Quadrant 4 Systems Corp

On November 3, 2016, the Company formally completed the acquisition of Stratitude pursuant to the Stock Purchase Agreement, effective November 3, 2016 (the “Stratitude Purchase Agreement”).  Under the stock purchase agreement, the Company purchased all of the issued and outstanding capital stock of Stratitude.  Simultaneously with the acquisition of Stratitude, Stratitude purchased select assets of Agama Solutions, Inc. (“Agama”). The agreement is effective July 1, 2016 for accounting consolidation purposes since the Company operated the business from that date.

The Company’s headquarters and operations are located in the United States. However, the Company does have a key supplier and subcontractor known as Quadrant 4 Software Solutions (Pvt.) Limited, located in India (“Q4 India”).  The Company has no ownership, directly or indirectly, in Q4 India.  Prior to May 25, 2016, Q4 India was, according to public records, wholly-owned by Stonegate Holdings, Inc., a significant shareholder of the Company.  According to Maryland public records, Stonegate Holdings, Inc. has been dissolved. Based on information available to the Company, Stonegate Holdings, Inc. was acquired by another entity that has no relationship to the Company or its affiliates in or around 2010.  Stonegate Assets, Inc., which, based on information available to the Company, is an affiliate of Stonegate Holdings, Inc., is also a significant shareholder of the Company.  On May 25, 2016, Stonegate Holdings sold its 100% interest in Q4 India to Info-drive Analytics (Mauritius) Limited, which is also unrelated to the Company either directly or indirectly. The Company also markets its activities through Q4 India. Q4 India billed the Company $2,250,000 and $2,100,000 for the three months ended September 30, 2016 and 2015, respectively. Q4 India billed the Company $7,475,000 and $6,075,000 for the nine months ended September 30, 2016 and 2015, respectively. The Company owed Q4 India $750,000 and $700,000 as of September 30, 2016 and December 31, 2015, respectively.

Common Stock Purchase Warrant:  The Subordinated Credit Agreement provides for the issuance of a common stock purchase warrant (the “Warrant”) to the BIP Lender for the purchase of 3,000,000 shares of common stock of the Company.  The exercise price under the Warrant is $0.45, subject to adjustment as contemplated therein.  The Warrant expires on the close of business on the five (5) year anniversary of the initial exercise date (as defined in the Warrant).

Collateral and Remedies: The credit made available to the Company pursuant to the Subordinated Credit Agreement is secured by a second-priority lien on substantially all of the assets of the Company and its subsidiaries.  In addition, the obligations of the Company under the Subordinated Credit Agreement are guaranteed by Stratitude.  The Subordinated Credit Agreement contains various events of default typical for subordinated secured credit transactions of this type, including, but not limited to failure to pay any interest, principal, fees or other amounts when due, default under any covenant or agreement in the Subordinated Credit Agreement or the documents delivered in connection therewith, the inaccuracy of statements made by the Company or false representations or warranties of the Company, cross-defaults with other debt obligations of the Company, bankruptcy and other insolvency events, prohibited changes of control and unsatisfied judgments.  The events of default are generally qualified to include customary materiality thresholds and exceptions, and to otherwise include concepts of reasonableness when discretion is granted to the BIP Lender or the Agent, as applicable.  In the event that the Company defaults with respect to the any of its obligations under the Subordinated Credit Agreement or an event of default occurs and is continuing, the Subordinated Credit Agreement permits the Agent to accelerate, and demand payment in full of, all amounts outstanding thereunder. In such event, the Agent has the ability to enforce its remedies against the collateral pledged to the Agent by the Company as noted above.  All of the rights and remedies of the Agent and the BIP Lender are subject to the terms and conditions set forth in an intercreditor and subordination agreement (the “Intercreditor Agreement”) by and among BMO Harris Bank N.A. (the Company’s senior secured lender), the second lien lenders (as defined in the Intercreditor Agreement) and the Agent.

Interest expenses for the third quarter ending September 30, 2016 totaled $730,258 compared to $516,439 during the same period in 2015. The increase in interest expenses of $213,819 or 41% over the previous period was due to our refinancing of our debt through our new loans through BMO Harris.  We expect in future periods that our interest expense will decrease substantially as the rates we obtained through our loans from BMO Harris are significantly less than what we were previously being charged by our various loan and convertible note holders.