BKSD BluePrint Technologies Inc (CE)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2010

OR

o		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 0-52702

BROOKSIDE TECHNOLOGY HOLDINGS CORP.

(Exact name of registrant as specified in its charter)

Florida		20-3634227
State or other jurisdiction of incorporation or organization		(I.R.S. Employer Identification No.)

15500 Roosevelt Blvd, Suite 101
Clearwater, FL 33760
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code (727) 535-2151

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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company þ

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

Yes o No þ

Number of shares outstanding of registrant’s class of common stock as of August 13, 2010: 182,579,405

 

 

Index

ITEM

PART I – FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements			4
Item 2. Management’s Discussion and Analysis Financial Condition and Results of Operation			28
Item 3. Quantitative and Qualitative Disclosures about Market Risk			35
Item 4(T) Controls and Procedures			35
PART II – OTHER INFORMATION
Item 1. Legal Proceedings			37
Item 1A. Risk Factors			38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			38
Item 3. Defaults Upon Senior Securities			38
Item 4. Submission of Matters to a Vote of Securities Holders			38
Item 5. Other Information			38
Item 6. Exhibits			38
EX-31.1
EX-31.2
EX-32.1
EX-32.2

INTRODUCTORY NOTE

This Report on Form 10-Q for Brookside Technology Holdings Corp. (“we,” “us,” or the “Company”) may contain forward-looking statements. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” and “continue” or similar words. Forward-looking statements include information concerning possible or assumed future business success or financial results. You should read statements that contain these words very carefully because they discuss future expectations and plans, which contain projections of future results of operations or financial condition or state other forward-looking information. We believe that it is important to communicate future expectations to investors. However, there may be events in the future that we are not able to accurately predict or control. Accordingly, we do not undertake any obligation to update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future.

The forward-looking statements contained herein are based on current expectations that involve a number of risks and uncertainties including those set forth under “Risk Factors” in our Form 10-K for the year ended December 31, 2009, as filed with the Securities and Exchange Commission, and any other periodic reports filed with the Securities and Exchange Commission. Accordingly, to the extent that this Quarterly Report contains forward-looking statements regarding the financial condition, operating results, business prospects or any other aspect of the Company, please be advised that the Company’s actual financial condition, operating results and business performance may differ materially from that projected or estimated by the Company in its forward-looking statements.

BROOKSIDE TECHNOLOGY HOLDINGS CORP

CONSOLIDATED BALANCE SHEETS
As of June 30, 2010 and December 31, 2009

		June 30,				December 31,
		2010 (Unaudited)				2009
ASSETS
Current assets
Cash and cash equivalents		$	1,251,362			$	196,424
Cash collateral account			—				361,097
Accounts receivable, net			3,057,334				2,908,056
Inventory			2,252,434				2,011,052
Deferred contract costs			(464	)			7,937
Deferred finance charges, net of amortization			241,592				339,756
Prepaid expenses			97,791				69,541
Total current assets			6,900,049				5,893,863
Property and equipment
Office equipment			592,554				645,506
Furniture, fixtures and leasehold improvements			169,364				169,364
			761,918				814,870
Less: accumulated depreciation			(502,996	)			(459,059	)
Property and equipment, net			258,922				355,811
Goodwill			11,659,254				11,659,254
Deposits and other assets			78,267				28,267
TOTAL ASSETS		$	18,896,492			$	17,937,195
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities
Accounts payable and accrued expenses		$	2,369,709			$	2,728,404
Billings in excess of revenues			1,990,164				2,350,065
Payroll liabilities			762,175				443,945
Current portion of long term debt			943,135				8,413,200
Income taxes payable			96,700				96,700
Other current liabilities			288,724				288,724
Total current liabilities			6,450,607				14,321,038
Long term debt, less current portion			6,075,469				17,392
Derivative financial instruments at fair value			9,938,127				6,437,547
Total liabilities			22,464,203				20,775,977
Stockholders’ deficit
Series A convertible preferred stock, 15,000,000 authorized, 17,843,799 and 13,106,716 issued and outstanding at June 30, 2010 and December 31, 2009, respectively, at 8% dividend yield. Liquidation preference of $20,082,495 and $14,738,181 at June 30, 2010 and December 31, 2009, respectively.			13,084,696				7,740,386
Common stock, $.01 par value, 10,000,000,000 shares authorized, 182,579,405 and 178,079,405 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively.			182,580				178,080
Additional paid in capital			12,018,522				11,943,670
Accumulated deficit			(28,853,509	)			(22,700,918	)
Total stockholders’ deficit			(3,567,711	)			(2,838,782	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT		$	18,896,492			$	17,937,195

See accompanying notes to these unaudited consolidated financial statements.

BROOKSIDE TECHNOLOGY HOLDINGS CORP
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended June 30, 2010 and 2009
Unaudited

		Quarter Ended June 30,								Six Months Ended June 30,
		2010				2009				2010				2009
REVENUES
Installation and other services		$	3,476,470			$	1,505,267				5,566,615			$	3,078,444
Equipment sales			1,428,168				3,038,784				3,010,098				6,466,906
Total revenues			4,904,638				4,544,051				8,576,713				9,545,350
COST OF SALES			2,244,418				1,696,552				3,805,081				3,972,732
GROSS PROFIT			2,660,220				2,847,499				4,771,632				5,572,618
OPERATING EXPENSES
General and administrative			2,702,550				2,840,295				5,547,464				5,950,392
Depreciation expense			25,740				35,731				54,285				70,863
Total operating expenses			2,728,290				2,876,026				5,601,749				6,021,255
OTHER INCOME (EXPENSE)
Interest expense			(318,158	)			(479,446	)			(761,139	)			(912,255	)
Amortization expense of loan discount and intangibles			(243,338	)			(516,713	)			(486,676	)			(993,387	)
Gain extinguishment of debt			56,435				—				56,435				—
Finance expense on derivatives			(4,290,875	)			(925,571	)			(4,290,875	)			(925,571	)
Gain on change in fair value of derivative financial instruments			622,656				5,751,603				790,295				6,429,505
Other income (expense), net			12,731				(7,538	)			2,456				(5,923	)
Total other income (expense)			(4,160,549	)			3,822,335				(4,689,504	)			3,592,369
INCOME (LOSS) BEFORE INCOME TAXES			(4,228,619	)			3,793,808				(5,519,621	)			3,143,732
Provision for income taxes			(160	)			—				(22,374	)			—
NET INCOME (LOSS)		$	(4,228,779	)		$	3,793,808				(5,541,995	)		$	3,143,732
Preferred Stock Dividends			(345,296	)			(244,190	)			(607,230	)			(488,524	)
Net income (loss) attributable to common shareholders		$	(4,574,075	)		$	3,549,618				(6,149,225	)		$	2,655,208
Loss per share- basic		$	(0.03	)		$	0.03				(0.03	)		$	0.02
Weighted average shares outstanding-basic			182,579,405				141,810,791				180,739,626				141,023,937
Loss per share- fully diluted		$	(0.03	)		$	0.00				(0.03	)		$	0.00
Weighted average shares outstanding-fully diluted			182,579,405				1,391,504,369				180,739,626				1,376,783,935

BROOKSIDE TECHNOLOGY HOLDINGS CORP
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Six Months Ended June 30, 2010 and 2009
Unaudited

		2010				2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)		$	(5,541,995	)		$	3,143,732
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation			54,285				70,863
Amortization of loan discounts and intangibles			486,676				993,387
Non-cash interest expense			217,121				232,544
Finance expense on derivatives			4,290,875				925,571
Gain on change in fair value of derivative financial instruments			(790,295	)			(6,429,505	)
Gain on extinguishment of debt			(56,435	)			—
Loss on disposal of fixed assets			42,604				6,717
Bad debt expense			116,465				26,700
Stock based compensation			49,075				24,364
(Increase) decrease in:
Accounts receivable			(265,743	)			587,653
Inventory			(241,382	)			(259,418	)
Deferred contract costs			8,401				70,099
Prepaid expenses			(28,250	)			(16,753	)
Deposits and other assets			(50,000	)			(58,132	)
Increase (decrease) in:
Accounts payable and accrued expenses			(114,395	)			(195,592	)
Accrued payroll liabilities			318,230				(146,344	)
Billings in excess of revenues			(359,901	)			107,522
Income taxes payable			—				(160,000	)
Other current liabilities			—				43,966
			3,677,331				(4,176,358	)
NET CASH USED IN OPERATING ACTIVITIES			(1,864,664	)			(1,032,626	)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of equipment			—				(43,174	)
Cash used for restricted cash			—				(26,528	)
Cash used for cash collateral			—				(233,334	)
Cash provided by cash collateral			361,097				—
Cash provided by restricted cash			—				1,238,903
Acquisition of US Voice & Data, LLC (“USVD”) additional EBITDA Earnout			—				(61,634	)
NET CASH PROVIDED BY INVESTING ACTIVITIES			361,097				874,233
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long term debt			—				464,891
Proceeds from issuance of Series A preferred stock, net of issuance costs of $0 and $70,000 for the six months ended June 30, 2010 and 2009, respectively			3,000,000				930,000
Repayment of long term debt			(441,495	)			(1,379,345	)
NET CASH PROVIDED BY FINANCING ACTIVITIES			2,558,505				15,546
NET INCREASE (DECREASE) IN CASH			1,054,938				(142,847	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR			196,424				835,525
CASH AND CASH EQUIVALENTS AT END OF PERIOD		$	1,251,362			$	692,678
SUPPLEMENTAL DISCLOSURE
Income taxes paid		$	22,374			$	—
Interest paid		$	544,018			$	679,711
Non-cash financing and investing activities
Accretion of preferred stock dividend		$	607,230			$	488,524
Accrued interest added to note payable balance		$	117,174			$	503,893
Conversion of note payable and accrued interest to Series A preferred stock		$	1,737,080			$	—
Cashless exercise of warrants		$	—			$	3,857
Accrual for derivative financial instruments at fair value		$	4,290,875				1,925,571
Conversion of Series A preferred stock to common stock		$	—			$	20,026

See accompanying notes to these unaudited consolidated financial statements.

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 1 — Basis of Presentation and Nature of Business

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Brookside Technology Holdings Corp., a Florida corporation (the “Company”), have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). The financial statements and notes are presented as permitted on Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. These unaudited condensed consolidated financial statements and related notes should be read in conjunction with the Company’s Form 10-K for the fiscal year ended December 31, 2009. In the opinion of management, these unaudited condensed consolidated financial statements reflect all adjustments that are of a normal recurring nature and which are necessary to present fairly the financial position of the Company as of June 30, 2010 and December 31, 2009, and the results of operations and cash flows for the quarters and six months ended June 30, 2010 and 2009. The results of operations for the quarters and six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the entire fiscal year. The balance sheet at December 31, 2009 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

Operations

Brookside Technology Holdings Corp., (the “Company”), is the holding company for Brookside Technology Partners, Inc., a Texas corporation (“Brookside Technology Partners”), US Voice & Data, LLC, an Indiana Limited Liability Company (“USVD”), Standard Tel Acquisitions, Inc, a California Corporation (“Acquisition Sub”), Trans-West Network Solutions, Inc., (“Trans-West”), a California Corporation and Standard Tel Networks, LLC, a California Limited Liability Company (“STN”) and all operations are conducted through these wholly owned subsidiaries.

