UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C.   20549


___________________________________





FORM 10-Q


___________________________________








Quarterly Report Pursuant to Section 13 or 15(d) of the


Securities Exchange Act of 1934





For the Quarterly Period Ended September 30, 2010








Commission File Number:  1-34208





EMERGENT GROUP INC.


(Exact name of registrant as specified in its charter)





Nevada

93-1215401(State of jurisdiction of Incorporation)

(I.R.S. Employer Identification No.)





10939 Pendleton Street


Sun Valley, CA 91352


(Address of principal executive offices)





(818) 394-2800


(Registrant’s telephone number)





Not Applicable


(Former name, address and fiscal year, if changed since last report)


___________________________________








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. Yes  ý   No  o





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the 12 preceding months (or such shorter period that the registrant was required to submit and post such file). 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 definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.





Large accelerated filer o



Accelerated filer o





Non-accelerated filer o

(Do not check if a smaller reporting company)

Smaller reporting company ý





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o   No  ý





As of November 4, 2010, the registrant had a total of 6,897,949 shares of Common Stock outstanding.





1








EMERGENT GROUP INC.


FORM 10-Q Quarterly Report





Table of Contents




PagePART I.  FINANCIAL INFORMATIONItem 1.
Financial StatementsCondensed Consolidated Balance Sheets as of September 30, 2010 (unaudited)and December 31, 2009
3Condensed Consolidated Statements of Income for the Three and Nine MonthsEnded September 30, 2010 and 2009 (unaudited)
4Condensed Consolidated Statements of Cash Flows for the Nine Months EndedSeptember 30, 2010 and 2009 (unaudited)
5Notes to Condensed Consolidated Financial Statements (unaudited)
6Item 2.
Management’s Discussion and Analysis of Financial Conditionand Results of Operations
11Item 3.
Quantitative and Qualitative Disclosures and Market Risk
15Item 4.
Controls and Procedures
15PART II.  OTHER INFORMATIONItem 1.
Legal Proceedings
16Item1A.
Risk Factors
16Item 2.
Changes in Securities
16Item 3.
Defaults Upon Senior Securities
16Item 4.
Reserved
16Item 5.
Other Information
16Item 6.
Exhibits
16Signatures

17
  2
  PART I.  FINANCIAL INFORMATION





Item 1.  Financial Statements




Emergent Group Inc. and SubsidiariesCondensed Consolidated Balance SheetsSeptember 30,


December 31,2010


2009ASSETS

(Unaudited)Current assetsCash

$
7,283,073


$
7,427,165Accounts receivable, net of allowance for doubtfulaccounts of $98,909 and $83,704


3,803,026



4,006,123Inventory, net


1,130,668



889,526Prepaid expenses


299,523



380,825Deferred income taxes


257,630



557,630Total current assets


12,773,920



13,261,269Property and equipment, net of accumulated depreciation andamortization of $10,304,504 and $9,031,136


4,681,577



5,545,492Goodwill


1,120,058



1,120,058Deferred income taxes


21,126



21,126Other intangible assets, net of accumulated amortization of$372,373 and $300,672


393,564



455,265Deposits and other assets


82,671



80,992Total assets

$
19,072,916


$
20,484,202LIABILITIES AND SHAREHOLDERS' EQUITYCurrent liabilitiesCurrent portion of capital lease obligations

$
1,834,276


$
1,901,272Dividends payable


-



2,710,817Accounts payable


1,671,098



1,440,122Accrued expenses and other liabilities


2,010,296



2,456,315Total current liabilities


5,515,670



8,508,526Capital lease obligations, net of current portion


1,872,710



2,670,942Total liabilities


7,388,380



11,179,468Commitments and contingencies, note 5


-



-Shareholders' equityPreferred stock, $0.001 par value, non-voting 10,000,000shares authorized, no shares issued and outstanding


-



-Common stock, $0.04 par value, 100,000,000 shares authorized6,897,024 and 6,776,118 shares issued and outstanding


275,877



271,042Additional paid-in capital


16,753,421



16,507,958Accumulated deficit


(5,786,081
)


(8,062,324
)Total Emergent Group equity


11,243,217



8,716,676Non-controlling interest


441,319



588,058Total shareholders' equity


11,684,536



9,304,734Total liabilities and shareholders' equity

$
19,072,916


$
20,484,202


The accompanying notes are an integral part of these condensed consolidated financial statements.


3


Emergent Group Inc. and SubsidiariesCondensed Consolidated Statements of Income(Unaudited)Three Months Ended


Nine Months EndedSeptember 30,


September 30,2010


2009


2010


2009Revenue

$
7,594,715


$
7,981,464


$
22,214,727


$
23,105,272Cost of goods sold


4,607,609



4,802,495



13,465,898



13,839,056Gross profit


2,987,106



3,178,969



8,748,829



9,266,216Selling, general, and administrative expenses


1,566,503



1,490,174



4,522,235



4,442,338Income from operations


1,420,603



1,688,795



4,226,594



4,823,878Other income (expense)Interest expense, net


(64,410
)


(85,692
)


(210,496
)


(261,681
)Gain on disposal of property and equipment


-



5,500



64,323



8,050Other income from affiliated entities, net


-



-



190,221



-Other income, net


978



76



1,923



30,336Total other income (expense)


(63,432
)


(80,116
)


45,971



(223,295
)Income before provision for income taxes andnon-controlling interest


1,357,171



1,608,679



4,272,565



4,600,583Provision for income taxes


(472,755
)


(553,000
)


(1,550,044
)


(1,604,634
)Income before non-controlling interest


884,416



1,055,679



2,722,521



2,995,949Non-controlling interests in income of consolidatedlimited liability companies


(174,380
)


(225,023
)


(446,277
)


(597,030
)Net income

$
710,036


$
830,656


$
2,276,244


$
2,398,919Basic earnings per share

$
0.10


$
0.12


$
0.33


$
0.36Diluted earnings per share

$
0.10


$
0.12


$
0.32


$
0.34Basic weighted average shares outstanding


6,875,040



6,745,663



6,841,176



6,710,175Diluted weighted-average shares outstanding


7,045,049



7,089,598



7,020,315



7,059,774





The accompanying notes are an integral part of these condensed consolidated financial statements.


