UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10-Q/A


Amendment No. 1





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


For the quarterly period ended March 31, 2011


or





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


For the transition period from                                                                to





Commission File Number: 000-50502





PREMIER ALLIANCE GROUP, INC


(Exact Name of registrant as Specified in Its Charter)





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 is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer”, “non-accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.




Large accelerated filer [ ]                                                               Accelerated filer [ ]




Non-accelerated filer   [ ]                                                                Smaller reporting company [X]




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


[ ] Yes [X] No




Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 8,042,992 shares of common stock were outstanding as of May 05, 2011.







EXPLANATORY NOTE





This Amendment No. 1 to our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2011 (the “Form 10-Q”), as filed with the Securities and Exchange Commission on May 16, 2011­, is to file a restated Balance Sheet, Statement of Operations, Statement of Cash Flows, footnote disclosures and Management’s Discussion and Analysis or Plan of Operation due to the compounding effect of a single error in the volatility and risk free interest estimates used in the underlying Black-Scholes formula the Company utilizes for its estimate of the valuation of the following non-cash items: i) the derivative liability valuation of detachable warrants at each balance sheet date, and the change thereto, which change directly impacts the statement of operations, and ii) the measurement of compensation expense associated with the issuance of stock options and stock warrants, which also directly impacts the statement of operations, to properly reclassify derivative liability from current to long-term liabilities, and for additional information in Item 4T Controls and Procedures.  This restatement has no effect on our cash flow or liquidity.


This Form 10-Q/A should be read in conjunction with the original Form 10-Q, which continues to speak as of the date of the Form 10-Q. Except as specifically noted above, this Form 10-Q/A does not modify or update disclosures in the original Form 10-Q. Accordingly, this Form 10-Q/A does not reflect events occurring after the filing of the Form 10-Q or modify or update any related or other disclosures.













Table of ContentsPagePART I. FINANCIAL INFORMATIONItem 1. Condensed Financial Statements
1Balance Sheet as of March 31, 2011 (Unaudited) and December 31, 2010 (Audited)
1Statements of Operations for the Three Months Ended March 31, 2011 (Unaudited) and March 31, 2010 (Unaudited)
3Statements of Cash Flows for the Three Months Ended March 31, 2011 (Unaudited) and March 31, 2010 (Unaudited)
4Notes to Condensed Financial Statements (Unaudited)
5Item 2. Management’s Discussion and Analysis or Plan of Operation
10Item 3. Quantitative and Qualitative Disclosures About Market Risk
16Item 4T. Controls and Procedures
16PART II. OTHER INFORMATIONItem 1. Legal Proceedings
17Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
17Item 3. Defaults Upon Senior Securities
17Item 4. Reserved
17Item 5. Other Information
17Item 6. Exhibits
18Signatures
19CertificationsExhibit 31.1 - CEOExhibit 31.2 - CFOExhibit 32.1 - CEOExhibit 32.2 - CFO


table of contents


PART I


FINANCIAL INFORMATION





Item 1. Condensed Financial Statements




PREMIER ALLIANCE GROUP, INC.


BALANCE SHEETS





(Unaudited)March 31,


December 31,2011


2010(Restated)ASSETSCURRENT ASSETS:Cash

$
4,091,653


$
404,588Accounts receivable


2,304,045



2,279,952Marketable securities


34,310



31,748Deferred tax asset – current portion


57,000



39,000Income tax receivable


94,957



0Prepaid expenses and other current assets


35,441



61,420Total current assets


6,617,406



2,816,708PROPERTY AND EQUIPMENT - at cost lessaccumulated depreciation


81,830



83,827OTHER ASSETS:Goodwill


2,894,075



2,894,075Intangible assets - net


530,251



439,709Investment in equity-method investee


177,045



177,762Investment in cost-method investee


100,000



100,000Cash surrender value of officers’ life

insurance


425,776



407,403Deferred tax asset


698,000



0Deposits and other assets


20,025



20,025Total other assets


4,845,172



4,038,974TOTAL ASSETS

$
11,544,408


$
6,939,509





See Notes to Financial Statements
 1
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(Unaudited)March 31,


December 31,2011


2010(restated)LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIES:Note payable