Collectively, the subsidiary companies are providers of converged business communications products and services from Mitel, Nortel and NEC. The Company, as the 2 ^nd largest MITEL dealer, is recognized as a Diamond Dealer. The Company combines technical expertise in a range of communications products, including IP-enabled platforms, wired and wireless IP and digital endpoints and leading edge communications applications to create converged voice, video and data networks that help businesses increase efficiency and optimize revenue opportunities, critical for success in today’s competitive business environment. The Company specializes in selling, designing, analyzing and implementing converged Voice over IP (VoIP), data and wireless business communications systems and solutions for commercial and state/government organizations of all types and sizes in the United States. The Company has offices throughout the United States that provide a national footprint. Headquartered in Huntington Beach, California, STN has additional offices in Sacramento and San Diego. Headquartered in Austin, Texas, Brookside Technology Partners serves the Texas market. Headquartered in Louisville, Kentucky, USVD serves the Kentucky and Southern Indiana markets, operating out of offices in Louisville, Lexington and Indianapolis. Combined, revenues from new implementations represent approximately 50% of the Company’s revenues with the remaining 50% generated by service, support, maintenance and other recurring revenues from the Company’s existing customer base.

Background/Name Change/Redomestication

Cruisestock, Inc, (“Cruisestock”) was incorporated in September 2005 under the laws of the State of Texas. Immediately prior to February 21, 2007, it was a shell corporation with no significant operations or assets. On February 21, 2007, Cruisestock acquired all of the stock of Brookside Technology Partners, a Texas corporation, in a transaction where the shareholders of Brookside Technology Partners exchanged all of their shares for shares of common stock of Cruisestock (the “Share Exchange”). As a result, Brookside Technology Partners became a wholly owned subsidiary of Cruisestock. However, from an accounting perspective, Brookside Technology Partners was the acquirer in the Share Exchange.

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 1 — Nature of Business (continued)

Redomestication

Subsequent to the Share Exchange, on July 6, 2007 (the “Effective Time”), Cruisestock changed its name to Brookside Technology Holdings Corp. and redomesticated in Florida. The name change and redomestication were accomplished by merging Cruisestock into a newly-formed, Florida wholly-owned subsidiary, with the subsidiary being the surviving entity (the “Redomestication”).

The Company’s common stock is quoted on the NASDAQ Over-the-Counter Bulletin Board (OTCBB) under the symbol: “BKSD”.

US Voice & Data, LLC

The Company has a wholly-owned subsidiary, US Voice & Data, LLC, an Indiana Limited Liability Company (“USVD”). USVD, headquartered in Louisville, Kentucky, with offices in Lexington, Kentucky and Indianapolis, Indiana, is a leading regional provider of telecommunication services, including planning, design, installation and maintenance for converged voice and data systems.

Standard Tel Networks, LLC

The Company, through its wholly-owned subsidiary, Standard Tel Acquisitions, Inc. (“Acquisition Sub”), owns Standard Tel Networks, LLC (“STN”), an independent distributor of high quality, turnkey converged voice and data business communications products and services. STN is headquartered in Huntington Beach, CA, and has other California offices in Sacramento and San Diego. In this acquisition, the Company also acquired a 100% interest in Trans-West Network Solutions, Inc.

Note 2 — Liquidity and Capital Resources

These unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and settlement of obligations in the normal course of business. The Company generated significant net losses in the prior three fiscal years. The Company has cash and cash equivalents of $1,251,362 at June 30, 2010.

On April 12, 2010, Vicis Capital Master Fund, a sub-trust of Vicis Capital Series Master Trust, and the Company’s largest preferred shareholder (“Vicis”), invested an additional $3 million in equity and converted its subordinated promissory note, in the original principal amount of $1.5 million plus accrued interest of $237,083, into 4,737,083 shares of Series A convertible preferred stock of the Company and a warrant to purchase 473,708,300 shares of common stock at an exercise price of $0.01 per share. The warrant includes a redemption right, payable in cash upon the future occurrence of a change in control. The warrant also includes a put provision inherent in the redemption provision; therefore, the warrant was recorded at issuance as a liability for “Derivative financial instruments at fair value” in the amount of $4,290,875 on the Company’s balance sheet in accordance with the current authoritative guidance. The Company is required to adjust the carrying value of the above warrants to their fair value at each balance sheet date and recognize any change since the prior balance sheet date as a component of other expense or income. In valuing the above warrants, the Company used the Black-Scholes model. As such, the Company recorded a derivative financial instrument at fair value of $4,290,875 in connection with this transaction in April 2010.

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 2 — Liquidity and Capital Resources (continued)

Additionally, the Company entered into a loan amendment with its senior lender, Chatham Credit Management III LLC, (“Chatham Capital”), which restructured the Company’s senior credit facility to, among other things, waived all prior defaults, extended the term of the senior loan to September 23, 2012, and eliminated and/or modified certain financial covenants.

The Company had a net loss for the three months and six months ended June 30, 2010 of approximately $4.2 million and $5.5 million, respectively, and has a retained deficit of approximately $28.9 million as of June 30, 2010. These net losses were primarily the result of the non-cash finance expense on derivatives of $4.3 million for the three and six months ended June 30, 2010. For the six months ended June 30, 2010, the Company had net cash used in operations of approximately $1.9 million. Historically, the Company has relied on borrowings and equity financings to maintain its operations. With the additional $3 million equity investment on April 12, 2010, the Company believes it has enough cash to operate through the end of the year with its cash on hand, cash to be generated from operations and the borrowing availability with its lenders. However, if the economic downturn, which started in 2008, continues then it could have a material effect on its business operations. The accompanying unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should the Company be unable to continue as a going concern.

Management is focused on managing costs in line with estimated total revenues for the balance of fiscal 2010 and beyond, including contingencies for cost reductions if projected revenues are not fully realized. However, there can be no assurance that anticipated revenues will be realized or that the Company will successfully implement its plans.

Note 3 — Significant Accounting Policies

The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles (GAAP) and to the practices within the telecommunications industry. There have been no significant changes in the Company’s significant accounting policies during the three and six months ended June 30, 2010 compared to what was previously disclosed in the Company’s Annual Report on 10-K for the year ended December 31, 2009.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of Brookside Technology Holdings Corp. and its wholly-owned subsidiaries, certain of which are Brookside Technology Partners, Inc., US Voice & Data, LLC, an Indiana Limited Liability Company, Standard Tel Acquisitions, Inc a California Corporation, Trans-West Network Solutions, Inc., a California Corporation and Standard Tel Networks, LLC, a California Limited Liability Company. All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates. The Company believes its estimates of allowance for doubtful accounts, inventory reserves, deferred taxes, intangible assets, and the fair value of stock options and warrants, as further discussed below, to be the most sensitive estimates impacting financial position and results of operations.

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 3 — Significant Accounting Policies (continued)

Financial Instruments

The amounts reported for cash and cash equivalents, receivables, accounts payable, and accrued liabilities are considered to approximate their market values based on comparable market information available at the respective balance sheet dates and their short-term nature. The Company believes that the notes payable fair values approximate their notional value at June 30, 2010.

Redeemable Securities

The authoritative guidance requires issuers to classify as liabilities (or assets in some circumstances) certain classes of freestanding financial instruments that embody obligations for the issuer. The Series A Stock is not presently redeemable and has been classified in equity in the unaudited condensed consolidated financial statements.

Convertible Securities With Beneficial Conversion Features

Under authoritative guidance, the Company considered the effect of a beneficial conversion feature of the Series A Stock issued in the December 2007 private placement and subsequently issued to Vicis during 2008. Since the redemption requirement of the Series A Stock is contingent on the occurrence of future events, the Company is not accreting the carrying value of the Series A Stock to redemption value and will not do so until the occurrence of any one of those future events becomes probable.

Derivative Financial Instruments at Fair Value.

Amounts have been classified as derivative financial instruments because of the provisions inherent in the redemption provision included in warrant agreements and recorded at issuance as a liability for “Derivative financial instruments at fair value” on the Company’s balance sheet in accordance with the current authoritative guidance. In accordance with provisions of this authoritative guidance, the Company is required to adjust the carrying value of the above warrants to its fair value at each balance sheet date and recognize any change since the prior balance sheet date as a component of other expense or income. In valuing the above warrants, the Company used the Black-Scholes model.

The Company’s Series A Stock is redeemable under certain conditions, including:

o		The Company effecting a merger or consolidation with another entity
o		The Company sells all or substantially all of the Company’s assets
o		The Company’s shareholders approve a tender or exchange offer, or
o		The Company’s holders of the common stock exchange their shares for securities or cash

Accordingly, upon the occurrence of any one of these events, the Series A Stock will become redeemable and the Company will accrete the carrying value of the Series A Stock to redemption value at that time.

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 3 — Significant Accounting Policies (continued)

Goodwill and Intangibles

The Company follows ASC 350, which requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually in accordance with ASC 350. ASC 350 also requires that intangible assets with finite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with ASC 360, “Accounting for the Impairment or Disposal of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.” The determination as to whether or not goodwill or other intangible assets have become impaired involves a significant level of judgment in the assumptions underlying the approach used to determine the value of the reporting units. Changes in operating strategy and market conditions could significantly impact these judgments and require adjustments to recorded amounts of intangible assets. The Company determines impairment by comparing the fair value of the goodwill, using a combination of approaches, including the net present value of discounted cash flow method, with the carrying amount of that goodwill. The Company’s impairment assessment involves estimating the future cash flows of its intangible assets including its eventual disposition. An impairment loss recognized is measured as the amount by which the carrying amount of the intangible asset exceeds its fair value. The Company conducts impairment testing annually, unless information during the year becomes available that requires an earlier evaluation of impairment. Based on a net realizable value analysis for the year ended December 31, 2009, goodwill from the acquisitions of USVD and STN was determined to be partially impaired. Therefore, an impairment of goodwill in the amount of $5,320,775 was recognized in 2009. The balance of goodwill at June 30, 2010 and December 31, 2009 was $11,659,254. The Company determined that no additional impairment of goodwill exists at June 30, 2010.

The Company acquired other intangible assets from the acquisitions of USVD and STN consisting of purchased contracts and non-compete contracts. Under ASC 350, other intangible assets acquired including purchased contracts are considered to have a finite life. Management estimated the useful life to be one year and amortized such costs on a straight-line basis over this period. The Company’s other intangible assets were fully amortized as of December 31, 2009.

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 3 — Significant Accounting Policies (continued)

Reclassifications

Certain prior year amounts have been reclassified to conform to the 2009 presentation.

Income taxes

Income taxes are accounted for under the asset and liability method. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. In estimating future tax consequences, the Company generally considers all expected future events other than enactments of changes in tax laws or rates. The effect on deferred tax assets and liabilities of a change in tax rates is recognized as income or expense in the period that includes the enactment date.

The Company records a valuation allowance to reduce its deferred assets when it is more likely than not that some portion or all of the deferred tax assets will expire before realization of the benefit or that future deductibility is not probable. The ultimate realization of the deferred tax assets depends on the Company’s ability to generate sufficient future taxable income. Accordingly, establishment of the valuation allowance requires the Company’s management to use estimates and make assumptions regarding significant future events.

The Company evaluates its tax positions under the authoritative guidance. Accordingly, the Company’s management first determines whether it is more likely than not that a tax position will be sustained upon examination based on the technical merits of the position. Any tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. Each identified tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement. No such tax positions were identified during the periods ended June 30, 2010 and December 31, 2009. The Company files tax returns in the U.S. federal and state jurisdictions.