4


Emergent Group Inc. and SubsidiariesCondensed Consolidated Statements of Cash Flows(Unaudited)Nine Months EndedSeptember 30,2010


2009Cash flows from operating activitiesNet income

$
2,276,244


$
2,398,919Adjustments to reconcile net income to net cashprovided by operating activities:Depreciation and amortization


1,773,679



1,620,057Gain on disposal of property and equipment


(64,323
)


(8,050
)Provision for doubtful accounts


15,205



21,415Non-controlling interest in income


446,277



597,030Stock-based compensation


220,230



170,494Deferred income taxes


300,000



1,217,122Other income from affiliated entities, net


(190,221
)


-Other expense


-



5,497(Increase) decrease in assets and liabilitiesAccounts receivable


187,892



(547,292
)Inventory


(241,142
)


2,315Prepaid expenses


81,302



(89,329
)Deposits and other assets


(11,679
)


(125,377
)Increase (decrease) inAccounts payable


215,976



396,288Accrued expenses and other liabilities


(413,428
)


262,699Net cash provided by operating activities


4,596,012



5,921,788Cash flows from investing activitiesPurchase of property and equipment


(362,110
)


(517,582
)Cash paid to members of limited liability companies


(446,637
)


(703,404
)Contributions from new members to limited liability companies


11,250



112,500Proceeds from the sale of property and equipment


164,169



4,050Net cash used in investing activities


(633,328
)


(1,104,436
)Cash flows from financing activitiesPayments on capital lease obligations


(1,554,092
)


(1,492,241
)Payments on dividends declared


(2,710,817
)


(1,989,750
)Proceeds from equipment refinancing


128,064



34,740Proceeds from exercise of options to purchase common stock


30,069



1,600Net cash used in financing activities


(4,106,776
)


(3,445,651
)Net increase (decrease) in cash


(144,092
)


1,371,701Cash, beginning of period


7,427,165



4,586,107Cash, end of period

$
7,283,073


$
5,957,808Supplemental disclosures of cash flow information:Interest paid

$
233,104


$
273,343$
-Income taxes paid

$
1,251,738


$
502,147Supplemental schedule of noncash investing and financing activities:During the nine months ended September 30, 2010 and 2009, the Company incurred capital lease obligationsof $688,864 and $918,266, respectively, for medical equipment. In addition, equipment purchasesof $195,000 are included in accounts payable in the accompanying balance sheet as of September 30, 2010for which the Company is arranging lease financing.
 
 The accompanying notes are an integral part of these condensed consolidated financial statements.


5


EMERGENT GROUP INC and SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Three and Nine Months Ended September 30, 2010 and 2009


(unaudited)





1.
BUSINESS





Emergent Group Inc. (“Emergent”) is the parent company of PRI Medical Technologies, Inc. (“PRI Medical”), its wholly owned subsidiary. Emergent and PRI Medical are referred to collectively hereinafter as the “Company” or “we”. PRI Medical provides mobile laser/surgical services, along with technical support, on a per procedure basis to hospitals, out-patient surgery centers, and physicians' offices.





2.
BASIS OF PRESENTATION





The accompanying unaudited condensed consolidated financial statements of Emergent have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary for a fair presentation of the results for the periods presented.





The results of operations presented for the three and nine months ended September 30, 2010 and 2009 are not necessarily indicative of the results to be expected for any other interim period or any future fiscal year.





Principles of Consolidation


The consolidated financial statements include the accounts of Emergent and its wholly owned subsidiaries. Also, in accordance with the guidance issued by the Financial Accounting Standards Board (“FASB”), the Company has accounted for its non-controlling interest in investments in certain limited liability companies under the full consolidation method. All significant intercompany transactions and balances have been eliminated through consolidation.





Use of Estimates


The preparation of the condensed consolidated financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of income and expenses during the reporting period. Actual results could differ significantly from those estimates.





Accounts Receivable and Concentration of Business and Credit Risks


We market our services primarily to hospitals, out-patient centers and physicians throughout 16 states located in the Western and Eastern United States. Our equipment rental and technician services are subject to competition from other similar businesses. Our accounts receivable represent financial instruments with potential credit risk. We offer credit terms and credit limits to most of our customers based on the creditworthiness of such customers. However, we retain the right to place such customers on credit hold should their account become delinquent. We maintain an allowance for doubtful accounts for estimated losses should customers fail to make required payments. In addition, we monitor the age of customer account balances, historical bad debt experience, customer creditworthiness, customer specific information, and changes in payment patterns when making estimates of the collectibility of trade receivables. Accounts receivable are written off when all collection attempts have failed. Our allowance for doubtful accounts will be increased if circumstances warrant. Based on the information available, management believes that our net accounts receivable are collectible.





