0001144204-15-034814.txt : 20150601 0001144204-15-034814.hdr.sgml : 20150601 20150601161447 ACCESSION NUMBER: 0001144204-15-034814 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20150601 ITEM INFORMATION: Other Events ITEM INFORMATION: Financial Statements and Exhibits FILED AS OF DATE: 20150601 DATE AS OF CHANGE: 20150601 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QTS Realty Trust, Inc. CENTRAL INDEX KEY: 0001577368 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 462809094 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-36109 FILM NUMBER: 15903552 BUSINESS ADDRESS: STREET 1: 12851 FOSTER STREET, SUITE 205 CITY: OVERLAND PARK STATE: KS ZIP: 66213 BUSINESS PHONE: 913-814-9988 MAIL ADDRESS: STREET 1: 12851 FOSTER STREET, SUITE 205 CITY: OVERLAND PARK STATE: KS ZIP: 66213 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QualityTech, LP CENTRAL INDEX KEY: 0001561164 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 270707288 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: 1934 Act SEC FILE NUMBER: 333-201810 FILM NUMBER: 15903553 BUSINESS ADDRESS: STREET 1: 12851 FOSTER STREET CITY: OVERLAND PARK STATE: KS ZIP: 66213 BUSINESS PHONE: 877-787-3282 MAIL ADDRESS: STREET 1: 12851 FOSTER STREET CITY: OVERLAND PARK STATE: KS ZIP: 66213 8-K 1 v412155_8k.htm FORM 8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

Date of Report (Date of Earliest Event Reported): June 1, 2015

QTS Realty Trust, Inc.

QualityTech, LP

(Exact name of registrant as specified in its charter)

Maryland (QTS Realty Trust, Inc.)

Delaware (QualityTech, LP)

001-36109

333-201810

46-2809094

27-0707288

(State or other jurisdiction

of incorporation)

(Commission

File No.)

(I.R.S. Employer

Identification No.)

12851 Foster Street

Overland Park, KS 66213

66213

(Address of principal executive offices)

(Zip Code)

(913) 814-9988

Registrant’s telephone number, including area code:

Not Applicable

(Former name or former address, if changed since last report.)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 8.01 Other Events.

As previously announced, on May 6, 2015, QTS Realty Trust, Inc. (the “Company”), through Quality Technology Services Holding, LLC, its taxable REIT subsidiary, entered into a stock purchase agreement with Carpathia Holdings, LLC and Carpathia Acquisition, Inc. (“Carpathia”), pursuant to which the Company will acquire indirectly 100% of the outstanding stock of Carpathia Hosting, Inc. for approximately $326 million (the “Carpathia Acquisition”). The Company is filing this Form 8-K to provide certain financial information with respect to the Carpathia Acquisition: (1) Carpathia’s audited financial statements and notes thereto for the year ended December 31, 2014, attached hereto as Exhibit 99.1; (2) Carpathia’s unaudited financial statements for the three months ended March 31, 2015 and 2014 and notes thereto, attached hereto as Exhibit 99.2; and (3) the Company’s unaudited pro forma financial statements for the year ended December 31, 2014 and the three months ended March 31, 2015 and the notes thereto, relating to the Carpathia Acquisition and other recently completed acquisitions and capital markets activity.

Item 9.01 Financial Statements and Exhibits.

(a)

Financial statements of businesses acquired

The audited consolidated financial statements of Carpathia Acquisition, Inc. for the year ended December 31, 2014 are filed herewith as Exhibit 99.1 and incorporated in this Item 9.01(a) by reference.

The unaudited consolidated financial statements of Carpathia Acquisition, Inc. for the three months ended March 31, 2015 and 2014 are filed herewith as Exhibit 99.2 and incorporated in this Item 9.01(a) by reference.

(b)

Pro forma financial information

The unaudited pro forma financial statements of QTS Realty Trust, Inc. for the year ended December 31, 2014 and for the three months ended March 31, 2015, giving effect to the acquisition of Carpathia Acquisition, Inc. and other recent acquisitions and capital markets activity, are filed herewith as Exhibit 99.3 and incorporated in this Item 9.01(b) by reference.

(d)

Exhibits

Exhibit Number		Exhibit Description

23.1		Consent of McGladrey LLP
99.1		Audited consolidated financial statements of Carpathia Acquisition, Inc. for the year ended December 31, 2014
99.2		Unaudited consolidated financial statements of Carpathia Acquisition, Inc. for the three months ended March 31, 2015 and 2014
99.3		Unaudited pro forma financial statements of QTS Realty Trust, Inc. for the year ended December 31, 2014 and for the three months ended March 31, 2015

SIGNATURES

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

	QTS Realty Trust, Inc.

DATE: June 1, 2015		/s/ Shirley E. Goza
		Shirley E. Goza
		Secretary and General Counsel

	QualityTech, LP

	By:	QTS Realty Trust, Inc.,
	its general partner

DATE: June 1, 2015		/s/ Shirley E. Goza
		Shirley E. Goza
		Secretary and General Counsel

EXHIBIT INDEX

Exhibit Number		Exhibit Description

23.1		Consent of McGladrey LLP
99.1		Audited consolidated financial statements of Carpathia Acquisition, Inc. for the year ended December 31, 2014
99.2		Unaudited consolidated financial statements of Carpathia Acquisition, Inc. for the three months ended March 31, 2015 and 2014
99.3		Unaudited pro forma financial statements of QTS Realty Trust, Inc. for the year ended December 31, 2014 and for the three months ended March 31, 2015

EX-23.1 2 v412155_ex23-1.htm EXHIBIT 23.1

Exhibit 23.1

Consent of Independent Auditor

We consent to the incorporation by reference in the Registration Statement (No. 333-199848) on Form S-3 of QTS Realty Trust, Inc. of our report dated April 15, 2015, relating to our audit of the consolidated financial statements of Carpathia Acquisition, Inc. and subsidiaries as of and for the year ended December 31, 2014, included in this Current Report on Form 8-K.

/s/ McGladrey LLP

McLean, Virginia

June 1, 2015

EX-99.1 3 v412155_ex99-1.htm EXHIBIT 99.1

Exhibit 99.1

INDEPENDENT AUDITOR’S REPORT

To the Board of Directors

Carpathia Acquisition, Inc.

Dulles, Virginia

Report on the Financial Statements

We have audited the accompanying consolidated financial statements of Carpathia Acquisition, Inc. and its subsidiaries (collectively, the Company) which comprise the consolidated balance sheet as of December 31, 2014, and the related consolidated statements of operations, stockholder’s equity and cash flows for the year then ended, and the related notes to the consolidated financial statements.

Management’s Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Carpathia Acquisition, Inc. and its subsidiaries as of December 31, 2014, and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States of America.

/s/ McGladrey LLP

McLean, Virginia
April 15, 2015

Carpathia Acquisition, Inc. and Subsidiaries
Consolidated Financial Statements
December 31, 2014

Table of Contents

Independent Auditor’s Report	1

Financial Statements

Consolidated Balance Sheet at December 31, 2014	3

Consolidated Statement of Operations for the year ended December 31, 2014	4

Consolidated Statement of Stockholder’s Equity	5

Consolidated Statement of Cash Flows for the year ended December 31, 2014	6

Notes to Consolidated Financial Statements	7

Carpathia Acquisition, Inc. and Subsidiaries

Consolidated Balance Sheet

	December 31, 2014

ASSETS
Current Assets
Cash	$	7,898,865
Accounts receivable, net		9,665,591
Income tax refunds receivable		108,752
Prepaid expenses and other receivables		1,850,866
Total current assets		19,524,074

Property and equipment, net		74,601,143
Goodwill		52,318,135
Intangibles, net		1,472,245
Deferred financing costs, net		1,133,403
Other non-current assets		998,641
Rate cap agreements		893
	$	150,048,534

LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Current portion of long-term debt	$	808,133
Current portion of lease financing obligations		1,323,779
Current portion of capital lease obligations		5,105,109
Accounts payable and accrued liabilities		6,137,474
Accrued expenses		6,925,141
Deferred revenue		8,004,419
Total current liabilities		28,304,055

Long-Term Liabilities
Deferred rent		3,353,273
Lease financing obligations, net of current portion		19,158,301
Capital lease obligations, net of current portion		15,065,352
Deferred revenue		910,688
Deferred income taxes		5,099,567
Long-term debt		68,696,867
Total liabilities		140,588,103

Commitments and Contingencies

Stockholder's Equity		9,460,431
	$	150,048,534

See accompanying notes to financial statements.

Carpathia Acquisition, Inc. and Subsidiaries

Consolidated Statement of Operations

	Year ended December 31, 2014

Revenues	$	82,117,097
Cost of Sales		40,990,499
Gross profit		41,126,598

General and Administrative Expenses		32,230,293
Management Fees - Related Party		222,732
Loss on Sale of Property and Equipment		23,283
		32,476,308

Operating income		8,650,290

Other Income (Expense)
Interest expense, net		(8,620,606	)
		(8,620,606	)

Income before provision for income tax expense		29,684

Provision for Income Tax Expense		797,963

Net loss	$	(768,279	)

See accompanying notes to financial statements.

Carpathia Acquisition, Inc. and Subsidiaries

Consolidated Statement of Stockholder’s Equity

	Common Shares				Shareholder
	Held by Carpathia Holdings, LLC				Notes			Additional		Accumulated
	Shares		Amount		Receivable			Paid-In Capital		Deficit			Total
Balance, December 31, 2013		100	$	1	$	(104,062	)	$	47,901,036	$	(37,568,463	)	$	10,228,512
Exercise of share options		-		-		-			198		-			198
Net loss		-		-		-			-		(768,279	)		(768,279	)
Balance, December 31, 2014		100	$	1	$	(104,062	)	$	47,901,234	$	(38,336,742	)	$	9,460,431

See accompanying notes to financial statements.