Earnings Per Common Share

Basic net income (loss) per share is based upon the weighted average number of shares of common stock outstanding. Diluted net income (loss) per share is based on the assumption that options, warrants and other instruments convertible into common stock are included in the calculation of diluted net income (loss) per share, except when their effect would be anti-dilutive. For instruments in which consideration is to be received for exercise, such as options or warrants, dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of actual issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. Cumulative dividends on the Company’s cumulative convertible preferred stock, although not declared, constitute a preferential claim against future dividends, if any, and are treated as an incremental decrease in net income from continuing operations or increase in net loss from continuing operations for purposes of determining basic and diluted net income (loss) from continuing operations per common share.

At June 30, 2010, there were potentially dilutive securities outstanding consisting of Series A Stock, warrants, and stock options issued to employees. At June 30, 2010, the number of potentially dilutive shares consisted of 31,740,000 stock option shares, 17,843,799 Series A Stock (exercisable into 1,784,379,900 common shares), and 2,021,515,319 common shares purchase warrants. At December 31, 2009, there were potentially dilutive securities outstanding consisting of Series A Stock, convertible debt, warrants, and stock options issued to employees of 1,303,281,724.

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 3 — Significant Accounting Policies (continued)

Stock Based Compensation

The Company follows the provisions of ASC 718-10 “Share-Based Payment”, which requires recognition of stock-based compensation expense for all share-based payments based on fair value. ASC 718-10, defines fair value-based methods of accounting for stock options and other equity instruments, which measures compensation costs based on the estimated fair value of the award and recognizes that cost over the service period (generally the vesting period of the equity award). ASC 505-50, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods, or Services” (“ASC 505-50”), establishes the measurement principles for transactions in which equity instruments are issued in exchange for the receipt of goods or services. The Company has relied upon the guidance provided under ASC 505-50 to determine the measurement date and the fair value re-measurement principles to be applied. The Company recognizes compensation costs, net of an estimated forfeiture rate, on a pro rata basis over the requisite service period of each vesting tranche of each award. The Company uses the Black-Scholes option valuation model in estimating the fair value of options or warrants.

Recent Accounting Pronouncements

Fair Value Measures

Effective the first quarter of fiscal 2010, the Company adopted revised accounting guidance for the fair value measurement and disclosure of its nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The adoption of this accounting guidance did not have a material impact on the Company’s financial position or results of operations.

Accounting Guidance Not Yet Effective

In July 2010, the FASB issued ASU 2010-20, “Disclosures About the Credit Quality of Financing Receivables and the Allowance for Credit Losses” to amend ASC 310 to provide additional financial statement disclosures to assist users in assessing an entity’s credit risk exposures and evaluating the adequacy of its allowance for credit losses. The amendments in ASC 2010-20 apply to all entities, and are effective for public companies for disclosures as of the end of a reporting period ending on or after December 15, 2010 and for disclosures about activity during a period for interim and annual periods after December 15, 2010.

In April 2010, the FASB issued ASU No. 2010-17 which establishes authoritative guidance permitting use of the milestone method of revenue recognition for research or development arrangements that contain payment provisions or consideration contingent on the achievement of specified events. This guidance is effective for milestones achieved in fiscal years beginning on or after June 15, 2010 and allows for either prospective or retrospective application, with early adoption permitted. Management is currently evaluating the impact that adoption of this guidance will have on the Company’s unaudited condensed consolidated financial statements.

In January 2010, the FASB issued ASU 2010-06 to improve disclosures about fair value measurements. ASU 2010-06 clarifies certain existing disclosures and requires new disclosure regarding significant transfers in and out of Level 1 and Level 2 of fair value measurements and the reasons for the transfer. The amendments in ASU 2010-06 will be effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal periods. The Company believes that ASU 2010-06 will not have a material impact on its fair value measurements.

In October 2009, the FASB issued ASU 2009-14 to amend ASC 605, “Revenue Recognition.” The amendments in this update change the accounting model for revenue arrangements that include both tangible products and software elements. The amendments in ASU 2009-14 will be effective for the Company beginning January 1, 2011, with early adoption permitted. The Company is currently evaluating the impact these amendments will have on its unaudited condensed consolidated financial statements when they become effective.

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 3 — Significant Accounting Policies (continued)

In October 2009, the FASB issued ASU 2009-13 amending ASC 605 related to revenue arrangements with multiple deliverables. Among other things, ASU 2009-13 provides guidance for entities in determining the selling price of a deliverable and clarifies that the allocation of revenue is based on entity-specific assumptions rather than assumptions of a marketplace participant. The Company is currently evaluating the impact ASU 2009-13 will have on its unaudited condensed consolidated financial statements when it becomes effective on January 1, 2011. Early adoption is permitted.

Other ASUs that have been issued or proposed by the FASB and ASCs that do not require adoption until a future date and are not expected to have a material impact on the financial statements upon adoption.

Note 4 —Billings in Excess of Revenues

Billings in excess of revenues at June 30, 2010 and December 31, 2009 consisted of the following:

		June 30,				December 31,
		2010				2009
Customer deposits and deferred income on installation contracts		$	132,656			$	247,682
Deferred revenue on maintenance contracts			1,857,508				2,102,383
		$	1,990,164			$	2,350,065

Note 5 —Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following:

		June 30,				December 31,
		2010				2009
Accounts payable, trade		$	2,049,760			$	2,175,376
Accrued interest			74,101				306,954
Accrued warranty liability			154,231				154,231
Other accrued expenses			91,617				91,843
Total		$	2,369,709			$	2,728,404

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 6 —Long Term Debt

Long-term debt as of June 30, 2010 and December 31, 2009 consisted of the following:

		June 30, 2010				December 31, 2009
Subordinated note payable to an individual, unsecured, accruing interest at 2% per annum, with monthly payments of $5,215 due May 1, 2010.		$	67,612			$	82,869
Subordinated note payable to USVD Sellers, unsecured, accruing interest at 0% per annum, due in installments over 3 years with a maturity date of September 26, 2009. Currently in litigation. Please see Note 7 — Commitments and Contingencies — Litigation .			850,000				850,000
Subordinated notes payable to an individual, unsecured, accruing interest at 7% per annum, with monthly payments of $1,130 due May 1, 2011. On March 15, 2010, the Company converted this note payable, which had a balance of $28,143 plus accrued interest of $2,134, to 4,500,000 in common stock.			—				28,143
Subordinated note payable to executive officer and shareholder, unsecured, accruing interest at 7% per annum, with monthly payments of $968, due September 1, 2010.			14,444				16,945
Subordinated notes payable to shareholder, unsecured, accruing interest at 7% per annum, with monthly payments of $6,432 due June 1, 2010. Balance paid in full in April 2010 for $50,000. This resulted in a gain on extinguishment of debt of $56,435.			—				97,982
Subordinated Note Payable to Vicis Capital Master Fund, accruing interest at 10%, maturing April 15, 2010, subordinated to the Chatham senior note. Net of discount of $0 and $1,784, respectively. (STN acquisition.) Balance converted to Series A Stock on April 12, 2010.			—				1,498,216
Senior note payable, Chatham Investment Fund III, LLC and Chatham Investment Fund III QP, LLC, accruing interest at the LIBOR rate plus 9.00%, monthly principal payments of $83,333 beginning March 2011, with the balance due on the third anniversary of the closing date of September 23, 2012, net of unamortized discount of $1,198,023 and $1,684,699, respectively. (STN acquisition)			6,063,261				5,820,507
Secured notes payable to Enterprise Fleet Services, accruing interest at 5% per annum, with monthly payments of $4,941, with various maturities ranging from August 2010 through May 2012. Notes were reclassified as operating leases as of June 30, 2010. These leases are secured by vehicles.			—				11,446
Secured notes payable to NEC Financial Services, accruing interest at 11.25% with monthly payments of $1,128, with a maturity date of February 25, 2011. Note is secured by testing equipment.			23,287				24,484
Total long term debt			7,018,604				8,430,592
Less current portion			(943,135	)			(8,413,200	)
Long term portion		$	6,075,469			$	17,392

     Principal maturities of long-term debt as of June 30, 2010 are as follows:

Years Ending December 31,		Gross
2010		$	943,135
2011			841,947
2012			6,431,545
			8,216,627
Less: Unamortized discounts			(1,198,023	)
Net of discounts		$	7,018,604

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 6 —Long Term Debt (Continued)

Change in unamortized discount and loan costs of the Note —

For the six months ended June 30, 2010, the discount on the above notes changed due to amortization of discounts in connection with the notes. The total discount on the notes changed from $8,338,342 at inception to $1,198,023 at June 30, 2010. Unamortized discounts recorded in amortization expense were $486,676 and $486,676 for the six months ended June 30, 2010 and 2009, respectively. In addition to the amortization of discounts in connection with the notes as discussed above, amortization expense also included amortization of intangible assets which totaled $0 and $506,711 for the six months ended June 30, 2010 and 2009, respectively.

Note 7 — Commitments and Contingencies

Leases

Effective September 26, 2007, the Company assumed current operating leases for the three offices leased by USVD. On October 15, 2007, the Company entered into a 60 month lease for its headquarters in Clearwater, Florida effective December 1, 2007. On June 15, 2009, the Company entered into a new lease for its Sacramento operations for 28 months under a lease classified as an operating lease. On September 7, 2009 the Company extended the lease for its San Diego operations for 60 months under a lease classified as an operating lease. Effective June 6, 2010, the Company renewed its lease in Austin, Texas for 36 months under a lease classified as an operating lease. Minimum lease obligations for the years ending December 31st are as follows:

2010 (remainder)		$	229,375
2011			371,913
2012			339,537
2013			101,659
2014			48,236

Rental expense for operating leases for the three months ended June 30, 2010 and 2009, was approximately $78,000 and $164,000, respectively. Rental expense for operating leases for the six months ended June 30, 2010 and 2009, was approximately $315,000 and $340,000, respectively.

Liquidated Damages Under Registration Payment Arrangements

The Company has accrued $154,400 which is included in other current liabilities in the accompanying consolidated balance sheets for June 30, 2010 and December 31, 2009 related to expected liquidated damages that will be paid in cash or by issuance of additional common shares or warrants for common shares under various registration rights agreements related to common shares, conversion rights and warrants for preferred shares.

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 7 — Commitments and Contingencies (continued)

Litigation

As previously disclosed, in 2007, the Company purchased USVD from the Michael P. Fischer Irrevocable Delaware Trust and the M. Scott Diamond Irrevocable Delaware Trust (the “USVD Sellers”) pursuant to a Membership Purchase Agreement between the Company and the USVD Sellers, dated September 26, 2007 (the “USVD Agreement”). The original purchase price was $15,429,242. As of September 30, 2009, the Company has paid to the USVD Sellers a total of $14,533,690, representing 94% of all sums payable under the USVD Agreement.

In addition, in connection with the acquisition of USVD, Messrs. Fischer and Diamond were provided employment agreements, pursuant to which they held the positions of CEO and COO, respectively at USVD. The employee agreements provided Messrs. Fischer and Diamond with annual base salaries of $105,000 and $145,000, respectively. As a result, until recently, the Company relied on Messrs. Fischer and Diamond to continue to operate USVD.

However, on May 12, 2009, Messrs. Fischer and Diamond notified the Company that they considered their employment to be “constructively terminated” as a result of the Company having failed to pay them, collectively, an EBITDA earn-out payment of approximately $289,000 they claim they were due on April 30, 2009. Since such time, Messrs. Fischer and Diamond have not shown up to work and they have ceased performing any employment duties.