Inventory


Inventory consists of finished goods primarily used in connection with the delivery of our mobile surgical equipment rental and services business. Inventory is stated at the lower of cost or market, on a first-in, first-out basis.


6


Stock-Based Compensation


On May 5, 2009, the Board approved establishing an Employee Benefit and Compensation Plan (the "2009 Plan") covering 300,000 shares with an effective date of June 29, 2009, the date of shareholder ratification of the 2009 Plan. The 2009 Plan will terminate and no awards may be granted after June 28, 2019. In April 2002, the Company adopted the 2002 Employee Benefit and Consulting Services Compensation Plan (the “2002 Plan”) under which we may issue a total of 650,000 options and awards. Our 2009 and 2002 Plans are substantially identical, except as to the number of shares covered by each respective plan and the 2009 Plan permits issuance of incentive stock options. The Plans were established for the purpose of providing incentives to key employees, officers, directors, and consultants of the Company who provide significant services to the Company. The 2009 and 2002 Plans are collectively referred to herein as the "Plans." No stock options have been issued under our 2009 Plan.




Compensation costs related to stock options issued under the Plans are determined in accordance with guidance issued by the FASB. We determine the fair value of option grants based on the Black-Scholes option-pricing model using the modified prospective method. Under this method, compensation cost recognized during the three and nine months ended September 30, 2010 and 2009 includes compensation cost for all share-based payments granted prior to but not yet vested as of January 1, 2006, and all grants subsequent to that date, based on the grant date fair value, which is amortized over the remaining vesting period for such options.




Earnings Per Share


Basic earnings per share is computed by dividing earnings available to common shareholders by the weighted-average number of common shares outstanding. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common share equivalents had been issued and if the additional common shares were dilutive. Common equivalent shares are excluded from the computation if their effect is anti-dilutive.




Three Months Ended


Nine Months EndedSeptember 30,


September 30,2010


2009


2010


2009Numerator -Net income attributable to commonShareholders

$
710,036


$
830,656


$
2,276,244


$
2,398,919Denominator -Weighted-average number of commonShares outstanding during the period


6,875,040



6,745,663



6,841,176



6,710,175Dilutive effect of stock options and warrants


170,009



343,935



179,139



349,599Common stock and common stockEquivalents used for diluted earnings per share


7,045,049



7,089,598



7,020,315



7,059,774


Recent Accounting Pronounments


In January 2010, the Financial Accounting Standards Board (“FASB”) issued ASU 2010-06, Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). ASU 2010-06 requires additional disclosures about fair value measurements including transfers in and out of Levels 1 and 2 and more disaggregation for the different types of financial instruments. This ASU is effective for annual and interim reporting periods beginning after December 15, 2009 for most of the new disclosures and for periods beginning after December 15, 2010 for the new Level 3 disclosures. Comparative disclosures are not required in the first year the disclosures are required. We did not have any significant transfers in or out of Level 1 and Level 2 fair value measurements during the three months ended September 30, 2010.





In August 2009, the FASB issued ASU 2009-15, which changes the fair value accounting for liabilities. These changes clarify existing guidance that in circumstances in which a quoted price in an active market for the identical liability is not available, an entity is required to measure fair value using either a valuation technique that uses a quoted price of either a similar liability or a quoted price of an identical or similar liability when traded as an asset, or another valuation technique that is consistent with the principles of fair value measurements, such as an income approach (e.g., present value technique). This guidance also states that both a quoted price in an active market for the identical liability and a quoted price for the identical liability when traded as an asset in an active market when no adjustments to the quoted price of the asset are required are Level 1 input fair value measurements. This ASU became effective for us on January 1, 2010. Adoption of this ASU did not have a material impact on our consolidated financial statements.




7





In June 2009, the FASB issued accounting guidance contained within ASC 810, Consolidation (“ASC 810”), regarding the consolidation of variable interest entities (formerly SFAS No. 167, Amendments to FASB Interpretation No. 46(R)). ASC 810 is intended to improve financial reporting by providing additional guidance to companies involved with variable interest entities and by requiring additional disclosures about a company’s involvement in variable interest entities. This standard is effective for interim and annual periods beginning after November 15, 2009. Our adoption of this ASC on January 1, 2010 had no material impact on our consolidated financial statements.





In June 2009, the FASB issued ASC 860, Transfers and Servicing (“ASC 860”), (formerly SFAS No. 166, Accounting for Transfers of Financial Assets). ASC 860 requires more information about transfers of financial assets and where companies have continuing exposure to the risk related to transferred financial assets. It eliminates the concept of a qualifying special purpose entity, changes the requirements for derecognizing financial assets, and requires additional disclosure. This standard is effective for interim and annual periods beginning after November 15, 2009. We adopted this standard on January 1, 2010. The adoption of this standard had no material impact on our financial statements.




3.     DEBT OBLIGATIONS




The Company maintains a $1.5 million line of credit under a revolving credit agreement (the “Agreement”) with a bank which is collateralized by substantially all unencumbered assets of the Company. Advances under the Agreement bear interest at the prime rate, plus one-half of one percent (3.75% as of September 30, 2010), with interest payable monthly. Subject to the terms of the Agreement, the Company may request and repay advances from time to time through the expiration date. The Agreement includes certain financial covenants that must be met including a covenant that for a period of not less than thirty (30) consecutive days during the loan term, that no loan amount will be outstanding under the Agreement. The Agreement expires on December 3, 2010. As of September 30, 2010 the Company was in compliance with the terms of its revolving credit agreement and no amounts have been drawn under this facility.