$
0


$
339,000Current portion of long-term debt


572,094



531,653Convertible debenture


36,090



12,735Accounts payable


456,214



450,084Accrued expenses


939,342



779,536Income taxes payable


0



0Total current liabilities


3,815,616



2,184,658NONCURRENT LIABILITIES:Long term debt – net of current portion


19,362



22,177Derivative liability


1,811,876



71,650Deferred tax liability


133,000



119,000Total noncurrent liabilities


1,964,238



212,827COMMITMENTS AND CONTINGENCIES


0



0STOCKHOLDERS' EQUITY:Class A convertible preferred stock, $.001par value, 5,000,000 shares authorized,0 shares issued and outstanding


0



0Class B convertible preferred stock, $.001par value, 2,000,000 shares authorized,1,200,000 shares issued and outstanding


1,200



1,200Class C convertible preferred stock, $.001par value, 2,500,000 shares authorized,2,380,952 shares issued and outstanding


2,381



0Common stock, $.001 par value, 45,000,000shares authorized, 7,967,992 sharesissued and outstanding


7,968



7,968Additional paid-in capital


10,836,685



5,888,399Accumulated deficit


(3,271,804
)


(1,283,893
)Total stockholders’ equity


7,576,430



4,613,674TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

$
11,544,408


$
6,939,509








See Notes to Financial Statements
 2
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PREMIER ALLIANCE GROUP, INC.


STATEMENTS OF OPERATIONS


THREE MONTHS ENDED MARCH 31, 2011 AND 2010


(Unaudited)


Three months


Three monthsended


endedMarch 31, 2011


March 31, 2010(restated)NET REVENUE

$
4,833,770


$
2,875,359OPERATING EXPENSES:Cost of revenues


3,687,116



2,276,733Selling, general and administrative


1,416,252



611,393Depreciation


5,764



1,191Total operating expenses


5,109,132



2,889,317INCOME FROM OPERATIONS


(275,362
)


(13,958
)OTHER (EXPENSE) INCOME:Interest expense, net


(72,307
)


(2,828
)Gain (loss) on marketable securities


2,561



354Officers’ life insurance


18,373



17,080Equity in net (loss) income ofequity-method investee


(717
)


(8,073
)Derivative income


291,051



0Other income


0



2,475Total other (expense) income


238,961



9,008LOSS BEFORE INCOME TAXES


(36,401
)


(4,950
)INCOME TAX BENEFIT


6,510



10,998NET INCOME (LOSS)


(29,891
)


6,048PREFERRED STOCK DIVIDENDS


(44,429
)


0DEEMED DIVIDEND ON PREFERRED STOCK


(1,913,592
)


0NET INCOME (LOSS) AVAILABLE TO COMMONSTOCKHOLDERS

$
(1,987,912
)

$
6,048Net income (loss) per shareBasic

$
( 0.25
)

$
0.00Diluted

$
( 0.25
)

$
0.00Weighted average number of sharesBasic


7,967,992



6,142,422Diluted


7,967,992



6,238,035


See Notes to Financial Statements
 3
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PREMIER ALLIANCE GROUP, INC.


STATEMENTS OF CASH FLOWS


THREE MONTHS ENDED MARCH 31, 2011 AND 2010


(Unaudited)




2011


2010(restated)Cash flows from operating activities:Net income (loss)

$
(29,891
)

$
6,048Adjustments to reconcile net income (loss)to net cash provided by operating activities:Depreciation and amortization


85,979



5,392(Increase) Decrease of cash surrender valueof officers’ life insurance


(18,373
)


(17,080
)Income from change in value of derivatives


(291,051
)


0Deferred income taxes


80,000



(13,000
)Stock issued for services


59,328



0Equity in loss(gain) of equity-method investee


717



8,073Changes in operating assets and liabilities:(Increase) Decrease in accounts receivable


(24,092
)


(308,138
)(Increase) Decrease in marketable securities


(2,562
)


(355
)Decrease (Increase) in prepaid expenses


25,979



16,082Decrease in deposits and other assets


0



0Increase (Decrease) in accounts payable


6,130



39,888Increase (Decrease) in accrued expenses


159,804



123,274(Decrease) Increase in income taxes receivable


(94,957
)


