachable warrants, must be allocated between the convertible preferred stock and the value assigned to the warrants (either the “Black –Scholes” or the “Binomial” value, as appropriate).

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Then, the residual amount allocated to the convertible preferred stock is divided by the number of common shares into which the preferred stock is convertible, developing an “effective conversion price”. This “effective conversion price” is then compared to the market price of the Company’s stock on the date of the transaction, and the “differential”, multiplied by the number of shares into which the preferred stock is convertible, yielding the theoretical “deemed dividend”, a non-cash event/charge. This calculated amount is recorded on the books and records as an “intra-equity” entry only, by reducing/charging retained earnings/accumulated deficit and simultaneously increasing additional paid in capital. Again, it is a non-cash accounting entry only and has no effect on the Statement of Operations. However, FASB ASC Accounting Standards (ASC 470-20-25) require that this amount be shown on the Statement of Operations below Net Income (Loss) as though it were a cash charge, as a deduction from Net Income (Loss), just as if it were dividends actually paid, thereby, reducing Net Income (Loss) Available for Common Stockholders’; hence, also reducing reported Net Income (Loss) per Common Share.

This “deemed dividend” only occurs at one time, on the date of issuance of preferred stock with detachable warrants (and certain debt issuances –see immediately below). This is the case with the issuance of the Series B Preferred Stock in 2010, Series C Preferred Stock in 2011, the Promissory Notes issued with detachable warrants in November 2012 (mandatorily converted to Series D Preferred December 26, 2012), each of the three issuances of Series D Preferred Stock on December 26, 2012, January 25, 2013 and February 26, 2013, respectively. The identical calculation is made for convertible debt issuances; however, the difference being that the non-cash accounting entry is to charge “debt discount” (as opposed to retained earnings/accumulated deficit), yet “Additional Paid in Capital” is still the credit entry; and, since the issuance is of debt, not equity, there is clearly no “deemed dividend to preferred shareholders’” to be recorded.

As a result of the above accounting requirements, a “deemed dividend” was calculated and recorded in the six months ended June 30, 2013 in the amount of $509,000, as a direct result of the issuance of the second and third round of our Series D Preferred Stock with detachable warrants. Therefore, taking into consideration the respective net income for the six months ended June 30, 2013, the dividends actually paid on the Series B and C Preferred Stock of $407,000, the initial dividends paid on the Series D Preferred Stock in May 2013 of $330,000 and the “deemed dividend to preferred stockholders’” of $509,000, described above, the net loss available for common stockholders was $684,000, or $(0.03) per share for the six months ended June 30, 2013 compared to $1,538,000, or $(0.12) per share for the same period in the prior year.

Results of Operations for the three months ended June 30, 2013 compared to the three months ended June 30, 2012.

Revenue, on a consolidated basis, for the three months ended June 30, 2013 was $4,971,000 compared to $5,494,000 for the same period in 2012, a decrease of 9.5%. Our Energy and Sustainability Solutions segment (“ESS”), is comprised currently of GHH and Ecological. Revenue for the three months ended June 30, 2013 contributed by GHH was $1,548,000 or 31.1% of total revenue compared to $1,261,000, or 22.9% of total revenue for the three months ended June 30, 2012. Ecological, acquired on December 31, 2012, generated $287,000 in revenue for the three months ended June 30, 2013. Total revenue for the Risk/Compliance segment for the three months ended June 30, 2013 were $3,136,000 (or 63.1% of total revenue) compared to $4,233,000 (or 77.1% of total revenue) for the same period in the prior year; an overall decrease in this segment of $1,097,000 or 25.9% for the three months ended June 30, 2013 compared to the same period in the prior year.

The substantial decline in revenue in the Risk Compliance segment is attributable to several unanticipated losses of revenue in the first six months ended June 30, 2013 in this business segment. First, a significant bank client, cancelled a large Basel III project that was planned and booked as they were no longer required to be Basel compliant because of corporate changes. This created a number of internal displacements as well as the cancelling of a substantial long-term project and revenue stream for us, which we have not yet replaced. Second, we experienced a significant retraction in a large project work through our existing Statements of Work (SOW’s) at another large financial client, as a result of more stringent controls introduced by the Bank’s Global Sourcing Group to reduce overall Bank spend. Next, we experienced a number of clients deferring Sarbanes-Oxley compliance projects to the 3rd and 4th quarters due to scheduling and timing. Finally, anticipated revenue growth from the addition of new business development resources did not occur as anticipated.

