TMCNet:  MIDAS MEDICI GROUP HOLDINGS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

[August 16, 2012]

MIDAS MEDICI GROUP HOLDINGS, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

(Edgar Glimpses Via Acquire Media NewsEdge) (Dollar amounts in thousands) Business Overview We are a global provider of comprehensive information technology solutions to medium sized and large commercial enterprises and government institutions in the United States and Brazil. Our solutions comprise data center and cloud computing enabling hardware, software and services. Our services include virtualization, cloud and managed services, storage and archiving solutions, smart grid services, business process outsourcing, and data center services. As part of these services, we offer customized solutions for business continuity, back-up and recovery, capacity on-demand, regulatory compliance and data center best practice methodologies as well as infrastructure as a service ("IaaS") and software as a service ("SaaS"). Our customers utilize our solutions to optimize their current and planned investments in IT infrastructure and data centers. We believe the breadth of our service offering and our consultative approach to working with clients distinguishes us from other providers.


We have developed an infrastructure that enables us to deliver our IT solutions and services agnostic as to technology platform and location through a flexible, customer-focused delivery model which spans three data center environments: customer-owned, co-location, and the cloud. By optimizing our customer's use of secure, energy efficient and reliable data centers combined with a comprehensive suite of related IT infrastructure services, we are able to offer our customers highly customized solutions to address their critical needs of data center availability, data management, data security, business continuity disaster recovery and data center consolidation, as well as a variety of other related managed services.

We serve clients across multiple industry verticals including financial services, government, manufacturing, pharmaceutical, telecommunications, technology, education, utilities, healthcare and consumer goods. Some of our larger customers in the US include The International Monetary Fund, Freepoint Commodities, State of North Carolina, and Avaya, and some of our larger customers in Brazil include Companhia De Tecnologia da Inf. do Estado de Minas Gerais -Prodemge, Banco do Brasil S.A., CEMIG Distribui o S.A., Banco Central Do Brasil - BACEN and MG Secretaria de Estado de Fazenda. Utilipoint, our utilities focused offering, currently provides energy industry consulting services and proprietary research. Our highly experienced consultants leverage direct industry experience to advise utilities along the range of the utility industry value chain and we intend to take advantage of those relationships to offer utility vertical focused solutions around our core data center and managed services offerings.

As of June 30, 2012, Midas Medici has 349 employees located in the United States, Brazil and Europe. Midas Medici is headquartered in New York City with regional offices in Cary, NC, Albuquerque, NM, Pittsburgh, PA and maintains international operations through its offices in Brno, Czech Republic and Belo Horizonte, Vitoria, Salvador, Brasilia, Curitiba, Florianopolis, Porto Alegre, Rio de Janeiro, and Sao Paulo, Brazil.

A key element of our growth strategy is to pursue acquisitions. We plan to continue to acquire businesses if and when opportunities arise. We expect future acquisitions to also be accounted for as purchases under the acquisition method of accounting and therefore generate goodwill and other intangible assets. We expect to incur additional debt for future acquisitions and, in some cases, to use our stock as acquisition consideration in addition to, or in lieu of, cash.

Any issuance of stock may have a dilutive effect on our stock outstanding.

On August 2, 2011, the Company completed the acquisition of a 80% interest in Cimcorp, pursuant to the terms of the Stock Purchase Agreement ("SPA"), as amended, among the Company, Cairene Investments, Ltd. (the "Seller"), and certain shareholders (the "Shareholders"), Cimcorp, Cimcorp Comércio Internacional e Informática S.A., a Brazilian Sociedade An nima, Cimcorp Comércio e Serviços Tecnológicos e Informática Ltda., a Brazilian limited liability company, and Cimcorp USA, LLC, a Florida limited liability company.

At the closing, the Company provided consideration of Seventeen Million Brazilian Reais ($10,987 USD), Eight Million Brazilian Reais ($5,150 USD) of which was paid in cash, Nine Million Brazilian Reais ($2,244 USD) in shares of common stock of the Company equal to 1,297,022 shares of common stock of the Company and a purchase price contingency of $3,593.