Carpathia Acquisition, Inc. and Subsidiaries

Consolidated Statement of Cash Flows

	Year ended December 31, 2014
Cash Flows From Operating Activities
Net loss	$	(768,279	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Amortization of intangibles		1,485,130
Amortization of deferred financing costs		600,835
Bad debt expense		91,290
Depreciation		18,453,187
Deferred rent		203,773
Deferred income taxes		820,315
Loss on sale of property and equipment		23,283
Change in fair value of interest rate cap		17,955
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable		(315,679	)
Income tax refunds receivable		(83,347	)
Prepaid expenses and other receivables		(398,775	)
Other non-current assets		268,957
Increase (decrease) in:
Accounts payable		3,926,385
Accrued expenses		(1,260,419	)
Deferred revenue		672,344
Net cash provided by operating activities		23,736,955
Cash Flows From Investing Activities
Funds transferred from restricted cash account		17,535
Purchase of property and equipment		(16,618,237	)
Net cash used in investing activities		(16,600,702	)
Cash Flows From Financing Activities
Proceeds from term loan		4,129,893
Principal payments on debt		(577,848	)
Principal payments on lease financing obligations		(1,173,713	)
Principal payments on capital lease obligations		(5,075,014	)
Proceeds from the exercise of share options		198
Debt financing costs		(926,743	)
Net cash used in financing activities		(3,623,227	)

Net increase in cash		3,513,026

Cash
Beginning		4,385,839
Ending	$	7,898,865
Supplemental Disclosures of Cash Flow Information
Cash paid for interest	$	9,129,142
Cash paid for income taxes	$	52,931

See accompanying notes to financial statements.

Carpathia Acquisition, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

December 31, 2014

Note 1: Nature of Business and Significant Accounting Policies

Nature of business: Carpathia Acquisition, Inc. and its subsidiaries (collectively, the Company) is a provider of hosting, managed hosting, cloud solutions and related services to commercial companies and government entities. These services are provided under long-term recurring revenue contracts. The Company is headquartered in Dulles, Virginia, and provides services in numerous datacenters across the United States, Canada, Asia and Europe.

A summary of the Company’s significant accounting policies follows:

Principles of consolidation: The Company has one class of shares of common stock with a $0.01 par value. There were 1,000 shares authorized and 100 shares outstanding as of December 31, 2014 which were all held by Carpathia Holdings, LLC (the Parent). The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Restricted cash: Restricted cash is related to a bank account which was to be used solely for the purpose of funding construction related to the transaction described in Note 9. During the year ended December 31, 2014, the remaining balance in this account was used for construction costs.

Revenue recognition: The Company recognizes revenue when a contract has been executed, the contract price is fixed and determinable, delivery of services has occurred and collectability of the contract price is considered probable and can be reasonably estimated. The Company generates revenue from the colocation, managed solutions and cloud services it provides to its customers. These services are provided under sales order contracts, which generally range from one to five years. The majority of the Company’s revenue is derived from recurring revenue contracts and most of these are non-cancellable. Most customers are billed monthly on or before the beginning of each month. Revenue for these services is recognized ratably as the services are delivered. Set-up fees are billed upon completion of contract implementation and recognized over 36 months.

Accounts receivable: Accounts receivable are generated from sales agreements with customers. Billed amounts represent invoices that have been prepared and sent to the customer. Unbilled amounts represent fees for services rendered that have not been billed. The Company evaluates the credit worthiness of its customers prior to extending credit and monitors collectability of accounts on a continuous basis. Accounts receivable are considered past due if the invoice has been outstanding more than 60 days. The Company does not charge interest on past due accounts receivable. The Company has established an allowance for doubtful accounts based on management’s estimate of potential losses. Accounts are written off when deemed uncollectible. As of December 31, 2014, the Company recorded an allowance for doubtful accounts of $649,887.

Property and equipment: Property and equipment are stated at cost or at the fair value of assets acquired upon acquisition. The Company follows the practice of capitalizing all expenditures for computers, furniture, equipment and leasehold improvements in excess of $1,000 and with a useful life in excess of one year. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized on a straight-line basis over the lesser of their useful lives or the term of the related lease. Upon retirement or sale of an asset, the cost and accumulated depreciation of assets sold or retired are removed from the respective accounts and any gain or loss is recognized in the consolidated statement of operations.

Deferred financing costs: Deferred financing costs are amortized using the effective interest method over the term of the related debt financing.

Goodwill and other indefinite-lived intangible assets: The Company records as goodwill the excess of the purchase price over the fair value of the identifiable net assets and other intangibles acquired. Other indefinite-lived intangible assets consist of a trade name. The Company tests indefinite-lived intangible assets for impairment by using first an assessment of qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. If, based on the qualitative assessment, the Company cannot conclude that it is more-likely-than-not that the fair value exceeds the carrying amount, the Company will test for impairment, which is performed annually or when an event triggering impairment may have occurred. The first step tests for impairment, while the second step, if necessary, measures the impairment. The Company has concluded that goodwill and the trade name were not impaired as of December 31, 2014.

Long-lived assets: Intangible assets consist of definite-lived assets, including customer contracts and non-compete agreements. The fair value of the intangible assets was initially determined using the estimated future cash flows from the assets. The customer contracts have an estimated life of six to ten years and the non-compete agreements have an estimated life of four to five years. The intangibles are being amortized using an accelerated cash flow-based methodology over their respective estimated lives. The Company accounts for the valuation of long-lived assets under ASC 360-10-15, Impairment or Disposal of Long-Lived Assets. The standard requires that long-lived assets and certain intangible assets be reviewed for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by a comparison of the carrying amount of the assets to the future undiscounted net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the estimated fair value of the assets. Assets to be disposed of are reportable at the lower of the carrying amount or fair value, less costs to sell.

Deferred revenue: Deferred revenue results when amounts billed under contract terms are in excess of revenue recognized in accordance with generally accepted accounting principles.

Income taxes: Under the provisions of the Internal Revenue Code (IRC) and applicable state laws, the Company’s Parent is taxed similarly to a partnership, and as a result, is not directly subject to income taxes. The results of its operations are included in the tax returns of its members.

Carpathia Hosting, Inc., a subsidiary of the Company, is taxed as a C Corporation under the provisions of the IRC. Deferred taxes are calculated using the liability method, whereby, deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

The Company has adopted the accounting standard on accounting for uncertainty in income taxes, which addresses the determination of whether tax benefits claimed, or expected to be claimed, on a tax return should be recorded in the consolidated financial statements. Under this guidance, the Company may recognize the tax benefit from an uncertain tax position only if it is more-likely-than-not that the tax position will be sustained on examination by taxing authorities based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The guidance on accounting for uncertainty in income taxes also addresses de-recognition, classification, interest and penalties on income taxes and accounting in interim periods. Management evaluated the Company’s tax positions and concluded that the Company has taken no uncertain tax positions that require adjustment to the consolidated financial statements. With few exceptions, the Company is no longer subject to income tax examinations by the U.S. federal, state or local tax authorities for years before 2011.

Share-based compensation: The Company applies the provisions of ASC 718-10, Stock Compensation. The standard requires that the compensation cost relating to share-based payment transactions, including grants of member interests, be recognized in the financial statements. Such cost is measured based on the fair value of the equity or liability instruments issued. The standard covers a wide range of share-based compensation arrangements including stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. The compensation cost representing the fair value of equity options granted to employees during the year ended December 31, 2014, was not considered material to the consolidated financial statements.

Derivative instruments: The Company adheres to the provisions of ASC 815, Derivatives and Hedging, to account for derivative instruments. All derivatives are recognized as either assets or liabilities at their fair value on the consolidated balance sheet, with the changes in the fair value reported in current period earnings. The Company currently has outstanding three interest rate cap agreements that are included on the consolidated balance sheet as other non-current assets, and the change in fair value is recorded on the consolidated statement of operations in interest expense. For the year ended December 31, 2014, the Company recognized a reduction in fair value of $17,955.

Use of estimates: The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Financial credit risk: The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash.

Financial statement presentation: Certain reclassifications were made the 2014 consolidated financial statements that had no impact on the previously reported net loss or stockholder’s equity.

Recent accounting pronouncements: In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which outlines a single, comprehensive model for accounting for revenue from contracts with customers, to be applied retrospectively. This standard is effective for the annual reporting period beginning after December 15, 2017. Early adoption is not permitted. The Company is not currently able to estimate the impact, if any, that the standard will have on the consolidated financial statements.

The FASB recently issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Cost. This ASU requires that debt issuance costs related to a recognized debt liability be presented in the consolidated balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs is not affected by the new guidance.

Subsequent events: The Company has evaluated subsequent events through April 15, 2015, the date on which the consolidated financial statements were available to be issued.