0Increase (Decrease)in income taxes payable


0



(25,184
)Net cash provided by (used in) operating activity


(42,989
)


(165,000
)Cash flows from investing activities:Acquisitions


(60,000
)


0Purchases of property and equipment


(3,767
)


0Net cash used in investing activities


(63,767
)


0Cash flows from financing activities:Additional paid in Capital


0



0Common Stock


0



0Preferred stock


4,215,065



0Dividends


(44,429
)


0(Payments)/Issuance of convertible debentures


(35,000
)


0Net (payments)/ proceeds from long-term debt


(2,815
)


0Payments (proceeds) on line of credit


(339,000
)


174,000Net cash provided by (used in) financing activities


3,793,821



174,000Net increase in cash


3,687,065



9,000Cash - beginning of period


404,588



0Cash - end of period

$
4,091,653


$
9,000


See Notes to Financial Statements
 4
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PREMIER ALLIANCE GROUP, INC.


NOTES TO FINANCIAL STATEMENTS


THREE MONTHS ENDED MARCH 31, 2011 AND 2010


(Unaudited)






Note 1 – Basis of Presentation:






The accompanying unaudited interim financial statements of Premier Alliance Group, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s Annual Report filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein.  The results of operations for interim periods are not necessarily indicative of the results expected for the full year.  Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for fiscal year 2010 as reported in the 10-K have been omitted.




The financial statements as of March 31, 2011 and for the three months then ended have been restated to give effect to a restatement of all financial statement line items impacted by the error in the valuation formula of derivatives, stock options and stock warrants issued. This restatement has no effect on cash flow or liquidity.




Note 2 – Cash and Cash Equivalents:






Cash equivalents consist of all highly liquid investments with an original maturity of three months or less.  As a result of the Company's cash management system, checks issued but not presented to the banks for payment may create negative book cash balances.  Such negative balances are included in trade accounts payable.







Note 3 – Material Transactions:




On January 1, 2011, the Company purchased business from an individual and accounted for the transaction under the acquisition method.In consideration of the purchase, the Company agreed to pay (a) the sum of $90,000 in cash, and (b) 164,384 stock options with an exercise price of $1.00 and maturing in ten years.  The Company paid $60,000 and delivered 82,192 options upon closing.





Additional consideration will be paid on January 15, 2012, subject to certain conditions, as follows: If the purchased Unit of Premier achieves $2,000,000 in gross revenue in 2011 and has a minimum gross margin of 30%, an additional 82,192 stock options and $30,000 of cash will be paid.  The Company also entered into employment agreements with the principal which included $20,000 for execution of a non-competition agreement.  The employment agreements contain cash and stock option bonuses, and stock option incentives based on achieving certain target revenues.  The estimated fair value of the total options to be issued in the deal of $11,959


5
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was calculated using the Black-Scholes option valuation method with the following assumptions: a risk free interest rate of 3.36 percent, an estimated volatility of 28.7 percent and no dividend yield.  The value of these warrants were capitalized as part of the purchase consideration of the business acquired .  The total present value of all consideration expected to be paid as part of this agreement was $112,400 and has been recorded as a customer relationship intangible asset to be amortized over its expected useful life of four years.





Note 4– Pro-Forma Financial Information:






The following unaudited pro-forma data summarizes the results of operations for the three months ended March 31, 2011 and 2010, as if the purchase of Intronic Solutions Group, LLC and Q5Group, Inc. had all been completed January 1, 2010.  The pro-forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place on January 1, 2010.




Three months ended

March 31, 2011


Three months ended

March 31, 2010Net revenues

$
4,833,770


$
4,849,900Operating income


(275,362
)


11,798Net (loss) income per share – basic


(0.25
) *


0.00Net (loss) income per share- diluted


(0.25
) *


0.00




Revenue contributed for the three month period ended March 31, 2010 from the Intronic Solutions Group, LLC acquisition accounted for $1,374,058 with operating income before taxes of $79,284.






Revenue contributed for the three month period ended March 31, 2010 from the Q5Group, Inc. acquisition accounted for $600,483 with an operating loss before taxes of $111,564.






As disclosed in Note 3, the company acquired a business from an individual and there is no discreet financial information to include in the proforma results.