24 -------------------------------------------------------------------------------- Table of Contents (Dollar amounts in thousands) Pursuant to the terms of the stock purchase agreement, the Company was to purchase on January 24, 2012 (but no later than January 27, 2012) an additional 20% of the shares of Cimcorp ("Tranche A") for a purchase price of Nine Million Brazilian Reais ($5,817 USD), which purchase price is subject to certain adjustments to the Brazil CPI index provided, however, such adjustments are capped at 7%. As a result of this provision, at closing date of August 2, 2011, the Company recorded a liability of $4,497 (net present value at a 15% discount rate) for the obligation to purchase the Tranche A shares of Cimcorp and effectively held an 80% interest in Cimcorp as of the acquisition date. As of June 30, 2012, the Company recorded a liability of $3,535 for the obligation to purchase the Tranche A shares. In February 2012, the Company paid Two Million Brazilian Reais ($1,146 USD) towards the purchase of the Tranche A shares, with the remaining amounts due at the closing of the sale of the Tranche A shares.

The Seller and minority shareholders' of Cimcorp have the right to elect to have the Company purchase the remaining 20% of the shares of Cimcorp (the "Tranche B") 30 days after the 24 month anniversary of the initial closing. The SPA provides that in the event the Company undergoes a Change in Control, as defined, or transfers more than 50% of the shares of Cayman Co. the purchase of Tranches A and B shall be accelerated. In March 2012, the Company entered into an amendment to the stock purchase agreement which amended the purchase price of the Tranche A shares to Seven Million Brazilian Reais from Nine Million Reais which is the Eleven Million Brazilian Reais purchase price of the Tranche A shares less Two Million Brazilian Reais of total net debt, as defined in the stock purchase agreement, less Two Million Brazilian Reais which has been previously paid by the Company. In addition, the amendment extended the closing date for the Tranche A shares from January 2012 to July 2012. The amendment also provides for the payment of any interest in arrears on the Tranche A shares on a monthly basis on the last day of the month in which the interest has accrued.

The amendment also provides that the purchase price of the Tranche A shares shall be adjusted solely to reflect the payment of the interest of 3% in arrears as a penalty calculated over the outstanding value of the Tranche A shares adjusted price to be paid until the last day of the months of February, March, April, May and June 2012.

In July 2012, we entered into a third amendment to the SPA which amends the Sales Period as defined in the SPA to be the period commencing December 3, 2012 through January 31, 2013, the date all obligations of the Company are fulfilled with respect to the shares issued under the SPA as part of the purchase price.

The third amendment also provides that the payment of the first installment of the Tranche A Shares Adjusted Price shall be paid by the Company on October 1, 2012 and the second installment of the Tranche A Shares Adjusted Price shall be paid by the Company on December 1, 2012, subject to adjustment based upon the IPCA index as provided in the SPA, as amended. The third amendment also provides for the payment of the unpaid interest accrued from February 2012 through June 2012 upon execution of the third Amendment. The Company has paid $400. In addition, the Company undertook to use its best efforts to release the shareholders from any obligations relating to the Total Debt as set forth on Schedule 1.1(d) of the SPA.

On June 8, 2011, Midas Medici completed its acquisition of the assets of Energy Hedge Fund Center, LLC, a web portal and community for clients interested in hedge funds in the energy and commodity sectors, in a stock, cash and forgiveness of debt transaction for a total purchase price of $30. The Company issued 1,430 shares of its common stock in relation to this transaction.

On May 3, 2011, the Company completed the acquisition of WeatherWise, an energy-efficiency analytics company, pursuant to the terms of an Agreement and Plan with Weather Wise, and MMGH WW Acquisition Sub, Inc., our wholly owned subsidiary, dated as of March 29, 2011 for a total purchase price of $268. At the closing of the Merger Agreement, MMGH WW Acquisition Sub, Inc. merged with and into WeatherWise and WeatherWise became our wholly-owned subsidiary. As part of the merger, WeatherWise was rebranded "UtiliPoint Analytics," allowing Midas to further leverage its Consonus and UtiliPoint brands to verticalize Midas into the utility sector.

On February 28, 2011, we completed the acquisition of Consonus pursuant to the terms of the Agreement and Plan of Merger with Consonus, and MMGH Acquisition Corp., our wholly-owned subsidiary dated as of April 30, 2010.