Note 2: Identifiable Intangible Assets

Identifiable intangible assets as of December 31, 2014, consist of the following:

	Estimated	Gross		Accumulated
	Useful Lives	Amount		Amortization		Net

Customer contracts and relationships	6 – 10 years	$	18,782,000	$	17,977,755	$	804,245
Trade name	Indefinite		668,000		-		668,000
		$	19,450,000	$	17,977,755	$	1,472,245

Future estimated aggregated amortization expense is as follows:

Year Ending December 31,

2015	$	402,123
2016		268,082
2017		134,040
	$	804,245

Note 3: Accounts Receivable

Accounts receivable at December 31, 2014, consist of the following:

Billed	$	10,076,728
Unbilled		238,750
Total receivables		10,315,478
Less allowance for doubtful accounts		649,887
Total accounts receivable	$	9,665,591

Note 4: Property and Equipment

Property and equipment at December 31, 2014, consist of the following:

	Estimated
	Useful Lives	Amount

Land	–	$	750,000
Buildings	22 to 29 years		750,000
Building improvements	2 to 14 years		43,664,339
Computer equipment	1 to 3 years		51,298,621
Software	1 to 3 years		5,957,018
Office furniture and equipment	1 to 3 years		1,095,035
Leasehold improvements	Life of lease		7,674,944
Construction-in-progress	–		4,400,616
Capital lease assets (Note 10)	Life of lease		37,358,406
			152,948,979
Less accumulated depreciation			78,347,836
		$	74,601,143

Note 5: Accrued Expenses

Accrued expenses at December 31, 2014, consist of the following:

Accrued operating expenses	$	3,276,920
Accrued payroll and commissions		1,583,174
Accrued bonuses		1,780,331
Accrued interest		54,833
Other accrued expenses		229,883
Total accrued expenses	$	6,925,141

Note 6: Long-Term Debt

In May 2012, the Company refinanced its debt with the same syndicate of lenders and amended the credit agreement. The amended credit agreement: (1) added a $20,000,000 delayed draw portion to the term loan and increased the previous term loan commitment by $350,000 for a total term loan commitment of $66,350,000; (2) changed the amount of required quarterly principal payments; (3) increased the applicable margin to be applied to either the base rate or London InterBank Offered Rate (LIBOR) rate; (4) changed the minimum financial covenant requirements; and (5) extended the maturity date to May 17, 2017. The funds obtained through the refinancing were used to finance the construction of a datacenter. The Company also paid approximately $1,148,000 of financing costs related to the amendment, which were capitalized as deferred financing costs for the year ended December 31, 2012.

On April 18, 2013, the Company amended its credit agreement to: (1) increase the revolving loan commitment to $8,000,000; (2) change the definition of the LIBOR rate; (3) revise the required quarterly principal payment amounts; and (4) amend the definition of certain financial covenants. The Company also paid approximately $419,000 of financing costs related to the amendment. The costs were capitalized as deferred financing costs for the year ended December 31, 2013.

On March 18, 2014, the Company amended its credit agreement to: (1) increase the total commitment to $70,000,000; (2) change the interest rate applicable margin; (3) revise the required quarterly principal payment amounts; (4) extend the maturity date to March 19, 2019; and (5) amend the definition of certain financial covenants. The Company also paid approximately $927,000 of financing costs related to the amendment. The costs were capitalized as deferred financing costs for the year ended December 31, 2014. Amortization recorded to interest expense during the year ended December 31, 2014, totaled $600,835.

There were no outstanding borrowings on the line of credit as of December 31, 2014. The outstanding balance on the term loan was $69,505,000 as of December 31, 2014.

The credit agreement is collateralized by substantially all of the Company’s tangible and intangible assets. Under the agreement, the Company is subject to certain financial and operating covenants and restrictions. The financial covenants consist of a senior leverage to adjusted EBITDA ratio, fixed charge coverage ratio and maximum capital expenditures test.

The term loan requires principal payments each quarter based on a specified payment schedule, with the unpaid balance due at maturity, which is March 19, 2019. Interest on borrowings under the agreement is based on the Company’s option of either (i) the base rate, as defined in the agreement, plus an applicable margin or (ii) the LIBOR rate (as defined) plus an applicable margin (5.50% at December 31, 2014). Interest expense on the term loan was $4,199,729 for the year ended December 31, 2014.

With the amendment to the credit agreement in 2012, the Company entered into two new interest rate cap agreements with notional amounts of $23,146,050 and $10,000,000. The Company paid a fixed amount in order to cap the term loan rate at 2.00% per annum. The fixed amount is now recorded at its fair value as a non-current asset on the consolidated balance sheet.

Annual maturities of the term loan are as follows:

Year Ending December 31,

2015	$	808,133
2016		849,012
2017		2,907,359
2018		3,627,027
2019		61,313,469
	$	69,505,000

Note 7: Income Taxes

The provision for income tax expense consists of the following:

Federal
Deferred income tax expense	$	820,315

State
Current income tax benefit		(28,914	)

Foreign
Current income tax expense		6,562
Total income tax expense	$	797,963

The difference between the applicable U.S. federal statutory rate of 34% and the actual tax rate for the years ended December 31, 2014, can be attributed to non-deductible items, state and foreign taxes and changes to the valuation allowance, since it was determined that it was more-likely-than-not that the deferred tax assets would not be realized given continued taxable losses. The items causing this difference are as follows:

Federal tax expense at statutory rate	$	10,093
State and foreign taxes		46,920
Non-deductible items		43,261
Change in valuation allowance		681,165
Other		16,524
	$	797,963

Deferred income taxes reflect the net effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts reported for income tax purposes. The significant components of the Company’s deferred tax assets (liabilities) are as follows:

Deferred Tax Liabilities
Prepaid expenses	$	(193,988	)
Goodwill		(5,100,395	)
Effect of change in accounting for leases		(3,421,804	)
		(8,716,187	)

Deferred Tax Assets
Allowance for doubtful accounts		245,737
Depreciation and amortization		7,018,483
Accrued compensation		1,066,964
Foreign tax credit		103,352
Deferred rent		876,697
Net operating loss carryforward		7,591,477
Valuation allowance		(13,286,090	)
		3,616,620
	$	(5,099,567	)

The components giving rise to the net deferred tax amounts described above have been classified in the accompanying consolidated balance sheet at December 31, 2014, as long-term liabilities.

The gross accumulated operating loss being carried forward totals approximately $20,917,000 and expires through 2034.

Note 8: 2008 Unit Plan

The Board of Managers adopted the 2008 Unit Plan (the Plan). The Plan authorizes the Company to sell restricted units or grant options to purchase restricted common units in Carpathia Holdings, LLC to designated employees or non-employees. Under the Plan, the maximum number of units which may be subject to options issued or sold under the Plan is 6,786,984 Class A Common Units. The units may be authorized but unissued or reacquired common units.

If an option or unit purchase right expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased units become available for future grant or sale under the Plan (unless the Plan has terminated). However, units that have actually been issued under the Plan, upon exercise of either an Option or Unit Purchase Right, shall not be returned to the Plan and shall not become available for future distribution under the Plan, except if restricted units are repurchased by the Company at their original purchase price, such units shall become available for future grant under the Plan.

The Company entered into Restricted Unit Purchase Agreements with two employees during the year ended December 31, 2012. The employees issued $104,062 in notes payable to the Company in exchange for 400,235 shares of Class A Common Units under these agreements. The notes accrue interest at 0.88% per annum and mature on the earlier of (1) a change of control, (2) termination of employment with the Company, or (3) the fifth anniversary of the grant date.

The options granted before 2012 vest over four years. Options granted in 2012 vest upon change of control. The fair value of the options granted to date was determined to be nominal, and as such, no compensation expense was recorded in 2014.

A summary of the status of the Company’s unit plan as of December 31, 2014, and changes during the year then ended, is as follows:

						Weighted-Average
				Weighted-		Remaining
				Average		Contractual Term
	Shares			Exercise Price		(Years)

Options outstanding, beginning of year		2,850,126		$	0.072
Exercised during the year		(198,146	)		0.001
Forfeited during the year		-			-
Options outstanding, end of year		2,651,980		$	0.134		5.12

Exercisable, end of year		1,536,618		$	0.054		4.38

Note 9: Lease Financing Obligations

The Company entered into a lease financing agreement, in connection with a $4,814,548 tenant improvement allowance on one of their datacenter lease agreements. The financing bears interest at 10% per annum and requires monthly payments of principal and interest of $61,950 through February 2019. The outstanding balance on the financing agreement was $2,524,723 as of December 31, 2014. Depreciation expense on the related leasehold improvements for the year ended December 31, 2014, was $451,364 and was charged as a direct expense on the consolidated statement of operations. Accumulated depreciation related to the leasehold improvements was $3,009,093 as of December 31, 2014.

As of December 31, 2014, the Company has a financing obligation totaling $17,957,357 related to a sale-leaseback transaction where the Company has continuing involvement. On December 23, 2011, the Company sold the shell of a building and the associated land to an unrelated third party for $1,500,000. The Company will lease the property back and is a party to an agreement with the same third party to construct a new building on the adjoining property for use as a datacenter. The Company is primarily responsible for financing the improvements and outfitting the building with the necessary equipment. The third party will lease back the new building in stages to the Company as the various stages are completed. The rental payments will be based upon the construction costs funded by the third party, plus an applicable mark-up. The imputed interest rates range from 9% to 10%. In accordance with ASC 840-40, Leases, the Company has continuing involvement with the related leased assets; therefore, the Company will continue to account for the existing building shell and the associated land as fixed assets and will capitalize the construction costs of the new building.

Due to the Company’s continuing involvement, the Company is precluded from recording this transaction as a sale; therefore, the Company recorded the $1,500,000 proceeds as a financing obligation. There were also construction costs that were funded by the third party totaling $0 and $4,627,793 that were added to the cost of the asset and to the financing obligation during the years ended December 31, 2014 and 2013, respectively. The financing obligation is reduced as rental payments are made, starting in January 2012, on the existing building. Rental payments, which will include amounts attributable to both principal and interest, were $15,000 per month initially. The newly constructed building was inhabited by the Company beginning in March 2013, at which time rental payments of $176,328 per month and depreciation began. Depreciation expense on the related asset was $1,469,401 for the year ended December 31, 2014, and was charged as a direct expense on the consolidated statement of operations. Accumulated depreciation related to the asset was $2,693,903 as of December 31, 2014.