* - accounts for a deemed dividend related to the preferred stock issuance, which substantially increases net loss available to common stockholders.











Note 5 – Series B Convertible Preferred Stock:






On April 14, 2010, the Company designated 2,000,000 shares of its preferred stock as Series B Convertible Preferred Stock, $.001 par value per share (“Series B Preferred Stock”). The Series B Preferred Stock (a) is convertible into one share of  common stock, subject to certain adjustments, (b) pays 7 percent dividends per annum, payable annually in cash or shares of common stock, at the Company’s option, (c) is automatically converted into common stock should the price of the Company’s common stock exceed $2.50, and (d) for a period of one year from the issuance date provides full-ratchet anti-dilution provisions on issuances of securities at a price less than $0.70 per share of common stock, subject to certain exceptions.




6
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As of March 31, 2011 1,200,000 shares of Series B Convertible Preferred stock have been issued. These shares of preferred stock were issued in conjunction with warrants. Dividends paid in the first quarter of 2011 on these shares totaled $44,429.













Note 6 – Series C Convertible Preferred Stock:






On March 1, 2011, the Company designated 2,500,000 shares of its preferred stock as Series C Convertible Preferred Stock, $.001 par value per share (“Series C Preferred Stock”), each share is priced at $2.10 and includes 3 warrants at an exercise price of $0.77 which expire in 5 years. The Series C Preferred Stock (a) is convertible into three shares of  common stock, subject to certain adjustments, (b) pays 7 percent dividends per annum, payable annually in cash or shares of common stock, at the Company’s option, (c) is automatically converted into common stock should the price of the Company’s common stock exceed $2.50 for 30 consecutive trading days.






On March 3, 2011, the Company closed an offering of its securities to accredited investors.  The Company sold 2,380,952 shares of Series C Preferred Stock and 7,142,856 warrants and for gross proceeds of $5,000,000. In connection with the sale of these securities $650,000 was paid and 714,285 warrants were issued, with an exercise price of $0.77, to a registered broker.  In addition a $100,000 advisory fee was paid and 360,000 warrants, with an exercise price of $0.77 were paid to a registered broker.  The issuance of these preferred shares contained an embedded beneficial conversion feature and the intrinsic value of this feature of $1,913,592 was recorded as a deemed dividend to preferred shareholders.






The 8,217,141 warrants issued in connection with the preferred stock contain full-ratchet anti-dilution provisions that require them to be recorded as a derivative instrument. The fair market value of the warrants at the issuance date of $2,031,277 was recorded as a derivative liability, and as a reduction to the additional paid in capital of $1,249,277, with a corresponding deferred tax asset of $782,000.  The derivative liability was adjusted to the fair market value of the warrants at March 31, 2011, of $1,719,026, with the change in value of $312,251 being recorded as derivative income on the statement of operations.






Note 7 –Convertible Debenture:




On May 21, 2010, the Company issued a 9 percent senior secured convertible debenture in the principal amount of $350,000 with an 8 percent original issue discount of $28,000 (the “Debenture”). Interest is payable monthly. Beginning January 2011, monthly principal payments of $17,500 are due. The remaining balance at November 2011 of $175,000 is due in full. The debenture is convertible at a conversion value of $0.70 per share. The Debenture was issued with 500,000 detachable warrants with an exercise price of $0.77 and expires in five years and contains full-ratchet and other standard anti-dilution protections. The Debenture is subordinate to the Company’s line of credit, and is secured by all the Company’s assets. In connection with the Debenture issuance, the Company issued the debenture holder 40,000 shares of common stock for $40 and paid a commitment fee of $20,000.  Legal fees associated with the transaction totaled $18,000.


7
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The Company has accounted for these transactions in accordance with FASB ASC Topic 470-20 “Debt with Conversion and Other Options”. Due to the full-ratchet anti-dilution protection in the warrants, they are considered to be derivative instruments.  As such, the fair market value of the warrants of $86,950 was recorded as a debt discount and as a derivative liability.  Additional debt discounts included the original issue discount of $28,000, a commitment fee of $20,000, stock issue discount of $31,960, and a beneficial conversion feature of $183,090.  The intrinsic value of the beneficial conversion feature was calculated as the difference between the fair value of the Debenture if converted on the commitment date and the effective conversion price as stated in the debenture. The discounts totaling $350,000 are being amortized under the interest method over the term of the debenture and being recorded as interest expense.  During the period ended March 31, 2011, $58,355 of interest expense related to this convertible debenture has been recorded and the principal amount of the loan has been reduced through payments to $315,000.