Pursuant to the Merger Agreement effective February 28, 2011, MMGH Acquisition Corp. merged with and into Consonus and Consonus became our wholly owned subsidiary. With the acquisition of Consonus on February 28, 2011, the Merger was accounted for as a reverse merger and recapitalization which resulted in Midas Medici being the "legal acquirer" and Consonus the "accounting acquirer" for a total purchase price of $5,236.

Consonus provides innovative data center solutions to medium sized and larger enterprises focused on virtualization, energy efficiency and data center optimization. Its highly secure, energy efficient and reliable data centers combined with its ability to offer a comprehensive suite of related IT infrastructure services gives it an ability to offer its customers customized solutions to address their critical needs of data center availability, data manageability, disaster recovery and data center consolidation, as well as a variety of other related managed services.

Consonus' data center related services and solutions primarily enable business continuity, back-up and recovery, capacity-on-demand, regulatory compliance (such as email archiving), virtualization, cloud computing, data center best practice methodologies and software as a service. Additionally, it provides managed hosting, maintenance and support for all of its solutions, as well as related consulting and advisory services.

25 -------------------------------------------------------------------------------- Table of Contents (Dollar amounts in thousands) Revenue Our revenue is predominantly generated through data center services and IT infrastructure solutions and services, consulting and other revenue. Data center services are comprised primarily of hosting, bandwidth, managed infrastructure, managed services, software and maintenance support services. IT infrastructure solutions and services include primarily the sale of hardware and software, along with consulting, integration and training services.

Our revenue mix varies from year to year due to numerous factors, including our business strategies and the procurement activities of our clients. Unless the content requires otherwise, we use the term "contracts" to refer to contracts and any task orders or delivery orders issued under a contract.

Cost of revenues Our cost of revenues consist of personnel costs, cost of sales of hardware and software, allocated lease and building costs, electricity costs and bandwidth.

Payroll costs are expected to increase as employees are given increased compensation based on merit. We also expect our other costs (such as cost of revenue of hardware and software) to increase as we increase our revenues. Cost of revenues also consist of costs incurred to provide services to clients and reimbursable project expenses associated with fringe benefits, all relating to specific client engagements. Cost of revenues also include the costs of subcontractors and outside consultants, third-party materials and any other related cost of revenues, such as travel expenses.

Our gross profit percentage is affected by a variety of factors, including competition, the mix and average selling prices of our products and services, our pricing policies, the cost of hardware products, the cost of labor and materials. Our gross profit percentage could be adversely affected by price declines or pricing discounts if we are unable to reduce costs on existing products and fail to introduce new products with higher margins. Our gross profit percentage for any particular quarter could be adversely affected if we do not complete a sufficient level of sales of higher-margin products by the end of the quarter. Many of our customers do not finalize purchasing decisions until the final weeks or days of a quarter, so a delay in even one large order of a high-margin product could significantly reduce our total gross profit percentage for that quarter.

Currently, IT infrastructure solutions typically have a lower gross profit as a percentage of revenue than our services due to the cost of various hardware products.

Selling, general and administrative Our selling expenses consist primarily of compensation and commissions for our sales and marketing personnel. They also include advertising expenses, trade shows, public relations and other promotional materials. General and administrative expenses include personnel compensation and related personnel costs, professional services not allocated to other areas, insurance fees, franchise and property taxes, and other expenses not allocated to cost of revenue. We also anticipate that we will incur additional expenses related to professional services and insurance fees necessary to meet the requirement of being a public company. Selling, general and administrative ("SG&A") expenses include our management, facilities and infrastructure costs, as well as salaries and associated fringe benefits, not directly related to client engagements.

Among the functions covered by these expenses are marketing, business and corporate development, bids and proposals, facilities, information technology and systems, contracts administration, accounting, treasury, human resources, legal, corporate governance and executive and senior management.

Results of Operations Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011 (Dollars in Thousands) The following discussion highlights results from our comparison of consolidated statements of operations for the periods indicated.