Annual estimated maturities of the lease financing obligations as of December 31, 2014, are as follows:

Year Ending December 31,

2015	$	1,323,779
2016		1,531,466
2017		1,761,859
2018		2,017,271
2019		1,656,970
Thereafter		12,190,735
	$	20,482,080

Note 10: Commitments and Contingencies

Operating leases: The Company leases office space under an operating lease that expires in 2024. Total rent expense charged to operating expense for office space for the year ended December 31, 2014, was $850,173. Future minimum lease payments required under this lease are follows:

Year Ending December 31,

2015	$	885,683
2016		907,766
2017		930,580
2018		953,894
2019		977,708
Thereafter		4,345,041
	$	9,000,672

In addition, the Company leases datacenter space in several locations under long-term non-cancellable lease agreements expiring through 2026. Rent expense related to these agreements is recorded as a direct expense. Total rent expense for these locations for the year ended December 31, 2014, was $13,861,815.

Future minimum lease payments required under these leases are as follows:

Year Ending December 31,

2015	$	7,837,053
2016		4,515,752
2017		3,218,701
2018		2,459,988
2019		2,406,739
Thereafter		18,182,383
	$	38,620,616

Capital leases: The Company has entered into financing-type agreements for datacenter space under two lease agreements expiring through 2019. Total monthly payments range from $199,900 to $485,300 over the lives of the leases. In 2013, the Company entered into seven additional equipment leases, expiring through 2016. Under the capital leases, monthly payments range from $5,000 to $90,000. The imputed interest rate is approximately 8.5% for the space and equipment leases. Future payment obligations, together with the present value of the net minimum lease payments at December 31, 2014, are as follows:

Year Ending December 31,

2015	$	6,612,842
2016		5,658,767
2017		5,701,691
2018		5,457,278
2019		311,007
		23,741,585
Less amount representing interest		3,571,124
		20,170,461
Less current portion		5,105,109
Long-term obligation	$	15,065,352

Depreciation expense related to capital leases for the year ended December 31, 2014, was $4,366,879. For the year ended December 31, 2014, $3,247,387 of depreciation expense was charged as a direct expense on the consolidated statement of operations related to the datacenter space. Accumulated depreciation related to capital lease assets was $22,089,796 as of December 31, 2014.

Legal matters: The Company is involved in legal disputes from time to time in the ordinary course of business. Management does not believe that these disputes require adjustment to the consolidated financial statements.

Note 11: Rental Income

The Company has entered into an operating lease agreement expiring in 2018 for certain of its datacenter space. The rental income recorded under this agreement is recorded as revenue. The Company’s obligations associated with this agreement are included in Note 10. Total rental income recorded for the year ended December 31, 2014, was $11,114,084.

Total future rental payments to be received are as follows:

Year Ending December 31,

2015	$	10,511,909
2016		10,818,137
2017		11,126,824
2018		1,038,828
	$	33,495,698

Note 12: Major Customers

For the year ended December 31, 2014, two customers each had revenue in excess of 10% of total revenue and accounted for approximately 24% of the Company’s total revenue. Accounts receivable from these customers totaled approximately $3,573,000 as of December 31, 2014. Deferred revenue totaling approximately $1,400,000 is recorded at December 31, 2014, for prepayments received from these customers.

Note 13: 401(k) Plan

Carpathia has a defined contribution 401(k) profit-sharing plan (the Plan), which covers all employees who meet the minimum age and service requirements set forth in the Plan documents. Participants in the Plan are able to make voluntary contributions up to the maximum amounts allowable by law and are 100% vested in such contributions. The Plan includes a provision for discretionary employer matching contributions of employee contributions. Employer matching contributions are subject to a five-year vesting schedule. The Company did not make contributions to the Plan during the year ended December 31, 2014.

Note 14: Related Party Transactions

The Company has entered into a management agreement with the Parent company’s majority member, whereby, the member is paid certain fees for general management, transactional, financial and other corporate advisory services. The management fee is $200,000 per year, to be paid on a quarterly basis, plus reasonable and customary out-of-pocket expenses associated with services to the Company. Fees paid under this agreement for the year ended December 31, 2014, totaled $222,732 and are recorded on the consolidated statement of operations.

EX-99.2 4 v412155_ex99-2.htm EXHIBIT 99.2

Exhibit 99.2

Carpathia Acquisition, Inc. and Subsidiaries
Unaudited Consolidated Financial Statements
March 31, 2015

Table of Contents

Unaudited Consolidated Balance Sheet at March 31, 2015	2

Unaudited Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014	3

Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014	4

Notes to Unaudited Consolidated Financial Statements	5

Carpathia Acquisition, Inc. and Subsidiaries

Unaudited Consolidated Balance Sheet

	March 31, 2015

ASSETS
Current Assets
Cash	$	5,638,752
Accounts receivable, net		10,736,650
Income tax refunds receivable		108,791
Prepaid expenses and other receivables		1,900,538
Total current assets		18,384,731

Property and equipment, net		76,589,830
Goodwill		52,318,135
Intangibles, net		1,371,714
Deferred financing costs, net		1,072,770
Other non-current assets		1,086,119
Rate cap agreements		21
	$	150,823,320

LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Current portion of long-term debt	$	739,700
Current portion of lease financing obligations		1,373,644
Current portion of capital lease obligations		4,889,019
Accounts payable and accrued liabilities		4,989,932
Accrued expenses		5,519,247
Deferred revenue		8,356,170
Total current liabilities		25,867,712

Long-Term Liabilities
Deferred rent		3,384,474
Lease financing obligations, net of current portion		18,797,332
Capital lease obligations, net of current portion		13,953,726
Deferred revenue		823,908
Deferred income taxes		5,300,725
Long-term debt		72,600,300
Total liabilities		140,728,177

Commitments and Contingencies

Stockholder's Equity		10,095,143
	$	150,823,320

See accompanying notes to financial statements.

Carpathia Acquisition, Inc. and Subsidiaries

Unaudited Consolidated Statements of Operations

	Three Months Ended March 31,
	2015			2014

Revenues	$	21,939,160		$	19,485,838
Cost of Sales		10,907,358			9,982,755
Gross profit		11,031,802			9,503,083

General and Administrative Expenses		8,123,914			8,306,442
Management Fees - Related Party		51,061			50,000
Loss on Sale of Property and Equipment		263			22,593
		8,175,238			8,379,035

Operating income		2,856,564			1,124,048

Other Income (Expense)
Interest expense, net		(2,017,239	)		(2,306,962	)
		(2,017,239	)		(2,306,962	)

Income (Loss) before provision for income tax expense		839,325			(1,182,914	)

Provision for Income Tax Expense		204,613			204,129

Net income (loss)	$	634,712		$	(1,387,043	)

See accompanying notes to financial statements.

Carpathia Acquisition, Inc. and Subsidiaries

Unaudited Consolidated Statements of Cash Flows

	For the three months ended March 31,
	2015			2014
Cash Flows From Operating Activities
Net income (loss)	$	634,712		$	(1,387,043	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Amortization of intangibles		100,531			373,744
Amortization of deferred financing costs		130,633			110,429
Depreciation		4,663,843			4,571,682
Deferred rent		31,201			52,936
Deferred income taxes		201,158			201,232
Loss on sale of property and equipment		263			22,593
Change in fair value of interest rate cap		872			6,900
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable		(1,071,059	)		(29,602	)
Income tax refunds receivable		(39	)		-
Prepaid expenses and other receivables		(49,672	)		26,275
Other non-current assets		(87,478	)		138,706
Increase (decrease) in:
Accounts payable and accrued liabilities		(1,147,542	)		1,965,431
Accrued expenses		(1,405,894	)		(3,653,029	)
Deferred revenue		264,971			179,260
Net cash provided by operating activities		2,266,500			2,579,514
Cash Flows From Investing Activities
Funds transferred from restricted cash account		-			17,535
Purchase of property and equipment		(6,652,793	)		(2,359,025	)
Net cash used in investing activities		(6,652,793	)		(2,341,490	)
Cash Flows From Financing Activities
Proceeds from term loan		4,000,000			-
Principal payments on debt		(165,000	)		(82,648	)
Principal payments on lease financing obligations		(311,104	)		(213,574	)
Principal payments on capital lease obligations		(1,327,716	)		(1,331,113	)
Proceeds from the exercise of share options		-			205
Debt financing costs		(70,000	)		(914,671	)
Net cash provided by (used in) financing activities		2,126,180			(2,541,801	)

Net decrease in cash		(2,260,113	)		(2,303,777	)

Cash
Beginning		7,898,865			4,385,839
Ending	$	5,638,752		$	2,082,062
Supplemental Disclosures of Cash Flow Information
Cash paid for interest	$	1,940,567		$	3,301,510
Cash paid for income taxes	$	3,460		$	2,900

See accompanying notes to financial statements.

Carpathia Acquisition, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

March 31, 2015

Note 1. Nature of Business, Basis of Presentation, and Significant Accounting Policies

Basis of Presentation: In the opinion of management for Carpathia Acquisition, Inc. and subsidiaries (collectively, the Company), the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to fairly present the financial position of the Company as of March 31, 2015, and the results of its operations and cash flows for the three months ended March 31, 2015 and 2014. The results of operations for the three months ended March 31, 2015 and 2014, are not necessarily indicative of the results to be expected for the full fiscal year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial report of the Company for the year ended December 31, 2014.

A summary of the Company’s significant accounting policies follows:

Principles of consolidation: The Company has one class of shares of common stock with a $0.01 par value. There were 1,000 shares authorized and 100 shares outstanding as of March 31, 2015 which were all held by Carpathia Holdings, LLC (the Parent). The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Restricted cash: Restricted cash was related to a bank account which was used solely for the purpose of funding construction related to the transaction described in Note 9. During the three months ended March 31, 2014, the remaining balance in this account was used for construction costs.