In connection with an acquisition of assets during 2008, we entered into an equipment lease financing loan with a bank for $1,750,000. The equipment lease is collateralized by the acquired assets and other assets of the Company and provides for monthly payments of principal and interest of $46,378 commencing on September 1, 2008 over 42 months, with interest at 6.4%. The lease financing agreement also requires the Company to meet certain financial covenants over the loan term. As of September 30, 2010 the Company was in compliance with terms of this loan agreement.





The Company incurred total net interest expense of $64,410 and $85,692 for the three months ended September 30, 2010 and 2009, respectively and $210,496 and $261,681 for the nine months ended September 30, 2010 and 2009, respectively.




4.     STOCK OPTION PLANS




The Company issues stock options and awards for the purpose of providing incentives to key employees, officers, directors, and consultants of the Company who provide significant services to the Company. Options and awards granted under the Plans generally vest over five years and are subject to forfeiture if the employee terminates prior to vesting. As of September 30, 2010 there have been no options or awards granted under our 2009 Plan. With regard to our 2002 Plan, there are 650,000 common shares authorized for grant and such options will not be granted for a term of more than ten years from the date of grant. The 2002 Plan expires in March 2012. Incentive stock options granted under the 2002 Plan are non-statutory stock options. As of September 30, 2010, the number of shares reserved for future awards was 55,430, which is net of the 45,000 and 53,500 restricted award shares granted in March 2010 and April 2009 under the 2002 Plan, respectively, as discussed below.




During the nine months ended September 30, 2010 and 2009 we issued -0- and 30,000, stock options, respectively, under our 2002 Plan to various employees. Such options vest in equal installments over five years and unvested options are subject to forfeiture should the respective employee leave the company. Compensation costs related to total stock options outstanding for the three months ended September 30, 2010 and 2009 were $2,595 and $3,858 respectively, and $8,715 and $11,420 for the nine months ended September 30, 2010 and 2009, respectively.


8




A summary of the Company's outstanding stock options and activity is as follows:




Number of Options


Weighted Average Exercise PriceOutstanding at January 1, 2010


305,965


$
2.34Options Granted


-


$
-Options Exercised


(79,408
)

$
0.65Options Canceled


(11,731
)

$
6.32Outstanding at September  30, 2010


214,826


$
2.75Exercisable at September 30, 2010


172,262


$
2.34




The weighted-average remaining contractual life of the options outstanding at September 30, 2010 is 4.38 years. The exercise prices for the options outstanding at September 30, 2010 ranged from $0.40 to $51.00 and information relating to these options is as follows:




Weighted
Weighted

Weighted


WeightedAverage
Average

Average


AverageRemaining
Remaining

Exercise


ExerciseRange of


Stock


Stock

Contractual
Contractual

Price of


Price ofExercise


Options


Options

Life of Options
Life of Options

Options


OptionsPrices


Oustanding


Exercisable

Outstanding
Exercisable

Outstanding


Exercisable$
0.40



144,576



144,576

2.94 years
2.94 years

$
0.40


$
0.40$
2.15 - 8.00



64,000



21,436

7.93 years
7.42 years

$
4.41


$
4.45$
20.00 - 51.00



6,250



6,250

1.08 years
1.08 years

$
40.00


$
40.00$
0.40 - 51.00



214,826



172,262

4.38 years
3.43 years

$
2.75


$
2.34




As of September 30, 2010, the total unrecognized compensation cost related to unvested stock options was $33,903, which is to be recognized over a remaining weighted average vesting period of approximately 3.09 years.




In addition to options granted under the 2002 Plan, as of September 30, 2010, we have 424,997 restricted award shares issued and outstanding of which 328,497 were issued outside of the 2002 Plan and 205,900 are fully vested. Award shares vest in equal installments over five years from the date of issuance. Such award shares are issued from time to time to executive officers, directors and employees of the Company. Non-vested award shares are subject to forfeiture in the event that the recipient is no longer employed by the Company at the time of vesting, subject to the Board’s right to waive the forfeiture provisions. Compensation expense related to such shares is determined as of the issuance date based on the fair value of the shares issued and is amortized over the related vesting period. In March 2010 and April 2009 we issued 45,000 and 53,500 restricted shares under the 2002 Plan, respectively. The total grant date fair value related to the restricted award shares issued in March 2010 and April 2009 was $380,700 and $363,265, respectively, representing the number of restricted shares issued times the closing prices of $8.46 and $6.79 per share, respectively.





Compensation costs are amortized over the vesting period of five years. Compensation expense related to outstanding restricted award shares was $75,451 and $59,421 for the three months ended September 30, 2010 and 2009, respectively, and $211,515 and $159,074 for the nine months ended September 30, 2010 and 2009, respectively.


9




Information relating to non-vested restricted award shares is as follows:




Weighted


WeightedAverage


AverageRemaining


Grant Date


AggregateNumber of


Contractual


Fair Value


IntrinsicShares


Life (in years)


Per Share


ValueNonvested, January 1, 2010


228,797



2.8


$
3.75


$
789,795Granted


45,000






$
8.46Forfeited/Cancelled


-






$
-Vested


(53,099
)





$
3.88Nonvested, September 30, 2010


220,698



2.4


$
4.68


$
413,675




5.
COMMITMENTS AND CONTINGENCIES





From time to time, we may become involved in litigation arising out of operations in the normal course of business. As of September 30, 2010 and as of the filing date of this Form 10-Q, we are not a party to any pending legal proceedings the adverse outcome of which could reasonably be expected to have a material adverse effect on our operating results or financial position.