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Gross margin (revenue less cost of revenues, defined as all costs for billable staff for the Risk/Compliance Solutions segment and cost of goods for the ESS Solutions segment) decreased from $1,391,000 for the three months ended June 30, 2012 to $1,149,000 for the three months ended June 30, 2013, and declined on a percentage basis, from 25.3% in 2012 to 23.1% in 2013 on a consolidated basis. The change in revenue mix among segments for the three months ended June 30, 2013 discussed immediately above, was primarily attributable for this decline, as gross margins achieved at GHH and Ecological for the three months ended June 30, 2013 were 28.4% and 29.8%, respectively. Gross margins for the Risk/Compliance segment for the three months ended June 30, 2013 were 24.1%.

SG&A expenses were $2,127,000 or 42.8% of revenue for the three months ended June 30, 2013, as compared to $2,073,000 or 37.7% for the same period in 2012, but a nominal increase of only $54,000 or 2.6%.

Loss from operations for the three months ended June 30, 2013, was $1,075,000 as compared to a loss of $751,000 for the same period in 2012. The increase in the loss in 2013 over 2012 is primarily attributable to the decline in revenue in the Risk/Compliance segment for the three months ended June 30, 2013 and its impact, as corporate level fixed and semi-fixed costs could not be adjusted in as rapid a period as the unanticipated revenue losses occurred.

Other income and expense, net resulted in net other income of $1,195,000 for the three months ended June 30, 2013 and was comprised of derivative income, a non-cash item, resulting from the revaluation of warrants and the related derivative liability at June 30, 2013 of $769,000. In the three months ended June 30, 2013, we recorded an “adjustment to estimates recorded at acquisition” of $432,000 (a non-cash item) related to the GHH acquisition (described in detail in Note 3 to the Financial Statements included elsewhere herein in this Form 10-Q) to include the retirement of certain escrow shares, recorded as part of the consideration given, in the initial purchase price allocation and removed liabilities assumed at acquisition, which management determined no longer met the requirements for maintaining an obligation on the books and records of the Company. These items were applicable only to the three months ended June 30, 2013.

The effective income tax rates for the three months ended June 30, 2013 and 2012 are 1.7% and 7.1%, respectively. These apparently low rates are the result of permanent differences attributable to derivative income, book income recognized from adjustments to acquired assets to fair value and certain stock compensation expense, all of which are considered permanent differences, as they are neither taxable or deductible items on the income tax return; hence, not providing a tax deduction or benefit.

Net income for the three months ended June 30, 2013 was $118,000 compared to net income of $1,012,000 for the same period in the prior year. After consideration of Deemed Dividends on Preferred Stock (described in detail in the Results of Operations for the six months ended June 30, 2013 compared to the six months ended June 30, 2012 above) and the first dividends paid on our Series D Preferred Stock in May 2013 of $330,000, this resulted in a net income or (loss) per share basic and fully diluted of $(0.01); for the three months ended June 30, 2013, and, as there were no dividends paid, nor any deemed dividends on preferred stock in this period in 2012, net income per share was $0.06 on a basic basis and $0.03 on a fully diluted basis.

Dividend

No dividend for common stock has been declared as of June 30, 2013, and the Company does not anticipate declaring dividends in the future.

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Critical Accounting Policies

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with the U.S. generally accepted accounting principles (“GAAP”). The preparation of these financial statements requires us to make significant estimates and judgments that affect the reported amount of assets, liabilities, revenues, and expenses and related disclosures of contingent assets and liabilities. We evaluate our estimates, including those related to bad debts, intangible assets and contingencies on an ongoing basis. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully described in our consolidated financial statements appearing in our Annual Report on Form 10-K as well as our

amended Annual Report on Form 10-K/A filed on October 18, 2013, we believe that the following critical accounting policies involve the more significant judgments and estimates used in the preparation of our consolidated financial statements and are the most critical to aid you in fully understanding and evaluating our reported financial results.

Revenue Recognition

Valuation of Goodwill and Intangible Assets

Our intangible assets include goodwill, trademarks, non-compete agreements, patents and purchased customer relationships, all of which are accounted for based on Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 350 Intangibles-Goodwill and Other. As described below, goodwill and intangible assets that have indefinite useful lives are not amortized but are tested at least annually for impairment or more frequently if events or changes in circumstances indicate that the asset might be impaired. Intangible assets with limited useful lives are amortized using the straight-line method over their estimated period of benefit, ranging from two to eight years. Goodwill is tested for impairment by comparing the carrying value to the estimated fair value, in accordance with GAAP. Impairment exists if the carrying amount is greater than its estimated fair value, resulting in a write-down equal to the difference between the carry amount and the estimated fair value. The values recorded for goodwill and other intangible assets represent fair values calculated by accepted valuation methods. Such valuations require critical estimates and assumptions derived from and which include, but are not limited to i) information included in our business plan, ii) estimated cash flows, and iii) discount rates.