USVD’s revenues until May 12, 2009, while under the direction of Messrs. Fischer & Diamond, were approximately $2,700,000 lower than its revenues in the same period in 2008. This decrease adversely impacted the Company’s liquidity and subsequently the Company’s largest equity investor, Vicis, provided an additional capital infusion to meet working capital needs. Also, the Company and its primary lender, Chatham, have made modifications to the Company’s credit facility as a result of decreased revenues.

However, USVD’s first quarter 2009 decreased earnings were offset by increased earnings provided by STN. as well as increased earnings at USVD in the months subsequent to the departure of Messrs. Fischer and Diamond under the direction of Brookside Technology Holdings Corp’s management and other existing USVD and STN senior managers, discussed further under “Business” and “Management’s Discussion and Analysis.” However, while the Company may have this offset from these combined earnings, Messrs. Fischer’s and Diamond’s earn-outs were to be based solely on USVD’s EBITDA. Given USVD’s performance under Messrs. Fischer’s and Diamond’s stewardship prior to May 12, 2009, it is presently unclear whether they would have earned any future earn-out payments subsequent to their alleged constructive terminations.

In addition to their alleged constructive termination, Messrs. Fischer and Diamond claim that their Restrictive Covenant Agreement entered into as part of their Employment Agreements signed with the Company at the time of the USVD acquisition are now null and void and that, accordingly, they are free to compete with the Company and USVD, and to solicit USVD employees. Subsequent to the departures of Messrs. Fischer and Diamond, on May 26, 2009, several USVD employees, mostly sales personnel, entered the USVD premises unescorted and removed Company and personal belongings in connection with their resignations from USVD and their new employment with a new company, which is owned by Messrs. Fischer and Diamond and/or some of their family members, either directly or indirectly.

In response to the actions of Messrs. Fischer and Diamond and certain former USVD employees, the Company has worked diligently to secure USVD and its assets, employees, vendors, partners and customers. USVD’s employees, vendors, partners and customers have reconfirmed their support and loyalty to USVD, despite the fact that many of them have been solicited by Messrs. Fischer and Diamond and certain former USVD employees.

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 7 — Commitments and Contingencies (continued)

On July 17, 2009, the USVD Sellers filed a civil action in the Circuit Court of Jefferson County, Kentucky, alleging that the Company breached the USVD Agreement by failing to pay the previously mentioned $289,000 EBITDA earn-out payment they claim they was due on April 30, 2009, in addition to $1,750,000 of other future payments they claim they are entitled to accelerate as a result of such alleged breach. The lawsuit calls for an acceleration of all money owed to the USVD Sellers including: the $850,000 Seller Note, the $289,000 accrued EBITDA earn-out and an additional $900,000 in Minimum Cash Payments (as defined by the employment agreements of Messrs. Fischer and Diamond) in connection with future estimations of earn-outs yet to be earned. The Company has a note payable — USVD Sellers included in its long-term debt of $850,000, as well as an accrual for the $289,000 accrued 2008 earn-out payment that the USVD Sellers, Messrs. Fischer and Diamond, claim is due to them.

On October 8, 2009 filed an answer and counter-claim to the USVD Sellers civil action discussed above. This answer and counter-claim outlines, among other things, the Company’s arguments for defense as well as the Company’s claims of breaches of fiduciary duty and other common law, contractual, quasi-contractual, and statutory claims against former employees of USVD. During their periods of employment, various employees of USVD who are now employees of a competitor, engaged in a variety of acts and omissions in breach of their legal duties to USVD and Brookside, including but not limited to (1) failure of the CEO and COO to fulfill their contractual duties under their Employment Agreements; (2) acts by these and other employees with fiduciary duties to act in the best interests of the company as opposed to their individual self-interests or the interests of third parties, in company matters; (3) destruction and/or seizure of proprietary documents and information belonging to USVD for the benefit of a competitor; and (4) failure by sales personnel to reimburse USVD for funds advanced on sales on behalf of USVD which were not consummated prior to their departures. The Company is continuing to analyze the forgoing civil action and continues to aggressively investigate the actions undertaken by of Messrs. Fischer and Diamond, as well as the former USVD employees, both before and after their resignations. The litigation is in its early stages, and it is premature to project its outcome. The Company continues to vigorously defend the Circuit Court action and to pursue all available defenses, claims and counter claims against the USVD Sellers, Messrs. Fischer and Diamond, and certain former USVD employees.

Risk Management

The Company maintains various forms of insurance that the Company’s management believes are adequate to reduce the exposure to property and general liability risks to an acceptable level.

N ote 8 — Related Party Transactions

The Company has notes payable to officers and shareholders of the Company. The balance of these notes payable was $864,444 and $964,927 at June 30, 2010 and December 31, 2009, respectively. These notes consist of (i) a note payable to executive officer and shareholder in the amount of $14,444 and $16,945 at June 30, 2010 and December 31, 2009, respectively, unsecured, accruing interest at 7% per annum, with monthly payments of $968, due September 1, 2010 (ii) a note payable to shareholder in the amount of $0 and $97,982 at June 30, 2010 and December 31, 2009, respectively, unsecured, accruing interest at 7% per annum, with monthly payments of $6,432, balance paid in full on April 12, 2010 and (iii) a note payable to shareholders in the amount of $850,000 at June 30, 2010 and December 31, 2009, unsecured, accruing interest at 0% per annum, due in installments over three years with a maturity date of September 26, 2009, currently in litigation (see Note 7 — Commitments and Contingencies — Litigation .

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 9 — Series A 8% Convertible Preferred Stock

The Company is authorized to issue 50,000,000 shares of preferred stock with a par value of $0.001 per share. The Company’s preferred stock may be divided into such series as may be established by the Board of Directors. The Board of Directors may fix and determine the relative rights and preferences of the shares of any series established.

The conversion price of the preferred stock and the exercise price of the warrants are subject to adjustment in certain instances, including the issuance by the Company of securities with a lower conversion or exercise price, which occurred as part of the USVD financings and STN financings and acquisition. The Series A Stock has voting rights equivalent to the 1,784,379,900 shares of common stock into which it can convert. The Series A stockholders also must approve any change to the Company’s Articles of Incorporation.

On July 3, 2008, the Company entered into a Securities Purchase Agreement (the “Vicis Agreement”) with Vicis Capital Master Fund, a sub-trust of Vicis Capital Series Master Trust (“Vicis”), pursuant to which Vicis acquired (a) 2,500,000 shares of Series A Stock; and (b) a warrant to purchase 250,000,000 shares of common stock of the Company at $0.03 per share (the “Exercise Price”), for an aggregate purchase price of $2,500,000 (“Vicis Equity Infusion”). The warrant included a put provision inherent in the redemption provision included in the warrant agreements and recorded at issuance as a liability for “Derivative financial instruments at fair value” on the Company’s balance sheet in accordance with the current authoritative guidance. The Company is required to adjust the carrying value of the above warrant to its fair value at each balance sheet date and recognize any change since the prior balance sheet date as a component of other expense or income. In valuing the above warrant, the Company used the Black-Scholes model. The warrant included a redemption right, payable in cash upon the future occurrence of a change in control. As such, the Company recorded a derivative financial instrument at fair value of $2,162,879 in connection with this transaction.

Effective June 1, 2009, the Company entered into a Securities Purchase Agreement with Vicis Capital Master Fund, a sub-trust of Vicis Capital Series Master Trust, and the Company’s largest preferred stockholder (“Vicis”), pursuant to which Vicis invested an additional $1,000,000 in the Company and the Company issued to Vicis 1,000,000 shares of the Company’s Series A Stock and a warrant to purchase 100,000,000 shares of Common Stock at an exercise price of $0.01 per share. Pursuant to this event, all the outstanding warrants have been re-priced to $0.01 and all conversion prices on the Series A Stock have been reduced to $0.01. The warrant included a put provision inherent in the redemption provision included in the warrant agreements and recorded at issuance as a liability for “Derivative financial instruments at fair value” on the Company’s balance sheet in accordance with the current authoritative guidance. In accordance with provisions of the authoritative guidance, the Company is required to adjust the carrying value of the above warrant to its fair value at each balance sheet date and recognize any change since the prior balance sheet date as a component of other expense or income. In valuing the above warrant, the Company used the Black-Scholes model. The warrant included a redemption right, payable in cash upon the future occurrence of a change in control. As such, the Company recorded a derivative financial instrument at fair value of $898,756 in connection with this transaction.

Pursuant to the Vicis Agreement, all the outstanding warrants have been re-priced to $0.01 and all conversion prices on the Series A Stock have been reduced to $0.01.

Upon any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary, the holders of the shares of Series A Stock shall be paid, before any payment shall be paid to the holders of common stock, or any other stock ranking on liquidation junior to the Series A Stock, an amount for each share of Series A Stock held by such holder equal to the sum of (1) the Stated Value thereof and (2) an amount equal to dividends accrued but unpaid thereon, computed to the date payment thereof is made available.

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 9 — Series A 8% Convertible Preferred Stock (continued)

In June 2009, the Company evaluated the issuance of 5,500,000 shares of Series A Stock for $5,500,000 ($2,500,000 in cash and $3,000,000 in reclassification of principal on the Series B Stock to Series A Stock) and 250,000,0000 warrants to purchase common stock and assigned the values to the Series A Stock and the warrants based on the relative fair values. The warrants were valued using the Black-Scholes valuation model, 0.0% dividend yield, a risk free rate of return of 4.21%, volatility of 181.04% and a five year term. The Company considered the effect of a beneficial conversion feature of the Series A Stock issued and the conversion of the Series B Stock to Series A Stock. The Company has attributed no beneficial conversion feature to the Series A Stock because the fair value of the warrants issued was recorded as a derivative liability. The carrying value of the Series A Stock was reduced to zero. Since the redemption requirement of the Series A Stock is contingent on the occurrence of future events, the Company is not accreting the carrying value of the Series A Stock to redemption value and will not do so until the occurrence of any one of those future events becomes probable.

On April 12, 2010, Vicis Capital Master Fund, a sub-trust of Vicis Capital Series Master Trust, and the Company’s largest preferred shareholder (“Vicis”), invested an additional $3 million in equity and converted its subordinated promissory note, in the original principal amount of $1.5 million plus accrued interest of $237,083, into 4,737,083 shares of Series A convertible preferred stock of the Company and a warrant to purchase 473,708,300 shares of common stock at an exercise price of $0.01 per share. The warrant includes a redemption right, payable in cash upon the future occurrence of a change in control. The warrant also includes a put provision inherent in the redemption provision; therefore, the warrant was recorded at issuance as a liability for “Derivative financial instruments at fair value” in the amount of $4,290,875 on the Company’s balance sheet in accordance with the current authoritative guidance. The Company is required to adjust the carrying value of the above warrant to its fair value at each balance sheet date and recognize any change since the prior balance sheet date as a component of other expense or income. In valuing the above warrant, the Company used the Black-Scholes model. As such, the Company recorded a derivative financial instrument at fair value of $4,290,875 in connection with this transaction in April 2010.