Revenues. Revenues for the three months ended June 30, 2012 totaled $28,502 compared to $15,188 for the three months ended June 30, 2011. The increase in revenues is attributable to increased sale of infrastructure solutions in our US operations and the Company's acquisition of CIMCORP, which occurred in the third quarter of 2011. We had $12,375 in incremental revenue from our Brazil acquisition during the three months ended June 30, 2012, which contributed about 43.4% to our total consolidated revenues and 93.0% to our consolidated revenue growth for the three months ended June 30, 2012. While our US revenues exceeded expectations for the quarter, our Brazil revenues were lower than anticipated for the quarter in part because of a large software deal that slipped into the third quarter.

26 -------------------------------------------------------------------------------- Table of Contents (Dollar amounts in thousands) Cost of revenues. Cost of revenues for the three months ended June 30, 2012 were $22,075, or 77.5% of revenue, compared to $10,787 or 71.0% of revenue for the three months ended June 30, 2011. Cost of revenues is our largest category of operating expenses, representing more than 64.5% of our total operating expenses for the three months ended June 30, 2012. The increase in cost of revenues was primarily due to the increase in revenues from the comparable period resulting from our Brazil acquisition. We had $10,067 in incremental costs of revenues from acquisitions outside the United States for the three months ended June 30, 2012, which contributed about 45.6% to our total consolidated cost of revenues.

The remainder of the incremental expenses were driven by our US operations due to an increase in volume compared to the same period in 2011 and an overall increase in cost of sales in our US operations in infrastructure services and solutions. The increase in the cost of sales margin from 71.02% at June 30, 2011 to 77.45% at June 30, 2012 was due to the lower margins realized in our Brazil and US operations in the infrastructure services and solutions. Our second quarter costs of revenues were higher relative to our first quarter primarily because of a price adjustment in the first three months ended March 31, 2012, which had minimal cost of sales and revenue recognition on a lease in the first quarter.

Selling, general and administrative expenses. Selling, general and administrative expenses for the three months ended June 30, 2012 were $11,008 compared to $4,971 for the three months ended June 30, 2011. The increase in selling, general and administrative expenses from the comparable period was primarily due to our acquisition of our Brazil operations. We had $5,274 in incremental SG&A attributable to our Brazil operations for the three months ended June 30, 2012, which contributed about 47.9% to our total consolidated selling, general and administrative expenses and 87.3% of the total incremental selling, general and administrative expenses in the three months ended June 30, 2012 compared to the prior comparable period. The remainder of the incremental expenses were driven by our US operations due to an increase in SG&A in our US operations compared to the same period in 2011. A significant portion of our selling, general and administrative expenses consist of personnel costs such as salaries, commissions, bonuses, a non-cash stock based compensation, deferred compensation expense or income and temporary personnel costs. Our SG&A includes non-cash stock based compensation of $270 for board of directors compensation and consulting services. Selling, general and administrative expenses also include costs of our facilities, utility expense, professional fees, sales and marketing expenses, auditing and consulting and taxes and fines accruals from contingent tax and labor provision, which contributed to an increase in our SG&A compared to the same period in 2011.

Operating loss. For the three months ended June 30, 2012, operating losses totaled $5,705 compared to an operating loss of $1,400 for the three months ended June 30, 2011. The operating losses increased by $4,305 as a result of an increase in our operating costs of $17,619 (or 106.2%) offset by an increase in revenues of $13,314 (or 87.7%).

Other income (expense). Other income (expense) for the three months ended June 30, 2012 consisted of other income of $139, a foreign currency transaction loss of $164, gain on sale of fixed assets of $152 and a loss on the change in fair value of the purchase price contingency of $337. As of June 30, 2012 the carrying amount of the purchase price contingency was $4,734.

Interest and tax expense. For the three months ended June 30, 2012, interest expense was $2,269 compared to $125 for the three months ended June 30, 2011.

The increase in interest expense is a result of assumed and new debt and leases from our Brazil operations, our revolving credit facility with Porter entered into in July 2011 and our junior subordinated notes incurred to facilitate our acquisition of our Brazil operations. Tax provisions resulted in a tax expense of $37 and a tax benefit of $417 for the three months ended June 30, 2012, and 2011, respectively. The tax expense of $37 is due to pre-tax income from a subsidiary of our Brazil operations.

Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011 (Dollars in Thousands) The following discussion highlights results from our comparison of consolidated statements of operations for the periods indicated.

Revenues. Revenues for the six months ended June 30, 2012 totaled $64,049 compared to $28,025 for the six months ended June 30, 2011. The increase in revenues is attributable to increased sale of infrastructure solutions and services in our US operations and the Company's acquisition of CIMCORP, which occurred in the third quarter of 2011. We had $32,512 in incremental revenue from our Brazil acquisition during the six-month ended June 30, 2012, which contributed about 50.8% to our total consolidated revenues and 90.3% to our consolidated revenue growth. While our US revenues exceeded expectations for the period, our Brazil revenues were lower than anticipated for the six months ended June 30, 2012 due to the performance in the first three months ended March 31, 2012 and slippage of a large software project to the third quarter.

27 -------------------------------------------------------------------------------- Table of Contents (Dollar amounts in thousands) Cost of revenues. Cost of revenues for the six months ended June 30, 2012 were $47,180, or 73.7% of revenue, compared to $20,315 or 72.5% of revenue for the six months ended June 30, 2011. Cost of revenues is our largest category of operating expenses, representing more than 65.8% of our total operating expenses for the six months ended June 30, 2012. The increase in cost of revenues was primarily due to the increase in revenues from the comparable period resulting from our Brazil acquisition. We had $23,607 million in incremental costs of revenues from acquisitions outside the United States for the six- month period ended June 30, 2012, which contributed about 87.8% to our total consolidated cost of revenues. The remainder of the incremental expenses were driven by our US operations due to an increase in volume compared to the same period in 2011 and an overall increase in cost of sales in our US operations in infrastructure services and solutions, The increase in the cost of sales margin from 72.5% at June 30, 2011 to 73.7% at June 30, 2012 was due to the lower margins realized in our Brazil and US operations in the infrastructure services and solutions.

Selling, general and administrative expenses. Selling, general and administrative expenses for the six months ended June 30, 2012 were $22,096 compared to $9,284 for the six-month ended June 30, 2011. The increase in selling, general and administrative expenses from the comparable period was primarily due to our acquisition of our Brazil operations. We had $11,093 in incremental SG&A attributable to our Brazil operations for the six months ended June 2012, which contributed about 50.2% to our total consolidated selling, general and administrative expenses and 86.6% of the total incremental selling, general and administrative expenses in six months ended June 30, 2012 compared to the prior comparable period. The remainder of the incremental expenses were driven by our US operations due to an increase in SG&A in our US operations compared to the same period in 2011. A significant portion of our selling, general and administrative expenses consist of personnel costs such as salaries, commissions, bonuses, a non-cash stock based compensation, deferred compensation expense or income and temporary personnel costs. Our SG&A includes non-cash stock based compensation of $431 for board of directors compensation and consulting services. Selling, general and administrative expenses also include costs of our facilities, utility expense, professional fees, sales and marketing expenses, auditing and consulting and taxes and fines accruals from contingent tax and labor provision, which contributed to an increase in our SG&A compared to the same period in 2011.

Operating loss. For the six months ended June 30, 2012, operating loss totaled $7,609 compared to an operating loss of $3,129 for the six months ended June 30, 2011. The operating loss increased by $4,480 (or 143.2%) as a result of an increase in our operating costs of $40,505 (or 130.0%) offset by an increase in revenues of $36,024 (or 128.5%), primarily driven by the acquisition of our Brazil operations which impacted the six months ended June 30, 2012. Our Brazil operations were acquired in August 2011.

Other income (expense). Other income (expense) for the six months ended June 30, 2012 consisted of other income of $266, a foreign currency transaction loss of $137 and gain on sale of fixed assets of $152 and a loss on the change in fair value of the purchase price contingency of $2,270. As of June 30 2012, the carrying amount of the purchase price contingency was $4,734.

Interest and tax expense. For the six months ended June 30, 2012, interest expense was $4,359 compared to $266 for the six months ended June 30, 2011. The increase in interest expense is a result of assumed and new debt and leases from our Brazil operations, our revolving credit facility with Porter entered into in July 2011 and our junior subordinated notes incurred to facilitate our acquisition of our Brazil operations. Tax provisions resulted in a tax expense of $76 and a tax benefit of $1,175 for the six months ended June 30, 2012 and 2011, respectively. The tax expense of $76 is due to pre-tax income from a subsidiary of our Brazil operations.