Impairment Testing

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Share-Based Compensation

Fair Value of Financial Assets and Liabilities – Derivative Instruments

Level 1 – quoted prices in active markets for identical assets or liabilities.

Level 2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable.

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Income Taxes

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Recent Accounting Pronouncements

Since January 1, 2012, there have been several new accounting pronouncements and updates to the Accounting Standards Codification. Each of these updates has been reviewed by Management who does not believe their adoption has had or will have a material impact on the Company’s financial position or operating results.

Liquidity and Capital Resources

As of June 30, 2013, we had cash and cash equivalents of $8,739,000, an increase of $4,268,000 from December 31, 2012, primarily attributable to the closing of the 2nd and 3rd rounds of finacing related to the sale and issuance of the Series D Preferred Stock in January and February 2013, resulting in total net proceeds of $5,452,000, net of the use of cash in the six months ended June 30, 2013. We continue to use our revolving line of credit, but our borrowings remained relatively stable, increasing only $106,000 from $1,094,000 at December 31, 2012 to $1,200,000 at June 30, 2013. As of June 30, 2013 our available borrowings under our revolving line of credit were $300,000. However, as discussed above, we closed on a new asset based revolving line of credit on July 5, 2013, increasing our borrowing base to 80% of eligible receivables or $3,000,000. The Company was required, as a first priority security interest, to maintain a compensating balance of $3 million on account at this financial institution. However, the loan terms include a release provision on the compensating balance, reducing it as the Company meets net operating income thresholds set forth in the loan agreement.

Working capital at June 30, 2013, was $7,986,000, representing an increase of $4,359,000 compared to $3,627,000 at December 31, 2012. This net increase of $4,359,000 in working capital is the result of a number of factors, primarily: i) an increase in cash on hand as a result of the 2nd and 3rd rounds of the Series D Preferred Stock financing in January and February 2013, respectively, ii) a decrease in accounts receivable of $396,000 reflecting only timing of receipts, iii) an increase in costs and estimated earnings in excess of billings of $729,000, reflecting increased revenue producing activity, iv) a reduction in current portion of long-term debt, reflecting the payoff of certain computer installment notes ($164,000), v) an increase of $954,000 in billings in excess of costs and estimated earnings, due to increased business activity, where we have been able to advance collect from our clients on projects, and, vi) a decrease in accrued expenses of $316,000 (this decrease would actually have been $515,000, but for a properly accrued litigation settlement of $199,400 at December 31, 2012). This accrual, which was paid in January, was primarily non-cash, with the issuance of $169,400 in Premier stock (non-cash) and $30,000 in cash). Non-current liabilities at June 30, 2013 are $1,183,000, primarily comprised of a “book” liability related to the current valuation of all outstanding warrants, considered a derivative liability, of $1,095,000, with substantially all the remaining balance representing a deferred tax liability of $85,000. Shareholders’ equity was $22,048,000 at June 30, 2013 (representing 78.2% total assets), compared to December 31, 2012, of $16,455,000 (representing 71.3% of total assets).

During the six months ended June 30, 2013, net cash used in operating activities was $1,196,000 and was primarily attributable to: i) the net income of $562,000, ii) increased by noncash depreciation and amortization of $193,000, iii) decreased by the noncash income of $17,000 recognized on the increase in cash surrender value under the insurance policies owned by us, iv) decreased by the non-cash adjustment recognized in income for the adjustment to fair value of assets acquired of $432,000, v) reduced by the noncash “book” income recognized for derivative income of $1,782,000, vi) offset by the decrease in accounts receivable of $396,000, vii) the increase in costs and estimated earnings in excess of billings of $729,000, again reflecting increased revenue producing activity, and finally, and viii) the increase in billings in excess of costs and estimated earnings of $954,000.

Cash used in investing activities during the six months ended June 30, 2013 of $46,000 was comprised of acquisitions of property, plant and equipment.

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Cash provided from financing activities of $5,509,000 for the six months ended June 30, 2013 was comprised primarily of the following: i) the 2nd and 3rd (and final round) issuances of the 7% Convertible Redeemable Series D Preferred Stock in January and February 2013, respectively, with net proceeds of $5,452,000, ii) payments on long-term debt of $49,000, also reflecting the payoff of certain computer installment notes, iii) net proceeds from the revolving line of credit of $106,000.