Note 10 — Cost of Sales

For the periods ended June 30, 2010 and 2009, costs of sales consisted of the following:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2010				2009				2010				2009
Equipment costs		$	1,649,098			$	1,178,861			$	2,552,138			$	2,938,072
Contract labor			8,362				18,610				10,962				24,225
Software assurance			161,990				—				161,990				—
Direct labor			153,473				328,881				657,114				663,820
Sales commissions and selling costs			232,544				132,779				354,613				261,173
Lite warranty costs			20,150				24,101				43,579				55,020
Other costs			18,801				13,320				24,685				30,422
		$	2,244,418			$	1,696,552			$	3,805,081			$	3,972,732

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 11 — Employee Benefit Plan

USVD, the Company’s subsidiary, has a 401(k) profit sharing plan (the Plan) and other employee health and benefit plans. The Plan allows all eligible employees to defer a portion of their income on a pretax basis through contributions to the Plan.

The Company has made 401(k) matching contributions of $9,429 and $21,830 for the three months ended June 30, 2010 and 2009, respectively. The Company has made 401(k) matching contributions of $19,354 and $53,397 for the six months ended June 30, 2010 and 2009, respectively.

The Company provides group health and other benefits to its employees through plans that cover all employees that elect to be covered. The Company’s share of group health care costs was approximately $127,000 and $155,000 for the three months ended June 30, 2010 and 2009, respectively, and such amounts have been included in employee compensation and benefits expense. The Company’s share of group health care costs was approximately $239,000 and $302,000 for the six months ended June 30, 2010 and 2009, respectively, and such amounts have been included in employee compensation and benefits expense.

Note 12 — Stock-Based Compensation

The following disclosures provide information regarding the Company’s stock-based compensation awards, all of which are classified as equity awards in accordance with the authoritative guidance:

Stock options.

The Company grants stock options to employees that allow them to purchase shares of the Company’s common stock. Options are also granted to members of the Board of Directors. The Company determines the fair value of stock options at the date of grant using the Black-Scholes valuation model. Most options vest annually over a three-year service period. The Company will issue new shares upon the exercise of stock options.

2007 Stock Incentive Plan

Effective April 19, 2007, the Company adopted the Brookside Technology Holdings Corp. (formerly Cruisestock, Inc) 2007 Stock Incentive Plan (the “Stock Incentive Plan”). The Stock Incentive Plan is discretionary and allows for an aggregate of up to 35,000,000 shares of the Company’s common stock to be awarded through incentive and non-qualified stock options and stock appreciation rights. The Stock Incentive Plan is administered by the Board of Directors, which has exclusive discretion to select participants who will receive the awards and to determine the type, size and terms of each award granted.

The Company recognized $26,718 and $7,420 compensation expense for options for the three months ended June 30, 2010 and 2009, respectively. The Company recognized $49,075 and $24,364 compensation expense for options for the six months ended June 30, 2010 and 2009, respectively.

Effective March 17, 2010, the Company issued to several of its non-executive employees 10,560,000 stock options. The stock options vest over three years, and have a strike price of $.01 per share, the fair value of the Company’s common stock at issuance date. The Company recognized employee stock option expense of $2,924 in March 2010 for these options. The Company determines the fair value of stock options at the date of grant using the Black-Scholes valuation model. Most options vest annually over a three-year service period. The Company will issue new shares upon the exercise of stock options.

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 12 — Stock-Based Compensation (continued)

A summary of the changes in the total stock options outstanding during the six months ended June 30, 2010 follows:

						Weighted
						Average
		Options				Exercise Price
Outstanding at December 31, 2009			21,200,000			$	0.03
Granted during 2010			10,560,000			$	0.01
Forfeited or expired			(20,000	)		$	0.01
Exercised			—				—
Outstanding at June 30, 2010			31,740,000			$	0.02
Vested and exercisable at June 30, 2010			19,037,083			$	0.03

The weighted average remaining term of the options is approximately 8.8 years at June 30, 2010. Options issued in 2010 had an exercise price of $0.01 per share. The grant date fair value for 2010 options was $0.01 per share. At June 30, 2010, there was approximately $199,000 of total unrecognized compensation cost related to non-vested stock option awards that are expected to be recognized over a period of 2 years. The Company has stock options outstanding with an intrinsic value of $185,667 at June 30, 2010. The options vest as follows:

Number of Shares				Year Vested
	3,570,282			2010 (Remainder)
	4,807,231			2011
	3,594,731			2012
	730,673			2013

Valuation Assumptions

The Company estimates the forfeiture rate based on past turnover data. The rate used in the three and six months ended June 30, 2010 and 2009 was minimal. Forfeiture rate is the estimated percentage of options granted that are expected to be forfeited or cancelled on an annual basis before becoming fully vested.

There were no options granted during the three months ended June 30, 2010 and 2009.

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 12 — Stock-Based Compensation (continued)

The stock based compensation expense under ASC 718 that has been reported in the consolidated statements of operations is as follows:

		Six Months Ended June 30,
		2010				2009
Stock-based compensation expense by caption:
Cost of sales		$	—			$	—
Selling, general and administrative			49,075				24,364
Total stock-based compensation expense		$	49,075			$	24,364

For stock subject to vesting, the Company utilized the “straight-line” method for allocating compensation cost by period.

Note 13 — Warrants

Warrants

The following is a summary of the warrants outstanding as of June 30, 2010.

		Outstanding				Exercise Price
Series B			318,041,815			$	0.01
Series C			5,329,534			$	0.01
Series D **			306,880,000			$	0.01
Series E			61,273,835			$	0.01
Series F			350,000,000			$	0.01
Series G			473,083,300			$	0.01
Chatham			506,906,835			$	0.01
Total warrants			2,022,140,319

No warrants were exercised during the six months ended June 30, 2010 and 2009.

A total of 152,106,955 Series A Warrants expired during the six months ended June 30, 2010.

Note 14 — Goodwill and Purchased Intangible Assets

(a) Goodwill

The following table presents the goodwill allocated to the Company’s reportable segments as of and during the six months ended June 30, 2010 and December 31, 2009:

		Balance at								Balance at
		Dec. 31, 2009				Impairment				June 30, 2010
USVD		$	8,204,318			$	—			$	8,204,318
STN			3,454,936				—				3,454,936
Total		$	11,659,254			$	—			$	11,659,254

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 14 — Goodwill and Purchased Intangible Assets (continued)

(b) Purchased Intangible Assets

Intangible assets represent amounts acquired in the acquisitions of USVD and STN and were fully amortized as of June 30, 2010 and December 31, 2009.

Amortization expense related to these intangible assets was $0 and $273,000 for the three months ended June 30, 2010 and 2009, respectively. Amortization expense related to these intangible assets was $0 and $498,000 for the six months ended June 30, 2010 and 2009, respectively. Amortization expense is included in amortization expense of loan discount and intangibles in the accompanying unaudited condensed consolidated statements of operations.

Note 15 — Derivative Financial Instruments at Fair Value

The Company issued the following warrants in conjunction with various financing related activities:

		2007 Original
		Series A								2008 Vicis				2009 Vicis				2010 Vicis
		Shareholders				Hilco				Financing				Financing				Financing
Financing		$	1,280,237			$	6,000,000			$	5,500,000			$	1,000,000			$	4,737,083
Total number of warrants			475,478,304				61,273,872				250,000,000				100,000,000				473,083,300
Exercise Price		$	.01			$	0.137			$	0.03			$	0.01			$	0.01
Term of warrants (years)			3-5				5				5				5				5
Debt issuance costs		$	554,996			$	1,659,773			$	—			$	—			$	—
Face value of debt/equity		$	2,141,990			$	4,340,227			$	5,500,000			$	1,000,000			$	4,737,083
Fair value of derivative at Inception		$	2,886,233			$	18,008,466			$	9,656,069			$	1,925,571			$	4,290,875
Financing expense recorded		$	2,886,233			$	12,348,466			$	4,156,069			$	925,571			$	4,290,875

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 15 — Derivative Financial Instruments at Fair Value (continued)

The above amounts have been classified as derivative financial instruments because of the put provisions inherent in the redemption provision included in the warrant agreements and recorded at issuance as a liability for “Derivative financial instruments at estimated fair value” on the Company’s balance sheet in accordance with the current authoritative guidance, whereby the Company is required to adjust the carrying value of the above warrants to its fair value at each balance sheet date and recognize any change since the prior balance sheet date as a component of other expense or income. In valuing the above warrants, the Company used the Black-Scholes model. Changes in warrant liabilities for 2010 and 2009 were as follows:

		2009
		3/31/09				6/30/09				9/30/09				12/31/09
Derivative financial instrument at opening balance sheet date		$	12,016,463			$	11,338,561			$	7,512,529				3,619,902
Fair value of new derivative During the period			—				1,925,571				—				2,886,233
Change in estimated fair market Value of derivative financial Instrument			(677,902	)			(5,751,603	)			(3,892,627	)			(68,588	)
Derivative financial instrument at closing balance sheet date		$	11,338,561			$	7,512,529			$	3,619,902			$	6,437,547

		3/31/10				6/30/10
Derivative financial instrument at opening balance sheet date		$	6,437,547			$	6,269,909
Fair value of new derivative during the Period			—				4,290,875
Change in estimated fair market Value of derivative financial instrument			(167,639	)			(622,657	)
Derivative financial instrument at Closing balance sheet date		$	6,269,909			$	9,938,127

The determination of fair value includes significant estimates by management including volatility of the Company’s common stock, interest rates, and the probability of redemption or a future dilutive financing transaction among other items. The recorded value of the derivative financial instrument can fluctuate significantly based on fluctuations in the fair value of the Company’s common stock, as well as in the volatility of the stock price during the term used for observation and the term remaining for exercise of these warrants. The fluctuation in estimated fair value may be significant from period to period which in turn may have a significant impact on reported financial condition and results of operations.

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 16 — Segment Information

The Company conducts business nationally and is primarily managed on a geographic basis through its three primary wholly-owned subsidiaries. The Company’s management makes financial decisions and allocates resources based on the information it receives from its internal management system. Sales are attributed to either STN, USVD or BTP based on the order placement. Based on the Company’s organization, the Company operates in three business segments: STN, USVD and BTP/BKSD. STN is headquartered in Huntington Beach, California, and has offices in Sacramento and San Diego. USVD is headquartered in Louisville, Kentucky, and serves the Kentucky and Southern Indiana markets, operating out of offices in Louisville, Lexington and Indianapolis. BTP is located in Austin, Texas and BKSD, the Company’s corporate office, is headquartered in Clearwater, Florida.