Liquidity and capital resources The Company's unaudited condensed consolidated financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business.

Our accumulated deficit at June 30, 2012 was $36,262, and we incurred a consolidated net loss of $14,033 for the six months ended June 30, 2012. On June 30, 2012, we had a working capital deficit of $47,789.

The Company's six months ended June 30, 2012 top line revenue grew 128.5% from the six months ended June 30, 2011 period due to the acquisition of the Brazilian operations. In May, the Company listed on the OTCQX U.S. in New York, which management believes will broaden the Company's options to raise capital.

The Company's working capital deficit of $47,789 is primarily comprised of the following accounts that impact cash flow for the remainder of 2012; current maturities of long term debt of $15,466 of which $4,970 relates to revolving credit facilities and mortgage note of $1,950 already extended through March 2013, $4,734 of deferred purchase price contingency consideration and $3,535 in deferred purchase price consideration, which the Company believes will be extended in the event it is unable to pay as they become due, and $4,552 relating to notes payable to vendors, accounts payable, accounts receivable and accrued other liabilities.

The cash flow provided by operations of $7,739 during the six months ended June 30, 2012 was achieved primarily through collection of accounts receivable.

28 -------------------------------------------------------------------------------- Table of Contents (Dollar amounts in thousands) During 2012, we took several initiatives which strengthened our ability to manage our liquidity position and will continue to do so throughout 2012: As a result of our recent acquisition of Cimcorp and the relationship Cimcorp maintains with several large financial institutions that have historically and currently provided financing, we believe that the Company has the opportunity to obtain additional working capital lines based on its new receivables it creates. In March 2012, the Company procured a new accounts receivable based working capital line for $1,207 from one of those banks.

In April 2012, the Company entered into a revolving credit facility and promissory note with Knox Lawrence International, LLC and Quotidian, LLC of $2,000 upon which the Company can draw down to support its working capital needs.

In May 2012, the Company procured a new accounts receivables based working capital line for $1,646 from one of the Company's Brazilian banks.

In May 2012, the Company secured a facility agreement with Cisco in the amount of $1,100 guaranteed by Cimcorp's endorsed invoices paid to a supplier.

In June 2012, the Company secured a working capital loan from a bank in the amount of $750. The Company also entered into another secured working capital loan from the same bank through discounted trade receivables in the amount of $687.

Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. We cannot assure you that we will maintain a level of cash flows from operating activities sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness.

If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay investments and capital expenditures, seek additional capital or restructure or refinance our indebtedness. These alternative measures may not be successful and may not permit us to meet our scheduled debt service obligations. If the Company is unable to raise additional capital in the near future, due to the Company's liquidity problems, management expects that the Company will need to liquidate assets, seek additional capital on less favorable terms and/or pursue other remedial measures.

The Company's financial statements have been prepared on a going concern basis, which implies the Company will continue to realize its assets and discharge its liabilities in the normal course of business. Management cannot provide assurance that the Company will ultimately achieve profitable operations or become cash flow positive, or raise additional debt and/or equity capital These financial statements do not include any adjustments related to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Critical Accounting Policies Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We review our estimates on an ongoing basis, including those related to allowances for doubtful accounts, certain revenue recognition related to contract deliverables, valuation allowances for deferred tax assets, rates at which deferred tax assets and liabilities are expected to be recorded or settled, accruals for paid time off and the estimated labor utilization rate used to determine cost of services of our foreign subsidiary.

We base our estimates on historical experience, known trends and events, and various other factors that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

Our management believes the following accounting policies and estimates are most critical to aid you in understanding and evaluating our reported financial results.

Revenue Recognition The Company derives revenues from data center services and solutions, IT infrastructure services and solutions and equipment leases.

Data center services and solutions are comprised of managed infrastructure, managed services, sale of software and support services. IT infrastructure services and solutions include the sale of software and hardware, along with consulting, integration and training services. Equipment leases comprise the sale of equipment through sales-type leases.