The derivative liability was adjusted at March 31, 2011 to the fair market value of the warrants of $92,850, with the resulting loss of $21,200 being recorded on the statement of operations for the three months ended March 31, 2011.








Note 8 – Stock Options and Warrants:




As discussed in Note 3, on January 1, 2011, the Board granted an aggregate of 82,192 incentive stock options under the 2008 Stock Incentive Plan to one employee.  The options have no vesting schedule and are exercisable at $1.00 per share and the options expire in 2021. The options were granted as purchase of customer accounts related to the employment contract of the individual hired.  The estimated fair value of the options of $11,959 was calculated using the Black-Scholes valuation method with the following assumptions: a risk free interest rate of 3.36 percent, an estimated volatility of 28.7 percent and no dividend yield.  The value of these warrants were capitalized as part of the purchase consideration of the business acquired.





The following represents the activity under the stock incentive plan as of March 31, 2011 and changes during the year:





Options
Shares
Weighted AverageExercise PriceOutstanding at January 1, 2009
889,291
$1.40Expired
289,291
$2.75Outstanding at January 1, 2010
600,000
$0.75Issued
925,000
$1.00Outstanding at December 31, 2010
1,525,000
$0.90Issued
82,192
$1.00Outstanding at March 31, 2011
1,607,192
$0.91





8
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On March 3, 2011 the Board granted an aggregate of 240,000 warrants to a consultant for strategic consulting services.  The warrants are exercisable at $0.77 and expire on March 3, 2016.  The Company accounted for the issuance of the options in accordance with FASB ASC 718 “Compensation-Stock Compensation” that requires the recognition of compensation expense in the financial statements based on the grant date fair value of the options.  The estimated fair value of the warrants of $59,328 was calculated using the Black-Scholes valuation method with the following assumptions: a risk free interest rate of 2.3 percent, an estimated volatility of 28.4 percent and no dividend yield.




As discussed in Note 6, a total of 7,142,856 warrants were issued in the quarter ended March 31, 2011 directly associated with the Class C convertible preferred stock. Additionally, 1,074,285 warrants were issued as commission on the sale of these securities.





The following represents the activity of warrants as of March 31, 2011 and changes during the year:


Options
Shares
Weighted AverageExercise PriceOutstanding at January 1, 2010
0
0Issued
1,778,940
$0.78Outstanding at December 31, 2010
1,778,940
$0.78Issued
8,457,141
$0.77Outstanding at March 31, 2011
10,236,081
$0.77

















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Item 2.Management’s Discussion and Analysis or Plan of Operation




Certain information contained in this Form 10-Q includes forward-looking statements that reflect the Company’s current views with respect to future events and financial performance. Certain factors, such as unanticipated technological difficulties, changes in domestic and foreign economic, market and regulatory conditions, the inherent uncertainty of financial estimates and projections, instabilities arising from terrorist actions and responses thereto, and other considerations described in this report could cause actual results to differ materially from those in the forward-looking statements. We assume no obligation to update the matters discussed in this report.




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




Operations




Our business consists of providing business consulting services to our customers. Our services began a transformation in 2005 from a pure technology focus to a business consulting focus which can encompass technology impact and effort.  Our consulting team provides deep business knowledge which helps our customers drive key initiatives forward.  Much of our expertise is focused on core areas of business processes used throughout the corporate world including: project management, business analysis, business consulting, and strategic consulting.  Typical initiatives in which we provide expertise include compliance and regulatory, merger and acquisition, and business process reengineering efforts.  With technology being such an integral part of business, many of our consultants possess solid knowledge and experience that encompasses technology and are typically well versed in the IT business-solution software development life cycle.