The Company’s chief operating decision makers utilize both revenue and income (loss) before income taxes, in assessing performance and making overall operating decisions and resource allocations. The BTP/BKSD segment represents corporate selling, general and administrative expenses and interest expense for the Company, as well as the results of operations for BTP, Inc. The Company does not allocate general corporate sales and marketing, or general and administrative expenses to USVD and STN in this internal management system because management does not include the information in its measurement of the performance of the operating segments. In addition, the Company does not allocate amortization of acquisition-related intangible assets, share-based compensation expense, and certain other items to the net income (loss) for USVD and STN because management does not include this information in its measurement of the performance of the operating segments.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies (Note 3). Information about the Company’s segments is as follows (in thousands):

Three months ended June 30, 2010:

						Income (loss)				Fixed
		Revenue				before income taxes				Assets
STN		$	2,447			$	271			$	62
USVD			2,655				42				138
BTP/BKSD			803				(4,542	)			58
		$	4,905			$	(4,229	)		$	258

Three months ended June 30, 2009:

						Income (loss)				Fixed
		Revenue				before income taxes				Assets
STN		$	2,096			$	197			$	65
USVD			2,043				302				264
BTP/BKSD			405				3,295				82
		$	4,544			$	(650	)		$	411

Brookside Technology Holdings Corp.
Notes to Unaudited Condensed Consolidated Financial Statements

Note 16 — Segment Information (continued)

Six months ended June 30, 2010:

						Income (loss)				Fixed
		Revenue				before income taxes				Assets
STN		$	3,930			$	(45	)		$	62
USVD			3,630				59				138
BTP/BKSD			1,017				(5,556	)			59
		$	8,577			$	(5,542	)		$	259

Six months ended June 30, 2009:

						Income (loss)				Fixed
		Revenue				before income taxes				Assets
STN		$	4,282			$	348			$	65
USVD			4,652				362				264
BTP/BKSD			611				2,434				82
		$	9,545			$	3,144			$	411

Other Segment Information

The majority of the Company’s assets, excluding cash and cash equivalents and investments, as of June 30, 2010 and December 31, 2009 are all located in the U.S. For the six months ended June 30, 2010 and 2009, no single customer accounted for 10% or more of the Company’s net sales.

Note 17 — Subsequent Events

No significant subsequent events have occurred subsequent to the balance sheet date that require disclosure.

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

The information presented in this section should be read in conjunction with our audited consolidated financial statements and related notes for the periods ended December 31, 2009 and 2008 included in our Form 10-K, as filed with the Securities and Exchange Commission, as well as the information contained in the consolidated financial statements, including the notes thereto, appearing in this report. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section entitled “Risk Factors” of our Form 10-K for the year ended December 31, 2009, and elsewhere in this report.

General

DESCRIPTION OF BROOKSIDE TECHNOLOGY HOLDINGS CORP.’S BUSINESS

Operations

Brookside Technology Holdings Corp., (the “Company”) is the holding company for Brookside Technology Partners, Inc, a Texas corporation (“Brookside Technology Partners”), US Voice & Data, LLC, an Indiana Limited Liability Company (“USVD”), Standard Tel Acquisitions, Inc., a California Corporation (“Acquisition Sub”), Trans-West Network Solutions, Inc., (“Trans-West”), a California Corporation and Standard Tel Networks, LLC, a California Limited Liability Company (“STN”). All operations are conducted through these (five) wholly owned subsidiaries.

Collectively, the subsidiary companies are providers of converged business communications products and services from Mitel, Nortel and NEC. We are the 2 ^nd largest MITEL dealer in the United States, and are recognized by Mitel as a Platinum ELITE Partner. We combine technical expertise in a range of communications products, including IP-enabled platforms, wired and wireless IP and digital endpoints and leading edge communications applications to create converged voice, video and data networks that help businesses increase efficiency and optimize revenue opportunities, critical for success in today’s competitive business environment. We specialize in selling, designing, analyzing and implementing converged Voice over IP (VoIP), data and wireless business communications systems and solutions for commercial and state/government organizations of all types and sizes in the United States, and we have offices throughout the United States that provide a national footprint. Headquartered in Huntington Beach, California, STN has offices in the Sacramento, and San Diego. Headquartered in Austin, Texas, Brookside Technology Partners serves the Texas market. Headquartered in Louisville, Kentucky, USVD serves the Kentucky and Southern Indiana markets, operating out of offices in Louisville, Lexington and Indianapolis. Combined, new implementations represent approximately 70% of our revenues with the remaining 30% generated by service, support, maintenance and other recurring revenues from our existing customer base.

Background/Name Change/Redomestication

Cruisestock, Inc, (“Cruisestock”) was incorporated in September 2005 under the laws of the State of Texas. Immediately prior to February 21, 2007, it was a shell corporation with no significant operations or assets. On February 21, 2007, Cruisestock acquired all of the stock of Brookside Technology Partners, a Texas corporation, in a transaction where the shareholders of Brookside Technology Partners exchanged all of their shares for shares of common stock of Cruisestock (the “Share Exchange”). As a result, Brookside Technology Partners became a wholly owned subsidiary of Cruisestock. However, from an accounting perspective, Brookside Technology Partners was the acquirer in the Share Exchange.

Subsequent to the Share Exchange, on July 6, 2007 (the “Effective Time”), Cruisestock changed its name to Brookside Technology Holdings Corp. and redomesticated in Florida. The name change and redomestication were accomplished by merging Cruisestock into a newly-formed, Florida wholly-owned subsidiary, with the subsidiary being the surviving entity (the “Redomestication”).

Our common stock is quoted on the NASDAQ Over the Counter Bulletin Board (OTCBB) under the symbol: BKSD.

Increase in Authorized Shares

On November 19, 2009, shareholders representing a voting majority of our shares executed and delivered to us written consents in lieu of a meeting approving an increase in our authorized shares of common stock from one billion (1,000,000,000) shares to ten billion (10,000,000,000) shares.

RECENT DEVELOPMENTS

Recent Financings

Effective June 1, 2009, we entered into a Securities Purchase Agreement with Vicis, pursuant to which Vicis invested an additional $1,000,000 in the Company and we issued to Vicis 1,000,000 shares of our Series A Stock and a warrant to purchase 100,000,000 shares of common stock at an exercise price of $0.01 per share. The warrant included a put provision inherent in the redemption provision included in the warrant agreements and recorded at issuance as a liability for “Derivative financial instruments at fair value” on our balance sheet in accordance with the current authoritative guidance. We are required to adjust the carrying value of the above warrant to its fair value at each balance sheet date and recognize any change since the prior balance sheet date as a component of other expense or income. In valuing the above warrant, we used the Black-Scholes model. The warrant included a redemption right, payable in cash upon the future occurrence of a change in control. As such, we recorded a derivative financial instrument at fair value of $898,756 in connection with this transaction.

Additionally, effective April 12, 2010, we entered into a Securities Purchase Agreement with Vicis, pursuant to which Vicis invested an additional $3,000,000 in the Company and we issued to Vicis 3,000,000 shares of our Series A Stock and a warrant to purchase 300,000,000 shares of Common Stock at an exercise price of $0.01 per share. The warrant included a put provision inherent in the redemption provision included in the warrant agreements and recorded at issuance as a liability for “Derivative financial instruments at fair value” on our balance sheet in accordance with the current authoritative guidance. We are required to adjust the carrying value of the above warrant to its fair value at each balance sheet date and recognize any change since the prior balance sheet date as a component of other expense or income. In valuing the above warrant, we used the Black-Scholes model. The warrant included a redemption right, payable in cash upon the future occurrence of a change in control. As such, we recorded a derivative financial instrument at fair value of $4,290,875 in connection with this transaction in April 2010.

Results of Operations

The following discussion of the financial condition and results of operations of the Company should be read in conjunction with the condensed consolidated financial statements included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future.

Revenues, Cost of Sales and Gross Margins

Total revenues from operations for the three months ended June 30, 2010 were $4,904,638 compared to $4,544,051 reported for the same period in 2009, an increase of $360,587 or 7.9%. This increase in revenues is primarily due to the increased sales activity experienced in all of our subsidiary entities in 2010 versus the comparable period in 2009. This is due primarily due to an increase in new equipment sales in the second quarter of 2010.

Total revenues from operations for the six months ended June 30, 2010 were $8,576,713 compared to $9,545,350 reported for the same period in 2009, a decrease of $968,637 or 10.1%. This decrease in revenues is primarily due to the decreased sales activity experienced in all of our subsidiary entities in the first quarter of 2010 versus the comparable period in 2009. This is primarily due to general market and economic conditions being unfavorable in the first quarter of 2010. This decrease was partially offset by the second quarter increase in revenues discussed above of $360,587 in 2010 versus 2009.

Cost of sales was $2,244,418 for the three months ended June 30, 2010 compared to $1,696,552 reported for the same period in 2009, an increase of $547,866 or 32.43%. Total cost of sales increased due to increased revenues discussed above. As a percentage of sales, cost of sales was 45.8% and 37.3% for the three months ended June 30, 2010 and 2009, respectively. The increase in the cost of sales as a percentage of revenue is due primarily to the recognized revenue on some specifically large deals, which totaled approximately $912,000 for the reporting period in 2010, which had a lower profit margin in 2010 versus

2009. This lower profit is due to the significant amount of new equipment involved, which as a mix of total revenue which includes hardware, software and annual labor maintenance, has a lower gross margin.

Cost of sales was $3,805,081 for the six months ended June 30, 2010 compared to $3,972,732 reported for the same period in 2009, an decrease of $167,651 or 4.2%. As a percentage of sales, cost of sales was 45.8% and 37.3% for the six months ended June 30, 2010 and 2009, respectively. Total cost of sales decreased due to decreased revenues discussed above. The increase in the cost of sales as a percentage of revenue is due primarily to the recognized revenue on some specifically large deals, which totaled approximately $948,000 for the reporting period in 2010, which had a lower profit margin in 2010 versus 2009. This lower profit is due to the significant amount of new equipment involved, which as a mix of total revenue which includes hardware, software and annual labor maintenance, has a lower gross margin.

Gross margin was $2,660,220 or 54.2% as a percentage of revenue for the three months ended June 30, 2010 compared to $2,847,499 or 62.7% as a percentage of revenue reported for the same period in 2009. The decrease in the gross margin as a percentage of revenue is due primarily to the recognized revenue on some specifically large deals, which totaled approximately $912,000 for the reporting period in 2010, which had a lower profit margin in 2010 versus 2009. This lower profit is due to the significant amount of new equipment involved, which as a mix of total revenue which includes hardware, software and annual labor maintenance, has a lower gross margin.

Gross margin was $4,771,632 or 55.6% as a percentage of revenue for the six months ended June 30, 2010 compared to $5,572,618 or 58.4% as a percentage of revenue reported for the same period in 2009. The decrease in the gross margin as a percentage of revenue is due primarily to the recognized revenue on some specifically large deals, which totaled approximately $948,000 for the reporting period in 2010, which had a lower profit margin in 2010 versus 2009.

General and Administrative Expenses

General and administrative expenses were $2,702,550 and $2,840,295 for the three months ended June 30, 2010 and 2009, respectively, representing a decrease of $137,745. The decrease in 2010 was primarily due to organizational sizing and direct cost cutting to reduce general and administrative expenses. Our management continues to evaluate expenses in line with revenues to determine additional cost cutting.

General and administrative expenses were $5,547,464 and $5,950,392 for the six months ended June 30, 2010 and 2009, respectively, representing a decrease of $402,928. The decrease in 2010 was primarily due to organizational sizing and direct cost cutting to reduce general and administrative expenses. Our management continues to evaluate expenses in line with revenues to determine additional cost cutting.

Rental expense for operating leases for the three months ended June 30, 2010 and 2009 was $77,760 and $164,122 respectively, representing a decrease of $86,362. The decrease is primarily due to renewing our San Diego, Sacramento and Austin, TX leases at reduced lease rates.

Rental expense for operating leases for the six months ended June 30, 2010 and 2009 was $314,509 and $339,635 respectively, representing a decrease of $25,126. The decrease is primarily due to renewing our San Diego, Sacramento and Austin, TX leases at reduced lease rates.

Amortization Expense

We recognized $243,338 and $516,713 of amortization expense for the three months ending June 30, 2010 and 2009, respectively. This represented a decrease of $273,375. The decrease is due primarily to the full amortization in 2009 of customer contracts purchased with the STN acquisition and classified as intangible assets.