Financing Arrangements

As discussed above, we have closed private placement financings from November 2012 through February 2013, resulting in net proceeds of $12,323,000, of which $2,000,000 was simultaneously used for the Ecological, LLC acquisition. Our unencumbered cash position at October 18, 2013 is $5,063,041. We believe the above unencumbered cash position and funds to be generated from operations, will meet our cash needs for operations at least through mid-2014.

We might need to raise additional funds in order to fund future business acquisitions. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and a downturn in the U.S. equity and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders will likely experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow. If we are unable to obtain additional financing, we will be required to further curtail our plans to acquire additional businesses.

Our liquidity may be negatively impacted by the significant costs associated with our public company reporting requirements, costs associated with applicable corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 and other rules implemented by the Securities and Exchange Commission. We expect all of these applicable rules and regulations to significantly increase our legal and financial compliance costs and to make some activities more time consuming and costly.

Off-Balance-Sheet Arrangements

As of June 30, 2013, and during the six 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.

Outlook

Our priority is to continue to build depth in the range of services and solutions we offer by building “areas of expertise and knowledge and increased industry specific knowledge.” 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.

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With our focus on capabilities related to the Energy and Risk/Compliance verticals, we must continue to adjust to the rapid change being driven by the evolving Energy sector as well as the ongoing wave of regulatory change affecting all industries. Both areas continue to increase in importance and are tied to key priority initiatives for most businesses regarding profitability and sustainability.

The energy sector has a fragmented regulatory environment driven by federal, state, provincial and local processes including: reliability, building and safety, environmental regulation and codes, permitting, rate structures, tariffs, incentives, tax credits, all which are changing frequently. In addition, the metrics and values used to deal with financing of energy related projects are still maturing. However, the drivers of rising energy costs combined with power reliance issues for countries and the long term view related to our carbon footprint continue to push the energy sector forward and our involvement in energy efficiency, frequency regulation, integrated demand side management, and distributed generation and renewable energy are priorities.

The regulatory and compliance sector continues to evolve globally and locally. The challenges that impact specific verticals, based on industry nuances, continue to expand and create ongoing challenges for businesses related to their overall risk. Many of the growing areas within this sector impact all industries and will also overlap with our energy services as maturation continues in relation to the energy sector. This will include cyber-security, risk mitigation, ongoing regulatory and compliance initiatives and program management as we move to expand our overall capabilities and expertise.

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, 2013, the Company had an outstanding balance of $1,200,000 under its revolving credit agreement. Interest on borrowings under the facilities is based on the daily LIBOR rate plus a 3.50% margin, and no less than 4%. The Company renewed this line effective January 19, 2013 for an additional six months through July 19, 2013. Daily average borrowings for the six months ended June 30, 2013 were $1,134,494. As discussed in Note 4 –Line of Credit Modification and Note 16 – Subsequent Events, the Company has put a new asset based revolving line of credit in place effective July 5, 2013. Interest on borrowings under this new facility is based on the one month LIBOR plus 225 basis points.

Market fluctuation impact on assets

For the six months ending June 30, 2013, the valuation of the Variable Life Insurance policies had an investment gain of $16,649.

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 can affect the fair value derivative calculations as well as could impact our decision or ability to utilize the equity markets as a potential source of our funding needs in the future.

Item 4.

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 Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures as

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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. Our management, with the participation of the President, evaluated the effectiveness of the Company's internal control over financial reporting as of March 31, 2013. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control -- Integrated Framework.

During the preparation of the Quarterly Report on Form 10-Q for the three and six months ended June 30, 2013, management at that time discovered that at the initial recording of the issuances of Preferred Stock Offerings, the recording of the Derivative Liability at its Fair Market Value was properly recorded as a liability on the books and records; however, the Derivative Liability was “Tax Effected” and a “Deferred Tax Asset” (established at a combined statutory effective tax rate) was also recorded, with the “differential” being charged to Additional Paid in Capital. This is incorrect accounting application, for the entire amount of the Derivative Liability valuation at issuance is to be charged to Additional Paid in Capital.