6.     RELATED PARTY TRANSACTIONS





Transactions with BJH Management


The services of the Company’s Chairman and Chief Executive Officer are contracted through BJH Management for a monthly fee of $15,167. In March 2010, the services agreement with BJH Management was extended to June 30, 2013.





The Company’s Chairman and Chief Executive Officer maintains his primary office in New York. In this regard, the Company reimbursed BJH Management, LLC (“BJH”), a company owned by the Company’s Chairman and Chief Executive Officer, for office rent and other reimbursable expenses totaling $19,492 and $18,073 for the three months ended September 30, 2010 and 2009, respectively, and $55,950 and $52,173 for the nine months ended September 30, 2010 and 2009, respectively.





7.     LIMITED LIABILITY COMPANIES





In connection with expanding its business, PRI Medical participates with others in the formation of Limited Liability Companies (“LLCs”) in which it will acquire either a non-controlling or controlling-interest and the remaining interests are held by other investors. These LLCs acquire certain medical equipment for use in their respective business activities which generally focus on surgical procedures. The LLCs will acquire medical equipment for rental purposes under equipment financing leases. The third party investors in each respective LLC generally provide the lease financing company with individual proportionate lease guarantees based on their respective ownership percentages in the LLCs. In addition, PRI Medical will provide such financing companies with its corporate guarantee based on its respective ownership interest in each LLC. In certain instances, PRI Medical has provided such financing companies with an overall corporate guarantee in connection with equipment financing transactions. In such instances, the individual investors in each respective LLC will generally indemnify PRI Medical against losses, if any, incurred in connection with its corporate guarantee. As of September 30, 2010, PRI Medical holds interests in seven active LLCs. We previously held interests in thirteen LLCs; however, during the second half of 2009, we ceased operations in six LLCs and began the wind-down and dissolution process as a result of regulatory changes.





For the three and nine months ended September 30, 2010 and 2009, in accordance with guidance issued by the FASB, the Company accounted for its equity investments in LLCs in which it holds a non-controlling interest under the full consolidation method whereby transactions between the Company and LLCs have been eliminated through consolidation.


10


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





Forward-Looking Statements





The information contained in this Form 10-Q and documents incorporated herein by reference are intended to update the information contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 and such information presumes that readers have access to, and will have read, the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors” and other information contained in such Form 10-K and other Company filings with the Securities and Exchange Commission (“SEC”).





This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements involve risks and uncertainties, and actual results could be significantly different than those discussed in this Form 10-Q. Certain statements contained in Management's Discussion and Analysis, particularly in "Liquidity and Capital Resources," and elsewhere in this Form 10-Q are forward-looking statements. These statements discuss, among other things, expected growth, future revenues and future performance. Although we believe the expectations expressed in such forward-looking statements are based on reasonable assumptions within the bounds of our knowledge of our business, a number of factors could cause actual results to differ materially from those expressed in any forward-looking statements, whether oral or written, made by us or on our behalf. The forward-looking statements are subject to risks and uncertainties including, without limitation, the following: (a) changes in levels of competition from current competitors and potential new competition, (b) possible loss of significant customer(s), (c) the Company’s ability to effectively integrate into its operations new and changing medical technologies, (d) the risk of equipment vendors not making their equipment and technologies available to equipment rental and service companies such as ours, (e) the Company’s ability to meet the terms and conditions of its debt and lease obligations, (f) the potential impact of new government rules and regulations, including recently enacted healthcare reform legislation, could have a material adverse affect on our results of our operations, and (g) changes in availability or terms of working capital financing from vendors and lending institutions. The foregoing should not be construed as an exhaustive list of all factors that could cause actual results to differ materially from those expressed in forward-looking statements made by us. All forward-looking statements included in this document are made as of the date hereof, based on information available to the Company on the date thereof, and the Company assumes no obligation to update any forward-looking statements.





Overview





Emergent Group Inc. (“Emergent”) is the parent company of PRI Medical Technologies, Inc. (“PRI Medical”), its wholly owned subsidiary. Emergent and PRI Medical are referred to collectively hereinafter as the “Company.” PRI Medical provides mobile laser/surgical services, along with technical support, on a per procedure basis to hospitals, out-patient surgery centers, and physicians' offices.





Critical Accounting Policies





Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of financial statements requires managers to make estimates and disclosures on the date of the financial statements. On an on-going basis, we evaluate our estimates including, but not limited to, those related to revenue recognition, inventory valuation and property and equipment. We use authoritative pronouncements, historical experience and other assumptions as the basis for making judgments. Actual results could differ from those estimates. We believe that the following critical accounting policies affect our more significant judgments and estimates in the preparation of our financial statements.





Revenue Recognition. Revenue is recognized once our mobile rental and technicians services are performed and billable. We are required to make judgments based on historical experience and future expectations, as to the realizability of goods and services billed to our customers. These judgments are required to assess the propriety of the recognition of revenue based on Staff Accounting Bulletin (“SAB”) No. 104, “Revenue Recognition,” and related guidance. We make such assessments based on the following factors: (a) customer-specific information, and (b) historical experience for issues not yet identified.





Inventory Valuation. We are required to make judgments based on historical experience and future expectations as to the realizability of our inventory. We make these assessments based on the following factors: (a) existing orders and usage, (b) age of the inventory, and (c) historical experience.