We recognized $486,676 and $993,387 of amortization expense for the six months ending June 30, 2010 and 2009, respectively. This represented a decrease of $506,711. The decrease is due primarily to the full amortization in 2009 of customer contracts purchased with the STN acquisition and classified as intangible assets.

Interest Expense

Interest expense was $318,158 and $479,446 for the three months ended June 30, 2010 and 2009, respectively. This decrease of $161,288 is due primarily to the full amortization of deferred finance charges in 2009, and a decrease of interest expense charged on the Chatham note payable in 2010 versus 2009 effective April 12, 2010.

Interest expense was $761,139 and $912,255 for the six months ended June 30, 2010 and 2009, respectively. This decrease of $151,116 is due primarily to the full amortization of deferred finance charges in 2009 and a decrease of interest expense charged on the Chatham note payable in 2010 versus 2009 effective April 12, 2010.

Gain on Change in Fair Value of Derivative Financial Instruments

Gain on change in fair market value of derivative financial instruments was $622,656 and $5,751,603 for the three months ended June 30, 2010 and 2009, respectively. This is a decrease in gain of $5,128,947. This is due to the decrease in fair market value of the warrants pursuant to a valuation using the Black-Scholes Model. The fair value of the derivative liability decreased as a result of a decline in the market price of our common stock.

Gain on change in fair market value of derivative financial instruments was $790,295 and $6,429,505 for the six months ended June 30, 2010 and 2009, respectively. This is a decrease in gain of $5,639,210. This is due to the decrease in fair market value of the warrants pursuant to a valuation using the Black-Scholes Model. The fair value of the derivative liability decreased as a result of a decline in the market price of our common stock.

Finance Expense on Derivatives

Finance expense on derivatives was $4,290,875 for the three and six months ended June 30, 2010 and $925,571 for the three and six months ended June 30, 2009, an increase of $3,365,304. On April 12, 2010, we issued 473,083,300 warrants in connection with the Vicis financing which resulted in an expense of $4,290,875 in 2010 and issued 100,000,000 warrants in June 2009 resulting in an expense of $925,571.

Loss on Impairment of Goodwill

We performed an analysis to ascertain the potential impairment to the current carrying value of goodwill at December 31, 2009. Management considered an analysis based on discounted cash flow and a market based approach to be the most applicable. This analysis was based on projected cash flows for the years ended 2010 through 2013, with a residual value of 4.5 times the earnings before interest, taxes, depreciation and amortization (“EBITDA”). This multiple approximates the actual negotiated average purchase price of STN and USVD by the Company, negotiated at arms-length. In order to achieve these future cash flows, we added an assumption for an initial investment of $1,000,000 in 2010.

Based on these assumptions, we calculated the value of goodwill to be $11,659,254. Since the carrying value of goodwill was $16,980,029, an adjustment for impairment of long-lived assets of $5,320,775 was made at December 31, 2009. There was no loss for impairment of goodwill for the six months ended June 30, 2010.

Income Taxes

Provision for income taxes was $160 and $0 for the three months ended June 30, 2010 and 2009, respectively. This expense relates to state income tax due for the three months ended June 30, 2010 and 2009, respectively.

Provision for income taxes was $22,374 and $0 for the six months ended June 30, 2010 and 2009, respectively. This expense relates to state income tax due for the three months ended June 30, 2010 and 2009, respectively.

We file U.S. federal and U.S. state tax returns. For state tax returns, we are generally no longer subject to tax examinations for years prior to 2006. We do not believe we have any significant uncertain tax positions.

Net Income (Loss)

Net income (loss) was ($4,228,779) and $3,793,808 for the three months ended June 30, 2010 and 2009, respectively. This represents an increase in net loss of $8,022,587. This increase in net loss is primarily due a non-cash charge on finance expense on derivatives of $4,290,875 for the three months ended June 30, 2010 versus $925,571 for the comparable period in 2009, the decrease in gain on change in fair value of derivative financial instruments and finance expense on derivatives of $5,128,947, partially offset by the decrease in amortization expense of $273,375 and the decrease in interest expense of $161,288. We may continue to have fluctuations in our net income (loss) due to changes in the fair value of our derivative instruments.

Net income (loss) was ($5,541,995) and $3,143,732 for the six months ended June 30, 2010 and 2009, respectively. This represents an increase in net loss of $8,685,727. This increase in net loss is primarily due a non-cash charge on finance expense on derivatives of $4,290,875 for the six months ended June 30, 2010 versus $925,571 for the comparable period in 2009, the decrease in gain on change in fair value of derivative financial instruments and finance expense on derivatives of $5,639,210, and the decrease in revenues of $968,637 as discussed above, partially offset by the decrease in amortization expense of $506,711 and the decrease in interest expense of $151,116.

Liquidity and Capital Resources

Additional Capital

To the extent that additional capital is raised through the sale of our equity or equity-related securities of our subsidiaries, the issuance of our securities could result in dilution to our stockholders. No assurance can be given that we will have access to the capital markets in the future, or that financing will be available on terms acceptable to satisfy our cash requirements, implement our business strategies, and meet the restrictive requirements of the debenture financing described above. If we are unable to access the capital markets or obtain acceptable financing, our results of operations and financial condition could be materially and adversely affected. We may be required to raise substantial additional funds through other means. In 2009, we did not generate sufficient revenues from our commercial operations associated with product sales. Management will seek to raise additional capital through one or more equity or debt financings or have discussions with certain investors with regard thereto. We cannot assure our stockholders that our revenues will be sufficient to fund our operations.

In April 2010, we obtained an additional $3 million in equity financing, which we believe will be sufficient to meet our working capital needs for the next 12 months. However, if our revenues continue to be insufficient and if adequate funds are not available to us, we may be required to curtail operations significantly or to obtain funds through entering into arrangements with collaborative partners or others that may require us to relinquish rights to sell certain of our technologies or products.

We had a net loss for the six months ended June 30, 2010 of approximately $5.5 million and have an accumulated deficit of approximately $28.9 million. For the six months ended June 30, 2010, we had net cash used in operations of approximately $1,865,000. Historically, we have relied on borrowings and equity financings to maintain our operations. We believe we have enough cash to operate for the coming year with our cash on hand, cash to be generated from operations and the borrowing availability with our lenders. However, the recent economic downturn could have a material effect on our business operations. The accompanying unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should we be unable to continue as a going concern.

Management is focused on managing costs in line with estimated total revenues for 2010 and beyond, including contingencies for cost reductions if projected revenues are not fully realized. However, there can be no assurance that anticipated revenues will be realized or that we will successfully implement our plans.

The following table presents a summary of our net cash provided by (used in) operating, investing and financing activities:

1		Six Months Ended June 30
Category		2010				2009
Net cash used in operating activities		$	(1,864,664	)			(1,032,626	)
Net cash provided by investing activities			361,097				874,233
Net cash provided by financing activities			2,558,505				15,546
Net increase (decrease) in cash		$	1,054,938			$	(142,847	)

For the six months ended June 30, 2010 and 2009, we did not have sufficient revenues to cover our incurred expenses. Our management recognizes that we must generate additional resources to enable us to pay our obligations as they come due, and that we must ultimately successfully implement our business plan and achieve profitable operations. We cannot assure you that we will be successful in any of these activities. Should any of these events not occur, our financial condition will be materially adversely affected.

The time required for us to become profitable from operations is highly uncertain, and we cannot assure you that we will achieve or sustain operating profitability or generate sufficient cash flow to meet our planned capital expenditures, working capital and debt service requirements. If required, our ability to obtain additional financing from other sources also depends on many factors beyond our control, including the state of the capital markets and the prospects for our business. The necessary additional financing may not be available to us or may be available only on terms that would result in further dilution to the current owners of our common stock.

We cannot assure you that we will generate sufficient cash flow from operations or obtain additional financing to meet scheduled debt payments. If we fail to make any required payment under the agreements and related documents governing our indebtedness or fail to comply with the financial and operating covenants contained in them, we would be in default. We believe we have enough cash to operate for the coming year with our cash on hand, cash to be generated from operations and the borrowing availability with our lenders.

Net Cash Used in Operations

Net cash used in operating activities for the six months ended June 30, 2010 was $1,864,664, compared with net cash used in operating activities of $1,032,626 during the same period for 2009, an increase in the use of cash for operating activities of $832,038 (80.6%). The increase in the use of cash is due to: (i) a decrease in revenue of $968,637, partially offset by a decrease in cost of sales and selling, general and administrative expenses of $167,651 and $402,928, respectively, and (ii) also by a net decrease in components of operating assets and liabilities of $741,495.

Net Cash Provided by Investing Activities

Net cash provided by investing activities was $361,097 and $874,233 for the six months ended June 30, 2010 and 2009, respectively. This represents a decrease of $513,136. This was due to the decrease in net cash generated from restricted cash and cash collateral in the amount of $617,944, partially offset by purchases of fixed assets of 43,174 for fiscal 2009, versus 2010.

Net Cash Provided by Financing Activities

Net cash provided by financing activities was $2,558,505 for the six months ended June 30, 2010 and $15,546 for the comparable period in 2009, or an increase of $2,542,959 or 163.6%. This is primarily due to the April 12, 2010 Vicis financing of $3,000,000.

Cash and Cash Equivalents

Our cash and cash equivalents increased the six months ended June 30, 2010 by $1,054,938 (537.1%). As outlined above, the increase in cash and cash equivalents for the current fiscal period was the result of; (i) cash used in operating activities of $1,864,664, (ii) the cash provided by investing activities of $361,097 and (iii) cash provided by financing activities of $2,558,505.

At June 30, 2010, we had a working capital of $449,442, compared with a working capital deficit of $8,427,175 at December 31, 2009, an increase in working capital of $8,876,617. For the six months ended June 30, 2010, overall current assets increased $1,006,186, including increases in cash and cash equivalents, accounts receivable, inventory with decreases in

current liabilities of trade payables. Also, current portion of long-term debt decreased $7,470,065 due to the reclassification of the Chatham debt from current to long-term in 2010 as well as the conversion of the $1,500,000 Vicis debt to Series A Stock on April 12, 2010. The increase in cash is the net result of our operating, investing and financing activities outlined above. Our revenue generating activities during the period, as in previous year, have not produced sufficient funds for profitable operations, and we have incurred operating losses for the six months ended June 30, 2010 and the year ended December 31, 2009. Accordingly, we have continued to utilize the cash raised in our financing activities to fund our operations. In addition to raising cash through additional financing activities, we have supplemented, and expect to continue to supplement, our future working capital needs through the extension of trade payables and increases in accrued expenses. In view of these matters, realization of certain of the assets in the accompanying balance sheet is dependent upon our continued operations, which in turn is dependent upon our ability to meet our financial requirements, raise additional financing, and the success of our future operations.

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 accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. For a description of those estimates, see Note 3, Significant Accounting Policies, contained in the explanatory notes to our financial statements contained in this Report. On an ongoing basis, we evaluate our estimates, including those related to reserves, deferred tax assets and valuation allowance, and impairment of long-lived assets. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates, including those for the above described items, are reasonable.

Revenue Recognition

We derive our revenues primarily from sales of converged VoIP telecommunications equipment and professional services implementation/installation, data and wireless equipment and installation, recurring maintenance/managed service and network service agreements and other services. We recognize revenue in accordance with ASC 605, Revenue Recognition. Under the authoritative guidance, revenue is recognized when there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is determinable, and collectability is reasonably assured. Sales are recorded net of discounts, rebates, and returns.