Revenue recognition: The Company recognizes revenue when a contract has been executed, the contract price is fixed and determinable, delivery of services has occurred and collectability of the contract price is considered probable and can be reasonably estimated. The Company generates revenue from the colocation, managed solutions, and cloud services it provides to its customers. These services are provided under sales order contracts, which generally range from one to five years. The majority of the Company’s revenue is derived from recurring revenue contracts and most of these are non-cancellable. Most customers are billed monthly on or before the beginning of each month. Revenue for these services is recognized ratably as the services are delivered. Set-up fees are billed upon completion of contract implementation and recognized over 36 months.

Accounts receivable: Accounts receivable are generated from sales agreements with customers. Billed amounts represent invoices that have been prepared and sent to the customer. Unbilled amounts represent fees for services rendered that have not been billed. The Company evaluates the credit worthiness of its customers prior to extending credit and monitors collectability of accounts on a continuous basis. Accounts receivable are considered past due if the invoice has been outstanding more than 60 days. The Company does not charge interest on past due accounts receivable. The Company has established an allowance for doubtful accounts based on management’s estimate of potential losses. Accounts are written off when deemed uncollectible. The Company recorded an allowance for doubtful accounts of $646,354 as of March 31, 2015.

Property and equipment: Property and equipment are stated at cost or at the fair value of assets acquired upon acquisition. The Company follows the practice of capitalizing all expenditures for computers, furniture, equipment, and leasehold improvements in excess of $1,000 and with a useful life in excess of one year. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. Leasehold improvements are amortized on a straight-line basis over the lesser of their useful lives or the term of the related lease. Upon retirement or sale of an asset, the cost and accumulated depreciation of assets sold or retired are removed from the respective accounts and any gain or loss is recognized in the consolidated statements of operations.

Deferred financing costs: Deferred financing costs are amortized using the effective interest method over the term of the related debt financing.

Deferred revenue: Deferred revenue results when amounts billed under contract terms are in excess of revenue recognized in accordance with generally accepted accounting principles.

Carpathia Hosting, Inc., a subsidiary of the Company, is taxed as a C Corporation under the provisions of the IRC. Deferred taxes are calculated using the liability method, whereby, deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

The Company has adopted the accounting standard on accounting for uncertainty in income taxes, which addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the consolidated financial statements. Under this guidance, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The guidance on accounting for uncertainty in income taxes also addresses de-recognition, classification, interest and penalties on income taxes, and accounting in interim periods. Management evaluated the Company’s tax positions and concluded that the Company has taken no uncertain tax positions that require adjustment to the consolidated financial statements. With few exceptions, the Company is no longer subject to income tax examinations by the U.S. federal, state or local tax authorities for years before 2011.

Derivative instruments: The Company adheres to the provisions of ASC 815, Derivatives and Hedging, to account for derivative instruments. All derivatives are recognized as either assets or liabilities at their fair value on the balance sheet, with the changes in the fair value reported in current period earnings. The Company currently has outstanding three interest rate cap agreements that are included on the consolidated balance sheet as other non-current assets, and the change in fair value is recorded on the consolidated statement of operations in interest expense. For the three months ended March 31, 2015 and 2014, the Company recognized reductions in fair value of $872 and $6,900, respectively.

Use of estimates: The preparation of the financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts, and not as a separate deferred charge. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments in this ASU are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption is permitted. The amendments are required to be applied on a retrospective basis, and upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle. Adoption of this standard will affect the Company’s consolidated balance sheets.

Note 2. Identifiable Intangible Assets

Identifiable intangible assets as of March 31, 2015 consist of the following:

	Estimated	Gross		Accumulated
	Useful Lives	Amount		Amortization		Net

Customer contracts and relationships	6 – 10 years	$	18,782,000	$	18,078,286	$	703,714
Trade name	Indefinite		668,000		-		668,000
		$	19,450,000	$	18,078,286	$	1,371,714

Note 3. Accounts Receivable

Accounts receivable as of March 31, 2015 consist of the following:

Billed	$	11,180,820
Unbilled		202,184
Total receivables		11,383,004
Less allowance for doubtful accounts		646,354
Total accounts receivable	$	10,736,650

Note 4. Property and Equipment

Property and equipment as of March 31, 2015 consist of the following:

	Estimated Useful Lives	Amount

Land	–	$	750,000
Buildings	22 to 29 years		750,000
Building improvements	2 to 14 years		42,478,282
Computer equipment	1 to 3 years		52,209,729
Software	1 to 3 years		7,693,500
Office furniture and equipment	1 to 3 years		1,095,034
Leasehold improvements	Life of lease		7,674,945
Construction-in-progress	–		9,550,523
Capital lease assets (Note 10)	Life of lease		37,358,406
			159,560,419
Less accumulated depreciation			82,970,589
		$	76,589,830

Note 5. Accrued Expenses

Accrued expenses as of March 31, 2015 consist of the following:

Accrued operating expenses	$	3,125,305
Accrued payroll and commissions		1,664,265
Accrued bonuses		504,468
Accrued interest		-
Other accrued expenses		225,209
Total accrued expenses	$	5,519,247

Note 6. Long-Term Debt

The Company has a credit agreement with a syndicate of lenders. The agreement includes a revolving loan commitment (line of credit) of $8,000,000 and a term loan commitment (term loan) of $70,000,000. There is also a delayed draw term loan that will be funded as needed up to $19,000,000.

There were no outstanding borrowings on the line of credit as of March 31, 2015. The outstanding balance on the term loan and delayed draw term loan in aggregate was $73,340,000 as of March 31, 2015.

The term loan requires principal payments each quarter based on a specified payment schedule, with the unpaid balance due at maturity, which is March 19, 2019. Interest on borrowings under the agreement is based on the Company’s option of either (i) the base rate, as defined in the agreement, plus an applicable margin, or (ii) the LIBOR rate (as defined) plus an applicable margin (5.50% at March 31, 2015). Interest expense on the term loan was $992,305 and $1,164,126 for the three months ended March 31, 2015 and 2014, respectively.

The Company has two interest rate cap agreements with notional amounts of $23,146,050 and $10,000,000. The Company paid a fixed amount in order to cap the term loan rate at 2.00% per annum. The fixed amount is now recorded at its fair value as a non-current asset on the consolidated balance sheet.

Annual maturities of the term loan and delayed draw term loan are as follows:

Period Ending December 31,

2015 (April - December)	$	554,850
2016		739,104
2017		3,610,045
2018		3,670,530
2019		64,765,471
	$	73,340,000

Note 7. Income Taxes

The provision for income tax expense consists of the following:

	March 31, 2015		March 31, 2014
Federal
Deferred income tax (benefit) expense	$	146,061	$	(69,775	)

State
Current income tax expense		3,455		2,897
Deferred income tax expense		55,097		271,007

Total income tax expense	$	204,613	$	204,129

The difference between the applicable U.S. federal statutory rate of 34% and the actual tax rate for the three months ended March 31, 2015 and 2014, can be attributed to non-deductible items, state and foreign taxes, and changes to the valuation allowance, since it was determined that it was more likely than not that the deferred tax assets would not be realized given continued taxable losses.

Note 8. 2008 Unit Plan

If an option or unit purchase right expires or becomes unexercisable without having been exercised in full, or is surrendered pursuant to an Option Exchange Program, the unpurchased units become available for future grant or sale under the Plan (unless the Plan has terminated). However, units that have actually been issued under the Plan, upon exercise of either an Option or Unit Purchase Right, shall not be returned to the Plan and shall not become available for future distribution under the Plan, except that if restricted units are repurchased by the Company at their original purchase price, such units shall become available for future grant under the Plan.

The Company entered into Restricted Unit Purchase Agreements with two employees during the year ended December 31, 2012. The employees issued $104,062 in notes payable to the Company in exchange for 400,235 shares of Class A common shares under these agreements. The notes accrue interest at 0.88% per annum and mature on the earlier of (1) a change of control, (2) termination of employment with the Company, or (3) the fifth anniversary of the grant date.

A summary of the status of the Company’s unit plan as of March 31, 2015, and changes during the quarter then ended, is as follows:

					Weighted-Average
			Weighted-		Remaining
			Average		Contractual Term
	Shares		Exercise Price		(Years)

Options outstanding, beginning of quarter		2,651,980	$	0.134
Exercised during the quarter		-		-
Forfeited during the quarter		-		-
Options outstanding, end of quarter		2,651,980	$	0.134		4.89

Exercisable, end of quarter		1,536,618	$	0.054		4.14

Note 9. Lease Financing Obligations

The Company entered into a lease financing agreement, in connection with a $4,814,548 tenant improvement allowance on one of their datacenter lease agreements. The financing bears interest at 10% per annum and requires monthly payments of principal and interest of $61,950 through February 2019. The outstanding balance on the financing agreement was $2,400,971 as of March 31, 2015. Depreciation expense on the related leasehold improvements was $112,841 for both the three months ended March 31, 2015 and 2014, and was charged as a direct expense on the consolidated statements of operations. Accumulated depreciation related to the leasehold improvements was $3,121,934 as of March 31, 2015.