11


Property and Equipment. We are required to make judgments based on historical experience and future expectations as to the realizability of our property and equipment. We made these assessments based on the following factors: (a) the estimated useful lives of such assets, (b) technological changes in our industry, and (c) the changing needs of our customers.





Results of Operations





The following table sets forth certain selected unaudited condensed consolidated statements of income data for the periods indicated in dollars and as a percentage of total revenues. The following discussions relate to our results of operations for the periods noted. The results of operations are not necessarily indicative of the results expected for any other interim period or any future fiscal year. In addition, we note that the period-to-period comparison may not be indicative of future performance.




Three Months Ended September 30,


Nine Months Ended September 30,2010


%


2009


%


2010


%


2009


%Revenue

$
7,594,715



100
%

$
7,981,464



100
%

$
22,214,727



100
%

$
23,105,272



100
%Cost of goods sold


4,607,609



61
%


4,802,495



60
%


13,465,898



61
%


13,839,056



60
%Gross profit


2,987,106



39
%


3,178,969



40
%


8,748,829



39
%


9,266,216



40
%Selling, general, and administrative expenses


1,566,503



21
%


1,490,174



19
%


4,522,235



20
%


4,442,338



19
%Income from operations


1,420,603



18
%


1,688,795



21
%


4,226,594



19
%


4,823,878



21
%Other income (expense)


(63,432
)


-1
%


(80,116
)


-1
%


45,971



0
%


(223,295
)


-1
%Income before provision for incometaxes and non-controlling interest


1,357,171



17
%


1,608,679



20
%


4,272,565



19
%


4,600,583



20
%Provision for income taxes


(472,755
)


-6
%


(553,000
)


-7
%


(1,550,044
)


-7
%


(1,604,634
)


-7
%-Net income before non-controlling interest


884,416



11
%


1,055,679



13
%


2,722,521



12
%


2,995,949



13
%Non-controlling interest in income ofconsolidated limited liability companies


(174,380
)


-2
%


(225,023
)


-3
%


(446,277
)


-2
%


(597,030
)


-3
%Net income

$
710,036



9
%

$
830,656



10
%

$
2,276,244



10
%

$
2,398,919



10
%





Comparison of the Three Months Ended September 30, 2010 to September 30, 2009





The Company generated revenues of $7,594,715 in 2010 compared to $7,981,464 in 2009. The decrease in revenues in 2010 of $386,749, or 5% is related to a decrease in revenues from our surgical procedures. The decrease in surgical revenues during the quarter may be attributable, in part, to current economic conditions whereby many individuals may have lost their healthcare coverage and as a result may be postponing medical procedures in the short-term.





Cost of goods sold was $4,607,609 in 2010 or 61% of revenues, compared to $4,802,495 or 60% of revenues for 2009. Costs of goods sold primarily consist of payroll costs and related expenses for technicians, cost of disposables consumed, depreciation and amortization related to equipment, insurance costs and other operating costs incurred in rendering mobile medical equipment and technician services. The overall decrease in cost of goods sold of $194,886 or 4% for 2010 is due to the decrease in revenues for the period resulting in lower overall operating costs including payroll and payroll related costs, partially offset by increases in depreciation and amortization expenses of $25,339. The increase in depreciation and amortization expense relates to equipment purchases in 2010 and 2009. The net change in other cost categories included in cost of goods sold remained relatively consistent in 2010 compared to 2009.





Gross profit from operations was $2,987,106 in 2010, compared to $3,178,969 in 2009. Gross profit as a percentage of revenues was 39% for 2010 compared to 40% for 2009. Gross profit margins after disposable costs will vary depending on the type of surgical procedure performed due to the fact that certain procedures require more expensive disposable items. In addition, gross profit margin rates will vary from period to period depending upon other factors including pricing considerations, and equipment and technician utilization rates. The gross profit margin for 2010 is not necessarily indicative of the gross profit margins that may be realized in future periods.





Selling, general, and administrative expenses were $1,566,503 and $1,490,174 for 2010 and 2009, respectively, or 21% and 19% of revenues, respectively. Such costs include, among others, payroll and related expenses, insurance costs and occupancy costs. Overall, the cost categories within selling, general and administrative expenses were relatively comparable for both 2010 and 2009.




12





Other income (expense) was $(63,432) in 2010 compared to $(80,116) in 2009. Other income (expense) includes interest income and expense, gains and losses on disposal of property and equipment, and other miscellaneous income and expense items. The net decrease in other income (expense) of $16,684 is primarily related to a decrease in net interest expense for 2010 of $21,282 primarily due to the continuing pay-down of lease obligations with higher interest rates and an increase in interest income, offset by a decrease of $5,500 in gain on disposal of property and equipment in 2010 compared to 2009.





The non-controlling interest (ownership interests held by third-parties) in net income of limited liability companies was $174,380 in 2010 compared to $225,023 in 2009. In 2010 and 2009, we held ownership interests in seven and thirteen entities, respectively. During mid to late 2009 we ceased operations in six LLCs and we began the wind-down and dissolution process. The decrease in non-controlling interest in earnings is related to the winding-down of operations for such LLCs. As of September 30, 2010 and 2009, in accordance with guidance issued by the FASB, the Company accounted for its equity investments in entities in which it holds a non-controlling interest under the full consolidation method.