We primarily apply the percentage-of-completion method and generally recognizes revenue based on the relationship of total costs incurred to total projected costs. Profits expected to be realized on such contracts are based on total estimated sales for the contract compared to total estimated costs, including warranty costs, at completion of the contract. These estimates are reviewed and revised periodically throughout the lives of the contracts, and adjustments to profits resulting from such revisions are made cumulative to the date of the change. Provision for anticipated losses on uncompleted contracts is made in the period in which such losses become evident.

Revenue from contracts that contain multiple elements that are not accounted for under the percentage-of-completion method are accounted for in accordance with the authoritative guidance. Revenue from these contracts is allocated to each respective element based on each element’s relative fair value, if determinable, and is recognized when the respective revenue recognition criteria for each element are fulfilled. We recognize revenue from the equipment sales and installation services using the percentage of completion method. The services for maintaining the systems we install are sold as a stand-alone contract and treated according to the terms of the contractual arrangements then in effect. Revenue from this service is generally recognized over the term of the subscription period or the terms of the contractual arrangements then in effect. A majority of equipment sales and installation services revenues are billed in advance on a monthly basis based upon the fixed price, and are included both accounts receivable and deferred income on the accompanying balance sheets. Direct costs incurred on such contracts are deferred until the related revenue is recognized and are included in deferred contract costs on the accompanying balance sheets. We also provide professional services (maintenance/managed services) on a fixed price basis. These services are billed as bundles and or upon completion of the services.

Stock-Based Compensation. We adopted on January 1, 2006, the provisions of ASC 718-10, which requires recognition of stock-based compensation expense for all share-based payments based on fair value. ASC 718-10, “Share-Based Payment” defines fair value-based methods of accounting for stock options and other equity instruments. This method measures compensation costs based on the estimated fair value of the award and recognizes that cost over the service period. We also consider ASC 505-50, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods, or Services” (“ASC 505-50”), establishes the measurement principles for transactions in which equity instruments are issued in exchange for the receipt of goods or services. We rely upon the guidance provided under ASC 505-50 to determine the measurement date and the fair value re-measurement principles to be applied. We recognize compensation costs, net of an estimated forfeiture rate, on a pro rata basis over the requisite service period of each vesting tranche of each award. We consider voluntary termination behavior as well as trends of actual option forfeitures when estimating the forfeiture rate.

Valuation of Long-Lived Assets Including Acquired Intangibles. We evaluate the carrying value of long-lived assets for impairment, whenever events or changes in circumstances indicate that the carrying value of an asset within the scope of ASC 360-10, “Accounting of the Impairment or Disposal of Long-Lived Assets” may not be recoverable. Our assessment for impairment of assets involves estimating the undiscounted cash flows expected to result from use of the asset and its eventual disposition. An impairment loss recognized is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset, and considers year-end the date for its annual impairment testing.

In 2007 and 2008, we completed the acquisitions of USVD and STN. These transactions were accounted for as a business combination. The purchase price for these assets and liabilities assumed were allocated to acquired intangible assets (e.g., purchased contracts) and goodwill.

Impairment of Excess of Purchase Price Over Net Assets Acquired. We follow the provisions of ASC 805-10, “Business Combinations” and ASC 350-10, “Goodwill and Other Intangible Assets.” These statements establish financial accounting and reporting standards for acquired goodwill. Specifically, the standards address how acquired intangible assets should be accounted for both at the time of acquisition and after they have been recognized in the financial statements. Pursuant to ASC 350-10, goodwill must be evaluated for impairment and is not amortized. Excess of purchase price over net assets acquired (“goodwill”) represents the excess of acquisition purchase price over the fair value of the net assets acquired. To the extent possible, a portion of the excess purchase price is assigned to identifiable intangible assets. We determine impairment by comparing the fair value of the goodwill, using primarily the undiscounted cash flow method, with the carrying amount of that goodwill. Impairment is tested annually or whenever indicators of impairment arise. Based on a net realizable value analysis as of December 31, 2009, it was determined that the asset was partially impaired and we took an approximately $5.3 million write-off for the impairment of goodwill.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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 3.

Item 4T. Controls and Procedures

Disclosure Controls and Procedures

As of June 30, 2010, the Chief Executive Officer and Chief Financial Officer of the Company (the “Certifying Officers”) conducted an evaluation of the Company’s disclosure controls and procedures pursuant to in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The term “disclosure controls and procedures” means controls and other procedures of an issuer that are designed to ensure the information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s (“SEC”) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including the Certifying Officers, to allow timely decisions regarding required disclosure.

Based on this evaluation, the Certifying Officers determined that, as of the end of the period covered by this Report, the Company’s disclosure controls and procedures were not effective to ensure that the information is recorded, processed, summarized and reported, to ensure that information required to be disclosed by the Company in the Reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding disclosure. Specifically, our controls and processes for recording and monitoring transactions involving financial derivative instruments (i.e., warrants) were limited.

Although the Certifying Officers have determined that our disclosure controls and procedures were not effective, management continues to believe that refinement to our disclosure controls and procedures is an ongoing progress. The Audit Committee believes we should continue the following activities: (a) additional education and professional development for our accounting and other staff on new and existing applicable SEC filing requirements, certain applicable SEC disclosure requirements, and the timing of the filing thereof, and (b) reviewing Regulation S-X and Regulation S-K disclosure requirements, SEC staff guidance and interpretations related thereto. We presently have limited resources, which limits our ability to have thorough management oversight and to fully review control documentation.

Our management believes that the Unaudited Condensed Consolidated Financial Statements included herein present, in all material respects, the Company’s financial condition, results of operations and cash flows for the periods presented.

Changes in Internal Control Over Financial Reporting

None

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

As previously disclosed, in 2007, we purchased USVD from the Michael P. Fischer Irrevocable Delaware Trust and the M. Scott Diamond Irrevocable Delaware Trust (the “USVD Sellers”) pursuant to a Membership Purchase Agreement between the Company and the USVD Sellers, dated September 26, 2007 (the “USVD Agreement”). The original purchase price was $15,429,242. As of September 30, 2009, we have paid to the USVD Sellers a total of $14,533,690, representing 94% of all sums payable under the USVD Agreement.

In addition, in connection with the acquisition of USVD, Messrs. Fischer and Diamond were provided employment agreements, pursuant to which they held the positions of CEO and COO, respectively at USVD. The employee agreements provided Messrs. Fischer and Diamond with annual base salaries of $105,000 and $145,000, respectively. As a result, until recently, we relied on Messrs. Fischer and Diamond to continue to operate USVD.

However, on May 12, 2009, Messrs. Fischer and Diamond notified us that they considered their employment to be “constructively terminated” as a result of we having failed to pay them, collectively, an EBITDA earn-out payment of approximately $289,000 they claim they were due on April 30, 2009. Since such time, Messrs. Fischer and Diamond have not shown up to work and they have ceased performing any employment duties.

As discussed further above under “Business” and “Management’s Discussion and Analysis,” USVD’s revenues, under the direction of Messrs. Fischer and Diamond, for the six months ended June 30, 2009 were approximately $2,700,000 lower than its revenues in the same period in 2008. This decrease adversely impacted our liquidity and subsequently our largest equity investor, Vicis, provided an additional capital infusion. Also, the Company and its primary lender, Chatham, have made modifications to our credit facility.

Fortunately, USVD’s first quarter decreased earnings were offset by increased earnings provided by STN, as well as increased earnings at USVD for the second quarter under the direction of Brookside Technology Holdings Corp’s management and other existing USVD and STN senior managers, discussed further above under “Business” and “Management’s Discussion and Analysis.” However, while we may have this offset from these combined strong earnings, Messrs. Fischer’s and Diamond’s earn-outs were to be based solely on USVD’s EBITDA. Given USVD’s performance under Messrs. Fischer’s and Diamond’s stewardship prior to May 12, 2009, it is presently unclear whether they would have earned any future earn-out payments subsequent to their alleged constructive terminations.

In addition to their alleged constructive termination, Messrs. Fischer and Diamond claim that their Restrictive Covenant Agreement entered into as part of their Employment Agreements signed with us at the time of the USVD acquisition are now null and void and that, accordingly, they are free to compete with us and USVD, and to solicit USVD employees. Subsequent to the departures of Messrs. Fischer and Diamond, on May 26, 2009, several USVD employees, mostly sales personnel, entered the USVD premises unescorted and removed Company and personal belongings in connection with their resignations from USVD and their new employment with a new company, which is owned by Messrs. Fischer and Diamond and/or some of their family members, either directly or indirectly.

In response to the actions of Messrs. Fischer and Diamond and certain former USVD employees, we have worked diligently to secure USVD and its assets, employees, vendors, partners and customers. USVD’s employees, vendors, partners and customers have reconfirmed their support and loyalty to USVD, despite the fact that many of them have been solicited by Messrs. Fischer and Diamond and certain former USVD employees.

On July 17, 2009, the USVD Sellers filed a civil action in the Circuit Court of Jefferson County, Kentucky, alleging that the Company breached the USVD Agreement by failing to pay the previously mentioned $289,000 EBITDA earn-out payment they claim they was due on April 30, 2009, in addition to $1,750,000 of other future payments they claim they are entitled to accelerate as a result of such alleged breach. The lawsuit calls for an acceleration of all money owed to the USVD Sellers including: the $850,000 Seller Note, the $289,000 accrued EBITDA earn-out and an additional $900,000 of Minimum Cash Payments (as defined by the employment agreements of Messrs. Fischer and Diamond) in connection with future estimations of earn-outs yet to be earned. We have a note payable — USVD Sellers included in

its long-term debt of $850,000 as well as an accrual for the $289,000 accrued 2008 earn-out payment that the USVD Sellers, Messrs. Fischer and Diamond, claim is due to them.

On October 8, 2009, we filed an answer and counter-claim to the USVD Sellers civil action discussed above. This answer and counter-claim outlines, among other things, the Company’s arguments for defense as well as the Company’s claims of breaches of fiduciary duty and other common law, contractual, quasi-contractual, and statutory claims against former employees of USVD. During their periods of employment, various employees of USVD who are now employees of a competitor, engaged in a variety of acts and omissions in breach of their legal duties to USVD and Brookside, including but not limited to (1) failure of the CEO and COO to fulfill their contractual duties under their Employment Agreements; (2) acts by these and other employees with fiduciary duties to act in the best interests of the company as opposed to their individual self-interests or the interests of third parties, in company matters; (3) destruction and/or seizure of proprietary documents and information belonging to USVD for the benefit of a competitor; and (4) failure by sales personnel to reimburse USVD for funds advanced on sales on behalf of USVD which were not consummated prior to their departures. The Company is continuing to analyze the forgoing civil action and continues to aggressively investigate the actions undertaken by of Messrs. Fischer and Diamond, as well as the former USVD employees, both before and after their resignations. The litigation is in its early stages, and it is premature to project its outcome. The Company continues to vigorously defend the Circuit Court action and to pursue all available defenses, claims and counter claims against the USVD Sellers, Messrs. Fischer and Diamond, and certain former USVD employees.

Item 1A. Risk Factors

No changes from prior disclosure.

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

The information required by this Item 2 was previously disclosed and included in Current Reports on Form 8-K filed by the Company.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. EXHIBITS

Exhibit 31.1		—		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
Exhibit 31.2		—		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
Exhibit 32.1		—		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.2		—		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Dated: August 13, 2010

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