A typical customer is an organization with complex business processes, large amounts of data to manage, and changing business requirements.  We promote our services through our two delivery channels, our Business Solutions and our Business Consulting divisions.  These divisions operate as one from an accounting and overall management perspective; however they are differentiated from a marketing and customer presentation perspective only.  Management reviews and oversees the divisions as one combined entity, utilizes resources across both areas, and makes operational assessments and plans together.  In light of this, Financial Accounting Standards Board (FASB) Account Standards Codification 280 “Segment Reporting” does not require separate financial reporting and the two channels are consolidated in all financial report presentations.




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Business Solutions Division. This division provides Knowledge Based Expertise within focused areas of concentration. Our core areas of expertise in this group revolve around efforts in 1) Governance, Risk Management, and Compliance (GRC), 2) Business Performance & Technology (BP&T) and 3) Finance & Accounting (F&A).  Types of engagements within this realm include: 1) GRC efforts with enterprise risk management, control and governance frameworks, internal audit services, regulatory and compliance, 2) BP&T efforts with systems planning, organizational effectiveness, business process re-engineering, workflow analysis, and 3) F&A efforts with financial reporting and financial advisory services. Engagements are typically structured in a Statement of Work and can be billed on fixed fee / delivery based arrangements or on a time-and-materials basis for all work performed. We are focused on providing Knowledge Based Expertise (KBE) and because of the expertise involved and the complexity of a typical initiative, customers seeking such services from us typically engage us on strategic or high priority initiatives.





Business Consulting Division. This division provides consulting expertise across a broad range of knowledge, skills and expertise including project management, systems implementation and architecture, information management, business intelligence, business expertise and analysis. We recruit, retain, manage, and provide to our clients skilled business, technical, financial and accounting expertise to help lead and train our customers or supplement their knowledge requirements. In these engagements we typically bill our customers on a time-and-materials basis for all work performed. Because of the expertise involved and the complexity of a typical initiative, many customers seeking such services from us commit to long-term engagements that are usually a minimum of 9 months in which our consultants work on site at customer facilities under the daily direction of the customer management.




Summary




Our focus is to provide subject matter expertise through our consulting team in a variety of ways that continue to help our clients navigate the changing business climate they must deal with.   Our approach is built 100% around our people - it is about knowledge, expertise and execution.   We have a focus on building our knowledge practices with talent in core areas we feel offer opportunity: compliance and regulatory, mergers and acquisitions, business process reengineering/analysis, and finance & accounting.  Our recruiting and sales organization work with customers closely - a consultative approach - to understand the business direction, initiatives or issues they are dealing with.  It is our focus to then provide subject matter experts that can bring the expertise and knowledge to the client to allow for successful efforts.  If, as we expect, we continue to grow and attract specialized expertise in our focused areas of discipline, we will continue to be recognized as a value add partner for existing customers, add new customers, and will identify new opportunities to provide additional value add services to our customers.





Our typical customers cross many spectrums, including Fortune 500 companies (including AIG, Lincoln Financial Group, Duke Power, Bank of America, and Wells Fargo), biotech early stage companies, established software and technology based firms.  They all share a trait where they continually seek expertise and knowledge in areas such as GRC, project management, business process and improvement, business consulting, finance and accounting.


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Results of Operations




Net revenue for the three months ended March 31, 2011 was $4,833,000, an increase of 68.10%, compared to $2,875,000 for the same period in 2010.  An increase in revenues for this period, attributed to the ISG and Q5 acquisitions accounts for $1,754,983 of the overall revenue.




Cost of revenues, defined as all costs for billable staff, were $3,687,000 or 76.28% of revenue for the three months ended Mach 31, 2011, as compared to $2,277,000 or 79.1% of revenue for the same period in 2010. The increase in cost of revenues as a percentage of revenue for this period is primarily a result of 1) client projects being adjusted or deferred from 1st quarter to 2nd quarter in our Charlotte and Kansas City offices and 2) an under utilization of resources in our San Diego office related to a drop in business.




General and administrative (G&A) expenses were $1,416,000 or 29.2% of revenue for the three months ended in Mach 31, 2011, as compared to $612,000 or 21.3% for the same period in 2010.  Most of the key G&A expense items including rent, professional services (legal, accounting, consulting), telecommunication, business insurance, benefits, and travel were managed effectively and increases were primarily offset by decreases within these categories.  The overall increase expense in G&A was mainly attributed to an increase in overhead from the ISG and Q5 acquisitions.