Net income was $710,036 in 2010 compared to $830,656 in 2009. Provision for income taxes was $472,755 in 2010 compared to $553,000 in 2009. The provision for income taxes for both 2010 and 2009 is comprised of state and federal taxes, federal Alternative Minimum Taxes (AMT) and the utilization of deferred income tax assets. At December 31, 2009, the Company had net operating loss carryforwards of approximately $3.4 million for federal tax purposes, which is subject to certain limitations due to statutory ownership changes. Basic net income per share for 2010 and 2009 was $0.10 and $0.12, respectively, while fully diluted net income per share for 2010 and 2009 was $0.10 and $0.12, respectively. Basic and fully diluted weighted average shares outstanding for 2010 were 6,875,040 and 7,045,049, respectively, and 6,745,663 and 7,089,598 for 2009, respectively.




Comparison of the Nine Months Ended September 30, 2010 to September 30, 2009





The Company generated revenues of $22,214,727 in 2010 compared to $23,105,272 in 2009. The decrease in revenues in 2010 of $890,545, or 4%, is primarily related to a decrease in surgical procedures, which may be attributable, in part, to current economic conditions whereby many individuals may have lost their healthcare coverage and as a result may be postponing medical procedures in the short-term.





Cost of goods sold was $13,465,898 in 2010 or 61% of revenues, compared to $13,839,056 or 60% of revenues for 2009. Costs of goods sold primarily consist of payroll costs and related expenses for technicians, cost of disposables consumed, depreciation and amortization related to equipment, insurance costs and other operating costs incurred in rendering mobile medical equipment and technician services. The overall decrease in cost of goods sold of $373,158 or 3% for 2010 is primarily related to the decrease in revenues during the period resulting in lower overall operating costs including disposable costs, payroll and payroll related costs, partially offset by increases in depreciation and amortization expenses of $157,550 and equipment maintenance costs of $131,492. The increase in depreciation and amortization expense relates to equipment purchases in 2010 and 2009. The net change in other cost categories included in cost of goods sold remained relatively consistent in 2010 compared to 2009.





Gross profit from operations was $8,748,829 in 2010 compared to $9,266,216 in 2009. Gross profit as a percentage of revenues was 39% in 2010 compared to 40% in 2009. Gross margins after disposable costs will vary depending on the type of surgical procedure performed due to the fact that certain procedures require more expensive disposable items. In addition, gross margin rates will vary from period to period depending upon other factors including pricing considerations, and equipment and technician utilization rates. The gross margin for 2010 is not necessarily indicative of the margins that may be realized in future periods.





Selling, general, and administrative expenses in 2010 were $4,522,235 compared to $4,442,338 in 2009. Selling, general, and administrative expenses as a percentage of revenues were 20% for 2010 and 19% for 2009. Such costs include, among others, payroll and related expenses, insurance costs and occupancy costs. Overall, the cost categories within selling, general and administrative expenses were relatively comparable for both 2010 and 2009.





Other income (expense) was $45,971 in 2010 compared to $(223,295) in 2009. Other income (expense) includes interest income and expense, gains and losses on disposal of property and equipment, and other miscellaneous income and expense items. The net increase in other income (expense) of $269,266 is related to other income of $190,221 from affiliated entities related to equipment acquired from such entities in 2010 while no such income items were recorded in the prior year, an increase of $56,273 in gain on disposal of property and equipment in 2010, a decrease of $51,185 in net interest expense related to the continuing pay-down of lease obligations with higher interest rates and an increase in interest income, offset by a decrease of $28,413 in miscellaneous income in 2010 compared to 2009.




13





The minority interest (ownership interests held by third-parties) in net income of limited liability companies was $446,277 in 2010 compared to $597,030 in 2009. In 2010 and 2009, we held ownership interests in seven and thirteen entities, respectively. During mid to late 2009 we ceased operations in six LLCs and we began the wind-down and dissolution process. The decrease in non-controlling interest in earnings is related to the winding-down of operations for such LLCs. As of September 30, 2010 and 2009, in accordance with guidance issued by the FASB, the Company accounted for its equity investments in entities in which it holds a non-controlling interest under the full consolidation method.





Net income was $2,276,244 in 2010 compared to $2,398,919 in 2009. Provision for income taxes was $1,550,044 in 2010 as compared to $1,604,634 in 2009. The provision for income taxes for both 2010 and 2009 is comprised of state and federal taxes, federal Alternative Minimum Taxes (AMT) and the utilization of deferred income tax assets. At December 31, 2009, the Company had net operating loss carryforwards of approximately $3.4 million for federal tax purposes, which is subject to certain limitations due to statutory ownership changes. Basic net income per share for 2010 and 2009 was $0.33 and $0.36, respectively, while fully diluted net income per share for 2010 and 2009 was $0.32 and $0.34, respectively. Basic and fully diluted weighted average shares outstanding for 2010 were 6,841,176 and 7,020,315, respectively, and 6,710,175 and 7,059,774 for 2009, respectively.





Liquidity and Capital Resources





The Company maintains a $1.5 million line of credit under a revolving credit agreement (the “Agreement”) with a bank which is collateralized by substantially all unencumbered assets of the Company. Advances under the Agreement bear interest at the prime rate, plus one-half of one percent (3.75% as of September 30, 2010), with interest payable monthly. Subject to the terms of the Agreement, the Company may request and repay advances from time to time through the expiration date. The Agreement includes certain financial covenants that must be met including a covenant that for a period of not less than thirty (30) consecutive days during the loan term, that no loan amount will be outstanding under the Agreement. The Agreement expires on December 3, 2010 and we are in the process of renewing the Agreement as of the filing of this Form 10-Q. In addition, as of September 30, 2010 and the filing of this Form 10-Q, the Company was in compliance with the terms of its revolving credit agreement and no amounts have been drawn under this facility.