This initial error was discovered by the Company on August 5, 2013. Further, as the derivative liabilities, valued at initial issuance, were subsequently and appropriately “marked to market” based on current valuations, the deferred tax asset (established at issuance as aforementioned), directly related to this derivative liability, was adjusted based on the movement of the derivative liability, essentially “tax effecting” the recorded derivative income or expense, as the case may have been, from quarter to quarter.. After substantial research and consultation, it was definitively determined this was not the proper accounting treatment, neither at initial issuance nor the subsequent accounting. The Company had to go back to inception of the first issuance when this accounting occurred (May 21, 2010), correct the entries to the balance sheet at that time to completely remove the deferred tax asset and appropriately charge Additional Paid in Capital, and for all subsequent measurement periods (impacting the Statement of Operations); not only for this initial issuance of debentures, but for all other subsequent issuances of Preferred Stock and Promissory Notes, completely remove the “deferred tax asset directly related to the derivative liability” and the deferred tax expense and/or benefit that had been inappropriately recognized in the Statement of Operations.

The additional research also indicated, that while we had been consistently applying the well accepted Black-Scholes methodology for valuation of detachable warrants treated as derivative instruments which created a derivative liability, we determined that the use of a “binomial” methodology for warrants which contain “down round protection” (ie, “anti-dilution”, full ratchet provisions) was required. Therefore, we simultaneously evaluated all tranches of outstanding warrants and their underlying characteristics. As a result, we engaged an independent valuation specialist to perform valuations for certain classes of warrants containing “down round protection”, primarily the warrants associated with the Series C Preferred Stock issuance on March 3, 2011. Hence, the valuation specialists necessarily had to go back to that issuance date and revalue these warrants, both at original issue and at every valuation date forward. This revaluation impacted the calculation of the beneficial conversion feature at issuance, as well as the initial valuation at recordation (in addition to adjusting for no longer recording the deferred tax asset discussed above), as well as each and every derivative valuation thereafter; hence, impacting recorded derivative income and/or expense.

Finally, the Company discovered that the detachable warrants issued in conjunction with the Series B Preferred Stock in 2010 had never been recorded as a derivative liability. The Company evaluated these detachable warrants closely, in conjunction with valuation specialists and counsel, and determined that they did not contain “down round protection”, and could properly be valued using the Black-Scholes methodology. These detachable warrants were recorded as of 2010, resulting in derivative income in 2010. A beneficial conversion feature, however, was recorded for this issuance, was carefully recalculated and a small adjustment was made. This restatement has no effect on our cash flow or liquidity.

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As a result, management has deemed it necessary to file and restate: i) its Annual Financial Statements for the years ended December 31, 2012 and 2011, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, ii) amended financial statements for the Company’s SEC Form 10-Q’s for; a) for the three months ended March 31, 2012 and 2011, b) the three and six months ended June 30, 2012 and 2011, c) the three and nine months ended September 30, 2012 and 2011, d) amended Management’s Discussion and Analysis of Financial Condition and Results of Operations for each of the interim periods outlined immediately above, and, iii) the cumulative impact on the beginning balance sheet as of January 1, 2011, resulting from errors outlined in detail above, as required by FASB ASC’s and SEC requirements. The amended and restated financial statements will include, for both the annual and interim periods, explanatory footnotes outlining each financial statement line item impacted, the original amount reported and the restated amount.

Based on the above, our management, with the participation of the President, concluded that as of June 30, 2013, our internal control over financial reporting was not effective and did not provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.

As required by Exchange Act Rule 13a-15(d), the Company's management, including the Chief Executive Officer and Chief 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, 2013 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, 2013. However, subsequently, the Company has taken immediate steps to enhance its internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. These changes are outlined as follows;

·	The Chairman and President and CEO have directed and authorized the hiring of an experienced CPA with extensive GAAP, SEC Reporting and Financial Reporting experience, which will allow the CFO to oversee and review the work in more detail.

·	The Company has also reviewed the work flow surrounding its monthly, quarterly and annual financial reporting to ensure that all reviews by appropriate parties are timely and that any edits or comments by any reviewing party get re-circulated back to the entire appropriate working group.

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PART II

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, no unregistered securities were sold or issued during the period ended June 30, 2013.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not Applicable.

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 Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Sec. 1350).

32.1		Written Statement of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).

32.2		Written Statement of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).

101.INS *		XBRL Instance Document.
101.SCH *		XBRL Taxonomy Extension Schema Document.
101.CAL *		XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF *		XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB *		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE *		XBRL Taxonomy Extension Presentation Linkbase Document.

*	Furnished herewith. XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

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SIGNATURES

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: October 25, 2013	By:	/s/ Mark S. Elliott
		Mark S. Elliott
		President (Chief Executive Officer)

DATE: October 25, 2013	By:	/s/ Larry W. Brumfield
		Larry W. Brumfield
		Chief Financial Officer

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