The Company recognizes revenue when all of the following conditions are satisfied: (1) there is persuasive evidence of an arrangement; (2) delivery has occurred; (3) the collection of fees is probable; and (4) the amount of fees to be paid by the customer is fixed or determinable. Delivery does not occur until products have been shipped or services have been provided and risk of loss has transferred to the client.

29 -------------------------------------------------------------------------------- Table of Contents (Dollar amounts in thousands) When the Company provides a combination of the above referenced products or services to its customers, recognition of revenues for the hardware and related maintenance services component is evaluated to determine if any software included in the arrangement is not essential to the functionality of the hardware based on accounting guidance related to "Non-Software Deliverables in an Arrangement Containing More-Than-Incidental Software." Hardware and related elements qualify for separation when the services have value on a stand-alone basis, evidence of fair value of the separate elements exists and, in arrangements that include a general right of refund relative to the delivered element, performance of the undelivered element is considered probable and substantially in its control. Fair value is determined principally by reference to relevant third-party evidence of fair value. Such third-party information is readily available since the Company primarily sells products offered by its vendors. The application of the appropriate accounting guidance to the Company's sales requires judgment and is dependent upon the specific transaction. The Company recognizes revenues from the sale of hardware products at the time of sale provided the revenue recognition criteria are met and any undelivered elements qualify for separation.

The Company sells equipment under capital lease arrangements. The Company uses the leases topic of the Financial Accounting Standards Board ("FASB") Accounting Standard Codification ("ASC") 840, " Leases ", to evaluate whether an arrangement is a capital or operating lease and to determine classification of capital leases as either sales-type or direct financing. For sales-type leases, the revenue allocated to the equipment is recognized when the lease term commences, which the Company deems to be when all of the following conditions have been met: (i) the equipment has been installed and (ii) receipt of the written customer acceptance certifying the completion of installation, provided collectability is reasonably assured. The initial revenue recognized for sales-type leases consists of the present value of future payments computed at the interest rate implicit in the lease. The determination of the fair value of the leased equipment requires judgment and can impact the split between revenue and finance income over the lease term. The Company includes interest income from sales-type leases in its revenues based on the effective interest rate of its lease agreements. As of June 30, 2012 and 2011, the amount of interest income included as part of leases revenue is $1,748 and $0, respectively.

The Company had entered into certain sales-type leases with customers, in which the underlying equipment was initially procured using a capital lease financing that restricted the Company from transferring title or ownership. In these situations, the Company has deferred revenue and costs related to the sales-type leases until the initial capital lease financing obligation was satisfied and/or title could be transferred.

In arrangements that include multiple elements, including software licenses, maintenance and/or professional services, the Company evaluates each element in a multiple-element arrangement to determine whether it represents a separate unit of accounting. An element constitutes a separate unit of accounting when the delivered item has stand alone value and delivery of the undelivered element is probable and within our control. The Company determines the best estimate of selling price or ESP of each element in an arrangement based on a selling price hierarchy of each deliverable: (i) vendor-specific objective evidence of selling price (VSOE), (ii) third-party evidence of selling price (TPE), and (iii) best estimate of selling price (BESP). Since primarily all of our units of accounting we sell the deliverable separately, we determined VSOE generally exists. Total arrangement fees will be allocated to each element using the relative selling price method.

In situations where our solutions contain software that is more than incidental, revenue related to the software and software-related elements is recognized in accordance with authoritative guidance on software revenue recognition. For the software and software-related elements of such transactions, revenue is allocated based on the relative fair value of each element, and fair value is determined by VSOE. If we cannot objectively determine the fair value of any undelivered element included in such multiple-element arrangements, we defer revenue until all elements are delivered and services have been performed, or until fair value can objectively be determined for any remaining undelivered elements. When the fair value of a delivered element has not been established, but fair value exists for the undelivered elements, we use the residual method to recognize revenue. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is allocated to the delivered elements and is recognized as revenue.

If a tangible hardware systems product includes software, we determine whether the tangible hardware systems product and the software work together to deliver the product's essential functionality and, if so, the entire product is treated as a nonsoftware deliverable. The total arrangement consideration is allocated to each separate unit of accounting for each of the nonsoftware deliverables using the relative selling prices of each unit based on the aforementioned selling price hierarchy. We limit the amount of revenue recognized for delivered elements to an amount that is not contingent upon future delivery of additional products or services or meeting of any specified performance conditions.