As of March 31, 2015, the Company has a financing obligation totaling $17,770,005 related to a sale-leaseback transaction where the Company has continuing involvement. On December 23, 2011, the Company sold the shell of a building and the associated land to an unrelated third party for $1,500,000. The Company will lease the property back and is a party to an agreement with the same third party to construct a new building on the adjoining property for use as a datacenter. The Company is primarily responsible for financing the improvements and outfitting the building with the necessary equipment. The third party will lease back the new building in stages to the Company as the various stages are completed. The rental payments will be based upon the construction costs funded by the third party, plus an applicable mark-up. The imputed interest rates range from 9-10%. In accordance with ASC 840-40, Leases, the Company has continuing involvement with the related leased assets; therefore, the Company will continue to account for the existing building shell and the associated land as fixed assets and will capitalize the construction costs of the new building.

Due to the Company’s continuing involvement, the Company is precluded from recording this transaction as a sale; therefore, the Company recorded the $1,500,000 proceeds as a financing obligation. The financing obligation is reduced as rental payments are made, starting in January 2012, on the existing building. Rental payments, which will include amounts attributable to both principal and interest, were $15,000 per month initially. The newly constructed building was inhabited by the Company beginning in March 2013, at which time rental payments of $176,328 per month and depreciation began. Depreciation expense on the related asset was $367,350 for both the three months ended March 31, 2015 and 2014, respectively, and was charged as a direct expense on the consolidated statements of operations. Accumulated depreciation related to the asset was $3,061,253 as of March 31, 2015.

Annual estimated maturities of the lease financing obligations as of March 31, 2015, are as follows:

Period Ending December 31,

2015 (April - December)	$	1,012,675
2016		1,531,466
2017		1,761,859
2018		2,017,271
2019		1,656,975
Thereafter		12,190,730
	$	20,170,976

Note 10. Commitments and Contingencies

Operating leases: The Company leases office space under an operating lease that expires in 2024. Total rent expense charged to operating expense for office space for the three months ended March 31, 2015 and 2014, was $220,962 and $215,582, respectively. Future minimum lease payments required under this lease are follows:

Period Ending December 31,

2015 (April - December)	$	664,721
2016		907,766
2017		930,580
2018		953,894
2019		977,708
Thereafter		4,345,041
	$	8,779,710

Future minimum lease payments required under these leases are as follows:

Period Ending December 31,

2015 (April - December)	$	4,650,725
2016		4,515,752
2017		3,218,701
2018		2,459,988
2019		2,406,739
Thereafter		18,182,383
	$	35,434,288

Period Ending December 31,

2015 (April - December)	$	4,865,867
2016		5,658,767
2017		5,701,691
2018		5,457,278
2019		311,007
		21,994,610
Less amount representing interest		3,151,865
		18,842,745
Less current portion		4,889,019
Long-term obligation	$	13,953,726

Depreciation expense related to capital leases for the three months ended March 31, 2015 and 2014, was $1,077,722 and $1,114,323, respectively. For the three months ended March 31, 2015 and 2014, $811,848 of depreciation expense was charged as a direct expense on the consolidated statements of operations related to the datacenter space. Accumulated depreciation related to capital lease assets was $23,880,829 as of March 31, 2015.

Note 11. Rental Income

Total future rental payments to be received are as follows:

Period Ending December 31,

2015 (April - December)	$	8,806,999
2016		10,818,137
2017		11,126,824
2018		1,038,828
	$	31,790,788

Note 12. Major Customers

For the three months ended March 31, 2015 and 2014, two customers each had revenues in excess of 10% of total revenue and accounted for approximately 28% and 24% of the Company’s recurring revenue, respectively. Accounts receivable from these customers totaled approximately $4,233,453 as of March 31, 2015. Deferred revenue totaling approximately $1,563,714 is recorded at March 31, 2015, for prepayments received from these customers.

Note 13. Related Party Transactions

The Company has entered into a management agreement with the Parent company’s majority member, whereby, the member is paid certain fees for general management, transactional, financial, and other corporate advisory services. The management fee is $200,000 per year, to be paid on a quarterly basis, plus reasonable and customary out-of-pocket expenses associated with services to the Company. Fees paid under this agreement for the three months ended March 31, 2015 and 2014, totaled $51,061 and $50,000, respectively, and are recorded on the consolidated statements of operations.

Note 14. Subsequent Events

The Company has evaluated subsequent events through June 1, 2015, the date on which the consolidated financial statements were available to be issued.

On May 6, 2015, the Company entered into a stock purchase agreement (the “Stock Purchase Agreement”) with QTS Realty Trust, Inc. (“QTS”), pursuant to which QTS will acquire indirectly 100% of the outstanding stock of Carpathia Hosting, Inc. for approximately $326 million. Upon completion of this transaction, Carpathia Acquisition, Inc. and its subsidiaries, including Carpathia Hosting, Inc., will become indirect, wholly-owned subsidiaries of QTS. Additionally, there are Carpathia executives that will be paid bonuses upon the change in control when this transaction closes.

EX-99.3 5 v412155_ex99-3.htm EXHIBIT 99.3

Exhibit 99.3

QTS Realty Trust, Inc.
QualityTech, LP
Unaudited Pro Forma Condensed Consolidated Financial Information

Table of Contents

Financial Statements

Unaudited Pro Forma Condensed Consolidated Balance Sheet at March 31, 2015	3

Unaudited Pro Forma Condensed Consolidated Statement of Operations For the Three Months Ended March 31, 2015	4

Unaudited Pro Forma Condensed Consolidated Statement of Operations For the Twelve Months Ended December 31, 2014	5

Notes to Unaudited Pro Forma Condensed Consolidated Financial Information	6

Throughout this report, the terms “the Company” or “QTS” refer to either QTS Realty Trust, Inc. or to QTS Realty Trust, Inc. and its operating subsidiaries collectively, as the context requires.

Set forth below are QTS’ unaudited pro forma condensed consolidated financial statements as of March 31, 2015 and for the year ended December 31, 2014 and for the three months ended March 31, 2015 which reflect the pending acquisition of Carpathia Acquisition, Inc. (the “Carpathia Acquisition”) and related issuance of equity with estimated net proceeds of approximately $178 million as well as certain historical transactions further described in the notes to the pro forma condensed consolidated financial statements. The pro forma condensed consolidated balance sheet and pro forma condensed consolidated statement of operations for the three months ended March 31, 2015 were derived from the Company’s and Carpathia Acquisition, Inc.’s (“Carpathia”) unaudited financial statements and the pro forma condensed consolidated statement of operations for the twelve months ended December 31, 2014 were derived from the Company’s audited financial statements as of and for the year ended December 31, 2014 and the audited financial statements of Carpathia Acquisition, Inc. and Subsidiaries as of and for the year ended December 31, 2014 and give effect to the Carpathia Acquisition, related issuance of equity and certain historical transactions as if they had occurred on January 1, 2014, including the acquisition of the Princeton, NJ facility, the issuance of $300 million of senior unsecured notes, the issuance of $165 million of Class A common stock, the acquisition of the Chicago, IL facility and the modification of the unsecured credit facility and the credit facility secured by the Richmond Property resulting in decreased interest rates on both.

The unaudited pro forma condensed consolidated financial statements were prepared using the acquisition method of accounting, with QTS considered the acquirer of Carpathia. The purchase price is allocated to the underlying Carpathia tangible assets acquired and liabilities assumed, acquired intangibles are all based on preliminary estimates of their respective fair values.

The pro forma adjustments and the purchase price allocation as presented are based on estimates and certain limited information that is currently available. Therefore, the provisional measurements of fair value reflected have not yet been finalized, are subject to change, and could vary materially from the actual amounts. A final determination of the fair value of Carpathia's assets and liabilities, including intangibles, will be made within the measurement period, not to exceed one year from the acquisition date. The pro forma adjustments are preliminary and are subject to change as additional information becomes available and as additional analyses are performed. The preliminary pro forma adjustments have been made solely for the purpose of providing the unaudited pro forma condensed consolidated financial statements presented below. QTS estimated the fair value of Carpathia's assets and liabilities based on discussions with Carpathia's management and preliminary valuation studies. Any increases or decreases in the fair value of relevant balance sheet amounts upon completion of the final valuations will result in adjustments to the pro forma condensed consolidated balance sheet and/or pro forma condensed consolidated statement of operations. The final purchase price allocation may be different than that reflected in the pro forma purchase price allocation presented herein, and this difference may be material.

Assumptions and estimates underlying the unaudited adjustments to the unaudited pro forma financial statements are described in the accompanying notes. The historical consolidated financial statements have been adjusted in the unaudited pro forma financial statements to give pro forma effect to events that are: (1) directly attributable to the acquisition and related equity issuance, (2) factually supportable, and (3) expected to have a continuing impact on the results of operations of the consolidated results of QTS. This information is presented for illustrative purposes only and is not indicative of the consolidated operating results or financial position that would have occurred if such transactions had occurred on the dates and in accordance with the assumptions described herein, nor is it indicative of future operating results or financial position.

The unaudited pro forma financial statements, although helpful in illustrating the financial characteristics of QTS under one set of assumptions, do not reflect opportunities to earn additional revenue, or other factors that may result as a consequence of the acquisition or related equity issuance and do not attempt to predict or suggest future results. The unaudited pro forma condensed consolidated financial statements exclude the effects of costs associated with any restructuring or integration activities which may occur, as they are currently not known, and to the extent they occur, are expected to be non-recurring and were not incurred at the closing date of the acquisition. However, such costs could affect QTS following the acquisition in the period the costs are incurred or recorded. Further, the unaudited pro forma condensed consolidated financial statements do not reflect the effect of any regulatory actions that may impact the results of QTS following the acquisition and related equity issuance.

