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PIMO > SEC Filings for PIMO > Form 10-Q on 25-Oct-2013All Recent SEC Filings

Show all filings for PREMIER ALLIANCE GROUP, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for PREMIER ALLIANCE GROUP, INC.


25-Oct-2013

Quarterly Report


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.

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".


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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.

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

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 ASC 604-45.

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 . . .

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