Consulting services revenue is recognized as the services are rendered. Revenues generated from fixed price arrangements are recognized using the proportional performance method, measured principally by the total labor hours incurred as a percentage of estimated total labor hours. For fixed price contracts when the current estimates of total contract revenue and contract cost indicate a loss, the estimated loss is recognized in the period the loss becomes evident. Consulting services rendered under time and materials contracts are billed at a set hourly rate. Project related expenses are passed through at cost to clients. Revenue from time and materials contracts are recognized as billed (clients are billed monthly) unless the project has a major deliverable(s) associated with it, in which case the revenue is deferred until the major deliverable(s) is provided.

Services revenue is recognized as the services are rendered. Project related expenses are passed through at cost to clients. Revenue from time and materials contracts are recognized as billed (clients are billed monthly) unless the project has a major deliverable(s) associated with it, in which case the revenue is deferred until the major deliverable(s) is provided.

The Company also generates revenue from it Bundled Service Agreements ("BSA") and its events and sponsorships, both of which are less than 5% of consolidated revenues. BSAs are packages of services that clients subscribe to, typically on an annual contract basis. The Company hosts events such as conferences. These events include revenues from sponsorships and registration fees which are recognized in the month of the event.

Unbilled services are recorded for consulting services revenue recognized to date that has not yet been billed to customers. In general, amounts become billable upon the achievement of contractual milestones or in accordance with predetermined payment schedules. Unbilled services are generally billable to customers within one year from the respective balance sheet date.

30 -------------------------------------------------------------------------------- Table of Contents Revenue also consists of monthly fees for data center services and solutions including managed infrastructure and managed services and is included within "data center services and solutions" revenue in the accompanying consolidated statements of operations. Revenue from managed infrastructure and managed services is billed and recognized over the term of the contract which is generally one to five years. Installation fees associated with managed infrastructure and managed services revenue is billed at the time the installation service is provided and recognized over the estimated term of the related contract or customer relationship. Costs incurred related to installation are capitalized and amortized over the estimated term of the related contract or customer relationship The Company's deferred revenue consists of amounts received from or billed to clients in conjunction with maintenance contracts, time and material and fixed price contracts for which revenue is recognized over time or upon completion of contract deliverables and for sales type leases in which the underlying equipment was procured using a capital lease financing that restricts the Company from transferring title or ownership.

Shipping and handling costs associated with the shipment of goods are recorded as costs of revenues in the consolidated statements of operations.

Long-lived Assets Property, equipment and definite lived intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell, and depreciation ceases.

The Company uses the non-amortization approach to account for purchased goodwill and certain intangibles. Under the non-amortization approach, goodwill and certain intangibles are not amortized into results of operations, but instead are reviewed for impairment at least annually and written down and charged to operations only in the periods in which the recorded values of goodwill or certain intangibles exceed their fair value. The Company has elected to perform its annual impairment test as of December 31 of each calendar year. An interim goodwill impairment test would be performed if an event occurs or circumstances change between annual tests that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

Business Combinations The Company allocates the total cost of an acquisition to the underlying net assets based on their respective estimated fair values and recognize the identifiable assets acquired and liabilities assumed in accordance with business combination accounting standards. As part of the allocation process, we identify and attribute values and estimated useful lives to the intangible assets acquired. These determinations involve significant estimates and assumptions regarding multiple, highly subjective variables, including those with respect to future cash flows, discount rates, asset lives, and the use of different valuation models. We base our fair value estimates on assumptions we believe to be reasonable but are inherently uncertain. Depending on the purchase price of a particular acquisition as well as the mix of intangible assets acquired, our financial results could be materially impacted by the application of a different set of assumptions and estimates.

Recent Accounting Pronouncements See Note 1 - Basis of Presentation and Description of Business.

Effects of Inflation We generally have been able to price our contracts in a manner to accommodate the rates of inflation experienced in recent years, although we cannot be sure that we will be able to do so in the future.

Off-Balance Sheet Arrangements We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our stockholders.

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