QTS Realty Trust, Inc.
QualityTech, LP
Unaudited Pro Forma Condensed Consolidated Balance Sheet

March 31, 2015
(in thousands)

	QTS Historical (A)			Carpathia Historical (B)			Carpathia Purchase Price Allocation Adjustments (C)			Total Before Equity Transaction			Equity Transaction (D)			QTS Pro Forma

ASSETS
Real Estate Assets
Land	$	48,577		$	750		$	-		$	49,327		$	-		$	49,327
Buildings and improvements		954,915			149,260			(73,561	)		1,030,614			-			1,030,614
Less: Accumulated depreciation		(192,107	)		(82,971	)		82,971			(192,107	)		-			(192,107	)
		811,385			67,039			9,410			887,834			-			887,834
Construction in progress		266,234			9,551			-			275,785			-			275,785
Real Estate Assets, net		1,077,619			76,590			9,410			1,163,619			-			1,163,619
Cash and cash equivalents		5,748			5,639			(5,639	)		5,748			-			5,748
Rents and other receivables, net		16,730			10,845			-			27,575			-			27,575
Acquired intangibles, net		17,262			1,372			91,128			109,762			-			109,762
Deferred costs, net		37,902			1,073			(1,073	)		37,902			-			37,902
Prepaid expenses		6,477			1,900			-			8,377			-			8,377
Goodwill		-			52,318			110,082			162,400			-			162,400
Other assets, net		24,252			1,086			1			25,339			-			25,339
TOTAL ASSETS	$	1,185,990		$	150,823		$	203,909		$	1,540,722		$	-		$	1,540,722

LIABILITIES
Mortgage notes payable	$	86,016		$	-		$	-		$	86,016		$	-		$	86,016
Unsecured credit facility		140,000			-			291,422			431,422			(177,650	)		253,772
Senior notes, net of discount		297,791			-			-			297,791			-			297,791
Credit agreement		-			73,340			(73,340	)		-			-			-
Capital lease obligations		13,509			39,014			4,986			57,509			-			57,509
Accounts payable and accrued liabilities		82,230			10,509			-			92,739			-			92,739
Dividends and distributions payable		13,381			-			-			13,381			-			13,381
Advance rents, security deposits and other liabilities		3,439			3,384			(3,384	)		3,439			-			3,439
Deferred income taxes		-			5,301			-			5,301			-			5,301
Deferred income		11,401			9,180			(680	)		19,901			-			19,901
TOTAL LIABILITIES		647,767			140,728			219,004			1,007,499			(177,650	)		829,849
EQUITY
Common stock		348			-			-			348			5			353
Additional paid-in capital		474,185			-			-			474,185			160,802			634,987
Accumulated dividends in excess of earnings		(29,563	)		-			-			(29,563	)		-			(29,563	)
Carpathia equity		-			10,095			(15,095	)		(5,000	)		-			(5,000	)
Total stockholders’ equity		444,970			10,095			(15,095	)		439,970			160,807			600,777
Noncontrolling interests		93,253			-			-			93,253			16,843			110,096
TOTAL EQUITY		538,223			10,095			(15,095	)		533,223			177,650			710,873
TOTAL LIABILITIES AND EQUITY	$	1,185,990		$	150,823		$	203,909		$	1,540,722		$	-		$	1,540,722

See accompanying notes to pro forma financial statements.

QTS Realty Trust, Inc.
QualityTech, LP
Unaudited Pro Forma Condensed Consolidated Statement of Operations

For the Three Months Ended March 31, 2015
(in thousands except share and per share data)

	QTS Historical (AA)			QTS Transactions			Subtotal			Carpathia Historical (DD)			Carpathia Purchase Price Allocation Adjustments			Carpathia Adjustments			Total Before Equity Transaction			Equity Transaction			QTS Pro Forma

Revenues:
Rental	$	49,333		$	-		$	49,333		$	8,911		$	-		$	-		$	58,244		$	-		$	58,244
Recoveries from customers		5,664			-			5,664			-			-			-			5,664			-			5,664
Cloud and managed services		5,795			-			5,795			13,017			-			-			18,812			-			18,812
Other		594			-			594			11			-			-			605			-			605
Total revenues		61,386			-			61,386			21,939			-			-			83,325			-			83,325
Operating Expenses:
Property operating costs		19,336			-			19,336			9,618			-			(2,497	)(II)		26,457			-			26,457
Real estate taxes and insurance		1,485			-			1,485			-			-			-			1,485			-			1,485
Depreciation and amortization		16,243			-			16,243			4,764			1,971	(EE)		352	(II)		23,330			-			23,330
General and administrative		13,838			-			13,838			4,670			-			2,197	(II)		20,705			-			20,705
Transaction costs		105			(105	)(BB)		-			31			(31	)(FF)		-			-			-			-
Total operating expenses		51,007			(105	)		50,902			19,083			1,940			52			71,977			-			71,977
Operating income		10,379			105			10,484			2,856			(1,940	)		(52	)		11,348			-			11,348

Other income and expenses:
Interest income		-			-			-			-			-			-			-			-			-
Interest expense		(5,342	)		1,684	(CC)		(3,658	)		(2,016	)		77	(GG)		-			(5,597	)		895	(LL)		(4,702	)
Other (expense) income, net		-			-			-			-			-			-			-			-			-
Income (loss) before taxes		5,037			1,789			6,826			840			(1,863	)		(52	)		5,751			895			6,646
Provision for income taxes		-			-			-			205			-			-			205			-			205
Net income (loss)		5,037			1,789			6,826			635			(1,863	)		(52	)		5,546			895			6,441
Net income attributable to noncontrolling interests		(955	)		(234	)(MM)		(1,189	)		-			-			-			(1,189	)		186	(NN)		(1,003	)
Net income attributable to QTS Realty Trust, Inc	$	4,082		$	1,555		$	5,637		$	635		$	(1,863	)	$	(52	)	$	4,357		$	1,081		$	5,438

Net income per share attributable to common shares:
Basic	$	0.13																							$	0.14
Diluted		0.13																								0.14

Weighted average common shares outstanding:
Basic		31,294,488			3,388,888	(HH)		34,683,376															5,000,000	(LL)		39,683,376
Diluted		39,209,226			3,388,888	(HH)		42,598,114															5,000,000	(LL)		47,598,114

See accompanying notes to pro forma financial statements.

QTS Realty Trust, Inc.
QualityTech, LP
Unaudited Pro Forma Condensed Consolidated Statement of Operations

For the Twelve Months Ended December 31, 2014
(in thousands except share and per share data)

	QTS Historical (AA)			QTS Transactions			Subtotal			Carpathia Historical (DD)			Carpathia Purchase Price Allocation Adjustments			Carpathia Adjustments			Total Before Equity Transaction			Equity Transaction			QTS Pro Forma

Revenues:
Rental	$	175,649		$	4,169		$	179,818		$	32,291		$	-		$	-		$	212,109		$	-		$	212,109
Recoveries from customers		19,194			3,137			22,331			-			-			-			22,331			-			22,331
Cloud and managed services		20,231			313			20,544			49,852			-			-			70,396			-			70,396
Other		2,715			291			3,006			(26	)		-			-			2,980			-			2,980
Total revenues		217,789			7,910	(JJ)		225,699			82,117			-			-			307,816			-			307,816
Operating Expenses:
Property operating costs		71,518			2,584	(JJ)		74,102			35,831			-			(9,053	)(II)		100,880			-			100,880
Real estate taxes and insurance		5,116			498	(JJ)		5,614			-			-			-			5,614			-			5,614
Depreciation and amortization		58,282			1,438	(JJ)		59,720			19,938			7,001	(EE)		1,231	(II)		87,890			-			87,890
General and administrative		45,283			-			45,283			17,646			-			7,775	(II)		70,704			-			70,704
Restructuring		1,298			-			1,298			-			-			-			1,298			-			1,298
Transaction costs		1,018			(1,018	)(BB)		-			28			(28	)(FF)		-			-			-			-
Total operating expenses		182,515			3,502			186,017			73,443			6,973			(47	)		266,386			-			266,386
Operating income		35,274			4,408			39,682			8,674			(6,973	)		47			41,430			-			41,430

Other income and expenses:
Interest income		8			-			8			-			-			-			8			-			8
Interest expense		(15,308	)		(1,897	)(CC)		(17,205	)		(8,621	)		2,506	(GG)		-			(23,320	)		2,948	(LL)		(20,372	)
Other (expense) income, net		(871	)		871	(KK)		-			(23	)		-			-			(23	)		-			(23	)
Income (loss) before taxes		19,103			3,382			22,485			30			(4,467	)		47			18,095			2,948			21,043
Provision for income taxes		-			-			-			798			-			-			798			-			798
Net income (loss)		19,103			3,382			22,485			(768	)		(4,467	)		47			17,297			2,948			20,245
Net income attributable to noncontrolling interests		(4,031	)		(146	)(MM)		(4,177	)		-			-			-			(4,177	)		818	(NN)		(3,359	)
Net income attributable to QTS Realty Trust, Inc	$	15,072		$	3,236		$	18,308		$	(768	)	$	(4,467	)	$	47		$	13,120		$	3,766		$	16,886

Net income per share attributable to common shares:
Basic	$	0.52																							$	0.43
Diluted		0.51																								0.43

Weighted average common shares outstanding:
Basic		29,054,576			5,000,000	(HH)		34,054,576															5,000,000	(LL)		39,054,576
Diluted		37,133,584			5,000,000	(HH)		42,133,584															5,000,000	(LL)		47,133,584

See accompanying notes to pro forma financial statements.

QTS Realty Trust, Inc.
QualityTech, LP
Notes to Unaudited Pro Forma Condensed Consolidated Financial Information

Pro Forma Condensed Consolidated Balance Sheet as of March 31, 2015

(A)

Reflects the historical consolidated balance sheet of QTS as of March 31, 2015.