Operating loss for the three months ended in March 31, 2011, was  $275,362 as compared to a loss of $13,958 for the same period in 2010.  The operating loss for the period included one time expenses related to funding and M&A activity that totaled approximately $232,000.




Other income and expense consisted of net income of $238,961 for the three months ended in March 31, 2011, compared to net income of $9,000 for the same period in 2010.  The net income is primarily attributable to four items: 1) derivative income related to fair value of warrants issued of $291,051 , 2) debt expense recorded for convertible debenture, related to funding, of $58,355, 3) an increase in value of life insurance policies based on market fluctuation of $18,373, and 4) interest expense of $15,402.





The effective income tax benefit for the first three months of 2011 is 18% compared to an effective income tax credit of 222% for the same period in 2010. The change in rate is primarily a result of permanent differences of officer’s life insurance.




Three months ended in March 31, 2011 resulted in a net loss of $29,891  compared with net income of $6,048 for the same period in 2010.  The earnings per share is impacted by a deemed dividend that is recorded as a non cash charge item, however this creates a loss per basic and diluted share of ($0.25 ) for the period ending March 31, 2011 compared to $.00 per basic and diluted share for the same period in 2010.




Dividend




No Dividend for common stock has been declared as of March 31, 2011, and the Company does not anticipate declaring dividends in the future.




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Critical Accounting Policies




Revenue Recognition




The Company follows the guidance of the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104 for revenue recognition.  In general, the Company records revenue when persuasive evidence of any agreement exists, services have been rendered, and collectability is reasonably assured, therefore, revenue is recognized when the Company invoices customers for completed services at contracted rates and terms.




Income Taxes




We make certain estimates and judgments in determining income tax expense for financial statement purposes. These estimates and judgments occur in calculating tax credits, tax benefits, and deductions that arise from differences in the timing of recognition of revenue and expense for tax and financial-statement purposes.




We assess the likelihood that we will be able to recover deferred tax assets. If recovery is unlikely, we must increase the provision for taxes by recording a valuation allowance against the estimated deferred tax assets that will not ultimately be recoverable. As of March 31, 2011, we believed that all of the deferred tax assets recorded on our balance sheet would ultimately be recovered. However, should there be a change in our ability to recover our deferred tax assets, our tax provision would increase in the period in which we determine that the recovery is unlikely.




Financial Condition and Liquidity




As of March 31, 2011, we had cash and cash equivalents of $4,091,653 representing an increase of $3,687,065 from December 31, 2010 . Net working capital at March 31, 2011, was $4,613,666 , as compared to $703,700 on December 31, 2010. Current assets at March 31, 2011, were $6,617,406.    We had long-term debt of $1,964,238, comprised primarily of a derivative liability  of $1,811,876 representing the current fair value of detachable stock warrants outstanding.   Shareholders’ equity as of March 31, 2011, was $7,576,430 which represented 65.6% of total assets.




During the three months ended March 31, 2011, the net cash used by operating activities was $43,000 and was primarily a result of increases in income taxes receivable of $95,000, accounts receivable of $24,000, cash surrender value of officers’ life insurance of $18,000, and income from change in value of derivatives of $291,000 offset by increases in accounts payable and accrued expenses of $166,000, issuance of stock warrants for services of $59,000, tax deferred assets of $80,000, a decrease in prepaid expenses of $26,000, with depreciation and amortization expense of $86,000.





Cash flows from investing activities used $64,000 and were primarily a result of upfront cash of $60,000 for the purchase of business from an individual and purchase of fixed assets for $4,000.




Financing activities provided $3,794,000 of cash for the three months ended March 31, 2011. Of that increase, $4,200,000 was the net result of shares of Series C Preferred Stock sold. This was offset by the repayment of our revolving line of credit of $339,000, payment of $35,000 toward principal of the convertible debentures, and payment of $3,000 toward capital lease obligations.




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Outlook




Major trends that we must deal with involve the following:  1) consolidation of customer’s primary vendor lists for all types of professional services and 2) customers are differentiating between the service firms that provide commodity based services and those that provide value added services. Premier must ensure our services are focused and delivered as knowledge based expertise, hence recognized as value add capabilities versus a commodity service where price is the only differentiator.