In connection with an acquisition of assets during 2008, we entered into an equipment lease financing loan with a bank for $1,750,000. The equipment lease is collateralized by the acquired assets and other assets of the Company and provides for monthly payments of principal and interest of $46,378 commencing on September 1, 2008 over 42 months, with interest at 6.4%. The lease financing agreement also requires Emergent to meet certain financial covenants over the loan term. As of September 30, 2010 and the filing of this Form 10-Q, the Company was in compliance with terms of this loan agreement.





The Company had cash and cash equivalents of $7,283,073 at September 30, 2010. Cash provided by operating activities for the nine months ended September 30, 2010 was $4,596,012. Cash generated from operations includes net income of $2,276,244, depreciation and amortization of $1,773,679, deferred income taxes of $300,000, non-controlling interest in income of $446,277, stock-based compensation of $220,230, an increase in provision for doubtful accounts of $15,205, decreases in accounts receivable and prepaid expenses of $269,194 and an increase in accounts payable of $215,976; offset by other income from affiliated entities of $190,221, gain on disposal of property and equipment of $64,323, an increase in inventory of $241,142, an increase in deposits and other assets of $11,679 and a decrease in accrued expenses and other liabilities of $413,428. Cash used in investing activities was $633,328 and consisted of the purchase of property and equipment of $362,110, cash distributions of $446,637 to members of limited liability companies, offset by proceeds from the sale of property and equipment of $164,169 and cash contributions from new members of limited liability companies of $11,250. Cash used for financing activities was $4,106,776 and consisted of payment of dividends on common stock of $2,710,817, payments of $1,554,092 on lease obligations; offset by proceeds of $128,064 from equipment refinancing and $30,069 from the exercise of common stock options.





The Company had cash and cash equivalents of $5,957,808 at September 30, 2009. Cash provided by operating activities for the nine months ended September 30, 2009 was $5,921,788. Cash generated from operations includes net income of $2,398,919, depreciation and amortization of $1,620,057, deferred income taxes of $1,217,122, minority interest in net income of $597,030, stock-based compensation of $170,494, an increase in provision for doubtful accounts of $21,415, and increases in accounts payable and accrued expenses of $396,288 and $262,699, respectively; and inventory and other expense-noncash of $7,812; offset by increases in accounts receivable, prepaid expenses, deposits and other assets, and gain on disposal of property and equipment of $547,292; $89,329; $125,377, and $8,050, respectively. Cash used in investing activities was $1,104,436 and consisted of the purchase of property and equipment of $517,582, cash distributions of $703,404 to members of limited liability companies, offset by contributions from new members to limited liability companies of $112,500 and proceeds from the sale of equipment of $4,050. Cash used for financing activities was $3,445,651 and consisted of payment of dividends on common stock of $1,989,750, and payments of $1,492,241 on lease obligations; offset by proceeds of $34,740 and $1,600 from equipment refinancing and the exercise of common stock options, respectively.




14





We anticipate that our future liquidity requirements will arise from the need to finance our accounts receivable and inventories, and from the need to fund our current debt and lease obligations and capital expenditures. The primary sources of funding for such requirements will be cash generated from operations, borrowings under debt facilities and trade payables, and raising additional capital from the sale of equity or other securities. The Company believes that it can generate sufficient cash flow from these sources to fund its on-going operations for at least the next twelve months.





Item 3. Quantitative and Qualitative Disclosures About Market Risk





Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. Our primary exposure to market risk is interest rate risk associated with our short term money market investments. The Company does not have any financial instruments held for hedging or other speculative purposes and does not invest in derivative financial instruments, interest rate swaps or other investments that alter interest rate exposure.





Item 4. Controls and Procedures




We maintain disclosure controls and procedures, which are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.




Under the supervision and with the participation of our management, including our CEO and CFO, an evaluation was performed on the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on that evaluation, our management, including our CEO and CFO, concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.




There were no changes in the Company’s internal controls over financial reporting during the most recently completed fiscal quarter that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.




15


PART II.  OTHER INFORMATION


.


Item 1.  Legal Proceedings





See Note 5 to Notes to Condensed Consolidated Financial Statements included herein for a description of legal matters.





Item 1A.  Risk Factors





As a  Smaller Reporting Company as defined Rule 12b-2 of the Exchange Act and in item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item 1A.





Item 2.  Changes in Securities





None.





Item 3.  Defaults Upon Senior Securities





None.


Item 4.  Reserved








Item 5.  Other Information





None





Item 6.  Exhibits





Except for the exhibits listed below, other required exhibits have been previously filed with the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended.




Exhibit

Number

Description11.1

Statement re: computation of earnings per share.  See condensed consolidated statement of operations and notes thereto.31(a)

Rule 13a-14(a) Certification – Chief Executive Officer *31(b)

Rule 13a-14(a) Certification – Chief Financial Officer *32(a)

Section 1350 Certification – Chief Executive Officer *32(b)

Section 1350 Certification – Chief Financial Officer *99.1

Press Release, dated November 4, 2010 Re: Quarterly Results*








* Filed herewith.


16


SIGNATURES








Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





EMERGENT GROUP INC.Date: November 5, 2010
By:
/s/ Bruce J. HaberBruce J. Haber,Chairman and Chief Executive OfficerDate: November 5, 2010
By:
/s/ William M. McKayWilliam M. McKay,Chief Financial Officer and Secretary