(B)

Reflects the historical consolidated balance sheet of Carpathia Acquisition, Inc. and Subsidiaries (“Carpathia”) as of March 31, 2015.

(C)

Reflects adjustments to Carpathia’s historical net book value of acquired assets and liabilities to arrive at QTS’ preliminary allocation of the total consideration for the Carpathia Acquisition. This incorporates working capital amounts as of March 31, 2015, with other amounts revalued as of the date of this filing.

QTS’ preliminary allocation of the total consideration for the Carpathia Acquisition is as follows (in thousands):

	Preliminary Fair Value
ASSETS
Buildings and improvements	$	86,000
Acquired intangibles, net		92,500
Goodwill		162,400
Total Assets	$	340,900
LIABILITIES
Capital lease obligations	$	44,000
Deferred income taxes		5,301
Net working capital		5,177
EQUITY
Carpathia equity*		286,422
Total Liabilities and Equity	$	340,900

For pro forma purposes, the Carpathia equity outlined above was purchased through borrowing under QTS’ revolving credit facility. This amount does not include estimated transaction costs of approximately $5 million that QTS will incur as part of this transaction and will also fund through its revolving credit facility. These transaction costs are reflected in the pro forma balance sheet as a reduction to equity and increase in the revolving credit facility to fund such costs.

The Carpathia Acquisition will be accounted for as an acquisition under the acquisition method of accounting in accordance with FASB Accounting Standard Codification Subtopic 805, Business Combinations. The assets and liabilities of Carpathia will be reflected at fair value. A final determination of the purchase accounting adjustments, including the allocation of the purchase price of the assets acquired and liabilities assumed based on their fair values, has not been made. Accordingly, the purchase accounting adjustments made in connection with the development of these unaudited pro forma condensed consolidated financial statements are preliminary and have been made solely for purposes of developing such unaudited pro forma condensed consolidated financial statements.

(D)

Reflects the estimated proceeds from the sale of 5,000,000 shares of Class A common stock utilizing the closing price on May 29, 2015 of $37.23 (in thousands):

Estimated proceeds from this offering	$	186,150
Less estimated costs of this offering		(8,500	)
Estimated net cash proceeds	$	177,650

Use of proceeds:
Repayment of unsecured credit facility	$	177,650

The Company expects to use a portion of the proceeds to pay down indebtedness under the revolving portion of its unsecured credit facility as of March 31, 2015.

In addition, this also reflects the change in the share of equity which is owned by the noncontrolling interest of QTS Realty Trust, Inc. resulting from this issuance of 5,000,000 shares of Class A common stock.

Pro Forma Condensed Consolidated Statements of Operations

(AA)

Reflects QTS’ condensed consolidated statements of operations for the three months ended March 31, 2015 and the year ended December 31, 2014.

(BB)

Pro forma adjustment for the three months ended March 31, 2015 reflects the elimination of $0.1 million of transaction costs incurred by QTS related to the examination of the proposed Carpathia Acquisition. Pro forma adjustment for the year ended December 31, 2014 reflects the elimination of $1.0 million of costs incurred by QTS primarily related to the acquisition of the Princeton facility.

(CC)

Reflects pro forma adjustments to interest expense as if the following transactions occurred at January 1, 2014:

March 2, 2015 equity issuance net proceeds of approximately $165 million used to reduce revolving credit facility debt outstanding;

July 23, 2014 senior note proceeds (net of fees) of approximately $290 million used to reduce revolving credit facility debt outstanding;

June 30, 2014 acquisition of the Princeton facility funded by borrowings of approximately $75 million;

July 8, 2014 acquisition of the former Sun Times Press facility in Chicago funded by borrowings of approximately $18 million; and

modifications to QTS’ unsecured credit facility and its credit facility secured by its Richmond property (the “Richmond Credit Facility”) in 2014 resulting in decreased interest rates on both.

Borrowings at January 1, 2014 included an unsecured credit facility with outstanding term loan indebtedness of $100 million, 5.875% senior notes of $300 million and associated discount on the senior notes of approximately $2.4 million, the Atlanta Metro equipment loan of approximately $16 million and the Richmond Credit Facility of $70 million. Interest expense on the revolving credit facility under the unsecured credit facility has been calculated by applying an interest rate reduction of 0.4% reflecting the change in the interest rate spread to LIBOR due to the modifications to the credit agreement. Amortization of deferred financing costs has been calculated using a five year term on the term loan facility, a four year term on the revolving credit facility and an eight year term on the senior notes. Capitalized interest has been adjusted to the weighted average interest rate considering the modifications to the credit agreement for all periods presented. The adjustments to interest expense set forth in the pro forma statements are based upon estimates and assumptions that QTS believes to be reasonable at this time and are subject to change in the future. Any cash retained after consideration of all the transactions was utilized to fund development in subsequent periods. The effect of an increase or decrease in interest rates of 1/8% on pro forma interest expense is $0.7 million and $0.2 million for the year ended December 31, 2014 and three months ended March 31, 2015, respectively.

(DD)

Reflects Carpathia’s condensed consolidated statements of operations for the three months ended March 31, 2015 and the year ended December 31, 2014.

(EE)

Reflects pro forma adjustments of Carpathia’s depreciation and amortization expense assuming the acquired buildings and improvements and intangibles were recorded at their preliminary fair value as disclosed in note (C) above on January 1, 2014.

(FF)

Reflects the elimination of transaction costs incurred by Carpathia related to the examination of the proposed sale of Carpathia.

(GG)

Pro forma adjustments to interest expense are comprised of the following two transactions described below (in thousands, positive amounts indicate decreases in interest expense, with negative amounts indicating increases in interest expense):

	December 31, 2014		March 31, 2015
Long term debt interest expense adjustment	$	779	$	(302	)
Capital lease interest expense adjustment		1,727		379
Total pro forma adjustment to interest expense	$	2,506	$	77

The adjustments to interest expense related to long-term debt assume that the approximately $291 million in credit facility borrowings to fund the acquisition was reduced by the available cash on hand from the equity and senior notes issuances, net of acquisitions, discussed in note (CC) above. The adjustments also assume that QTS’ incremental borrowing rate on the unsecured revolving credit facility at the time of the acquisition of 1.85% was applied to the outstanding debt during the periods. The historical Carpathia outstanding debt at March 31, 2015 and December 31, 2014 of approximately $73 million and $70 million, respectively, bore interest at 5.50%.

Interest expense is also adjusted for changes in the interest expense associated with Carpathia’s capital lease obligations. Pro forma adjustments assume Carpathia capital lease obligations with maturities of approximately four years or less were revalued using QTS’ weighted average interest rate on its unsecured revolving credit facility at the time of the acquisition, which was approximately 1.85%. Carpathia capital lease obligations with longer maturities were revalued using the current market interest rate applicable to the credit standing of QTS at the time of the acquisition, which was approximately 5.0%.

(HH)

Reflects the increase in QTS’ Class A common shares due to the equity issuance discussed in note (CC). The total shares outstanding are then accounted for as if they were outstanding as of January 1, 2014 and for the periods thereafter.

(II)

Reflects adjustments to historical Carpathia property operating costs, depreciation and amortization expense, and general and administrative expense in order to conform to QTS’ presentation. The adjustments are comprised of the following transactions described below (in thousands, negative amounts indicate decreases in expense, with positive amounts indicating increases in expense):

	December 31, 2014			March 31, 2015
Property Operating Costs:
Eliminate historical payroll expense	$	(12,338	)	$	(3,375	)
Management fee allocation		3,285			878
Pro forma adjustment to property operating costs	$	(9,053	)	$	(2,497	)

Depreciation and Amortization Expense:
Contract-based commissions expense adjusted to conform to QTS	$	1,231		$	352
Pro forma adjustment to depreciation and amortization expense	$	1,231		$	352

General and Administrative Expense:
Property operating costs adjustment	$	9,053		$	2,497
Eliminate historical contract-based commissions expense		(1,278	)		(300	)
Pro forma adjustment to property operating costs	$	7,775		$	2,197

QTS records all payroll expense related to cloud and managed service personnel to general and administrative expense, and offsets this expense through a management fee allocation to property operating costs based on 4% of revenues for each facility in order to allocate internal charges to cover back-office and service-related costs associated with the day-to-day operations of its data center facilities. Carpathia historically has recorded its payroll expense related to cloud and managed service personnel within operating costs.

In addition, QTS amortizes its contract-based prepaid commissions as incurred and records the expense to amortization expense over the life of the contract. Carpathia historically has amortized its contract-based commissions on a monthly basis for 12 months, and records the expense in general and administrative expense.

The above adjustments conform Carpathia’s historical results for these three line items to QTS’ accounting methodology.

(JJ)

Reflects the increase in revenues, property operating costs, real estate taxes and insurance, and depreciation and amortization expense that would have been incurred if the Princeton facility had been acquired at January 1, 2014.

(KK)

Reflects the elimination of the write off of deferred finance costs related to the modifications to the credit agreements for the unsecured credit facility and the Richmond Credit Facility discussed in note (CC) as they were non-recurring in nature and deemed to have occurred at January 1, 2014 for purposes of the pro forma statements.

(LL)

As discussed in note (D) above, the Company expects to use a portion of the proceeds from the sale of 5,000,000 shares of Class A common stock to pay down its indebtedness as of March 31, 2015 under the revolving portion of its unsecured credit facility. For the respective periods ended December 31, 2014 and March 31, 2015, interest expense is then reduced to reflect the effect such net proceeds would have had on indebtedness outstanding for those respective periods.

(MM)

Reflects the change in the share of net income attributable to the noncontrolling interest of QTS Realty Trust, Inc. resulting from the issuance of 5,000,000 shares of Class A common stock as discussed in note (CC).

(NN)