Premier Alliance Group is addressing these trends from 2 perspectives.  First we have laid the foundation and made a shift of our core services from a pure technology focus to a complete business consulting focus.  This shift is focused on specific areas where we believe Knowledge Based Expertise is, and will be, a key driver for customers.  By building our capabilities, expertise and knowledge in these focused areas customers will engage us on strategic and key initiatives. Secondly we are working to diversify and enhance our business model geographically as well as in our service offerings.  This will allow us to expand our internal skills and capabilities as well as reach other markets more effectively.




By providing key business consulting skills and establishing internal “subject matter groups of knowledge” we will be better positioned to advise and consult with customers on a strategic basis.  Our growth focus encompasses organic growth as well as merger and acquisition strategies.  We have retooled our sales and recruiting efforts to increase our focus on key business consulting services. Key initiatives have been to attract specific talent to our consulting team and to target efforts that require (1) more specialized process skills: project management, business analysis, and process reengineering and (2) specialized business skills such as: regulatory and compliance, merger knowledge, and financial expertise.  We see these areas as growth areas in the future. These types of customer based initiatives will allow us to separate ourselves from the “general” vendor perspective and allow us to be a strategic partner, increasing opportunity and long term viability.




Our top priority is to broaden the range of services and capabilities we offer by building “areas of business expertise” and at the same time build a more geographically diverse client base. We believe that achieving this goal will continue to require a combination of merger activity and organic growth. This will in part depend on continued improvement in the U.S. business market.




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Off-Balance-Sheet Arrangements




As of March 31, 2011, and during the prior three months then ended, there were no other transactions, agreements or other contractual arrangements to which an unconsolidated entity was a party under which we (1) had any direct or contingent obligation under a guarantee contract, derivative instrument, or variable interest in the unconsolidated entity, or (2) had a retained or contingent interest in assets transferred to the unconsolidated entity.




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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 March 31, 2011, the Company had an outstanding balance of $0 under its revolving credit agreement. Interest on borrowings under the facilities are based on the daily LIBOR rate plus a 2.75% margin, and no less than 4%. Daily average borrowings for the 2011 first quarter were $526,113.





Market fluctuation impact on assets





For the three months ending March 31, 2011, the valuation of the Variable Life Insurance policies had an investment gain of $18,373.





Equity Market Risks




The trading price of our common stock has been and is likely to continue to be volatile and could be subject to wide fluctuations. Such fluctuations could impact our decision or ability to utilize the equity markets as a potential source of our funding needs in the future.





Item 4T. Controls and Procedures




As required by Rule 13a-15(b) under the Securities Exchange Act of 1934 (the" Exchange Act"), the Company's management, with the participation of the Company's Chief Executive Officer ("CEO") and Principal Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report in reaching a reasonable level of assurance that the information required to be disclosed by the Company in the reports that it files with the Securities and Exchange Commission (“SEC”) is recorded, processed, summarized and reported within the time period specified in the SEC's rules and forms.   Management has determined that errors existed in key inputs to the Black Scholes model, the key valuation tool for our derivatives and stock warrants and stock options issued, thus requiring restatement of previously issued financial statements.  In light of the weakness in internal controls over financial reporting giving rise to this error, the CEO and Principal Financial Officer concluded that the Company's disclosure controls and procedures were not effective as of the end of the period covered by this report.




As required by Exchange Act Rule 13a-15(d), the Company's management, including the Chief Executive Officer and Principal Financial Officer, conducted an evaluation of the Company's internal control over financial reporting to determine whether any changes occurred during the fiscal quarter ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. Based on that evaluation, there has been no change in our internal control over financial reporting during the quarter ended March 31, 2011.


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PART II


OTHER INFORMATION





Item 1. Legal Proceedings




None




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




None




Item 3. Defaults Upon Senior Securities




None.




Item 4. [Removed and Reserved.]




Item 5. Other Information




None











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Item 6. Exhibits




31.1
Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Sec. 1350).


31.2
Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Sec. 1350).


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




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





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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: May 15, 2012
By:
/s/ Mark S. ElliottMark S. ElliottPresident (Chief Executive Officer)


DATE: May 15, 2012
By:
/s/ Larry W. BrumfieldLarry W. BrumfieldChief Financial Officer andPrincipal Financial Officer




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