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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 10-Q
 

 
(Mark One)
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2014
 
o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 
 For the transition period from                                 to                                  
 
Commission File Number 33-42498
GRAPHIC
QUADRANT 4 SYSTEM CORPORATION
(Exact name of registrant as specified in its charter)
 
Illinois
 
65-0254624
(State or other jurisdiction of
incorporation or organization)
 
(IRS Employer
Identification No.)
 
2850 Golf Road, Suite 405, Rolling Meadows, IL 60008
(Address of principal executive offices)
 
(855) 995-QFOR
(Registrant’s telephone number, including area code)
 
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.   Yes x   No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes x   No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-Q or any amendment to this Form 10-Q. x
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
    Accelerated filer   o
   
Non-accelerated filer o
    Smaller reporting company   x
(Do not check if a smaller reporting company)
 
 
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 126.2 of the Exchange Act).   Yes  o    No x
 
The number of shares of common stock outstanding as of November 12, 2014 was 99,160,719.
 
 
TABLE OF CONTENTS
 

 
PART I. FINANCIAL INFORMATION

Financial Statements
 
QUADRANT 4 SYSTEM CORPORATION
Consolidated Balance Sheet
 
   
September 30, 2014
   
December 31, 2013
 
   
(Unaudited)
   
(Audited)
 
ASSETS
           
Current Assets
           
Cash
 
$
959,439
   
$
897,215
 
Accounts and unbilled receivables (net of allowance for doubtful accounts of $801,725 and $808,497 at September 30, 2014 and December 31, 2013, respectively)
   
8,006,416
     
5,766,010
 
Other current assets
   
694,357
     
465,798
 
Total current assets
   
9,660,212
     
7,129,023
 
                 
Property and equipment - net
   
33,215
     
21,491
 
Other assets
   
4,690,640
     
3,409,834
 
Intangible assets, net
   
15,548,752
     
16,608,253
 
TOTAL ASSETS
 
$
29,932,819
   
$
27,168,601
 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
Current Liabilities
               
Accounts payable and accrued expenses
 
$
5,797,286
   
$
4,271,785
 
Note payable – Revolver
   
3,076,563
     
4,330,575
 
Earnouts payable
   
-
     
1,222,312
 
Current maturities - long term debt
   
2,701,046
     
442,717
 
Total current liabilities
   
11,574,895
     
10,267,389
 
Long term debt less current maturities
   
3,117,538
     
5,647,550
 
                 
Total liabilities
   
14,692,433
     
15,914,939
 
                 
                 
Stockholders' Equity
               
                 
Common stock - $0.001 par value; authorized:  200,000,000 shares,
issued and outstanding: 99,160,719 and 92,466,689 at September 30, 2014
and December 31, 2013, respectively
   
99,161
     
92,467
 
Additional paid-in capital
   
28,828,239
     
24,539,533
 
Accumulated Deficit
   
(13,687,014
)
   
(13,378,338
)
                 
Total stockholders' equity
   
15,240,386
     
11,253,662
 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
 
$
29,932,819
   
$
27,168,601
 

See notes to the consolidated financial statements
 
 
QUADRANT 4 SYSTEM CORPORATION
Consolidated Statements of Operations
 
   
Three Months Ending September 30,
   
Nine Months Ending September 30,
 
   
2014
   
2013
   
2014
   
2013
 
                         
Revenue
 
$
13,235,883
   
$
9,142,740
   
$
35,437,197
   
$
28,147,799
 
Cost of revenue
   
9,753,971
     
6,526,156
     
26,328,458
     
20,751,501
 
Gross Margin
   
3,481,912
     
2,616,584
     
9,108,739
     
7,396,298
 
                                 
General and administrative expenses
   
(1,557,970
)
   
(1,597,638
)
   
(4,267,864
)
   
(3,938,469
)
Amortization and depreciation expense
   
(1,437,395
)
   
(1,333,267
)
   
(4,159,650
)
   
(3,832,944
)
Forfeiture of earn-outs
   
-
     
570,000
     
-
     
570,000
 
Legal Judgment -Financing
   
-
     
-
     
-
     
(692,000
)
Interest expense
   
(314,447
)
   
(689,547
)
   
(989,901
)
   
(1,900,672
)
Derivative gain
   
-
     
(402,441
)
   
-
     
(287,429
)
Net Income / (loss) before income taxes
   
172,100
     
(836,309
)
   
(308,676
)
   
(2,685,216
)
Income taxes
   
-
     
-
     
-
     
-
 
Net Income/(loss)
 
$
172,100
   
$
(836,309
)
 
$
(308,676
)
 
$
(2,685,216
)
                                 
Net Income/ (loss) per common share
                               
Basic
 
$
0.00
   
$
(0.01
)
 
$
0.00
   
$
(0.04
)
Diluted
 
$
0.00
   
$
(0.01
)
 
$
0.00
   
$
(0.04
)
                                 
Weighted average common shares
                               
Basic
   
99,160,719
     
66,090,398
     
95,359,781
     
60,964,075
 
Diluted
   
103,137,119
     
66,090,398
     
95,359,781
     
60,964,075
 
 
See notes to the consolidated financial statements
 
 
QUADRANT 4 SYSTEM CORPORATION
Consolidated Statements of Cash Flows
 
   
For the Nine Months Ending
 
   
September 30,
 
     
2014
     
2013
 
Cash flows from operating activities:
               
Net loss
 
$
(308,676
)
 
$
(2,685,216
)
                 
Adjustments to reconcile net loss to net cash
provided by operating activities:
               
Derivative loss / (gain)
      -      
287,429
 
Forfeiture of earn-outs
      -      
(570,000
)
Accretion of interest
      -      
134,443
 
Amortization and depreciation
   
4,159,650
     
3,832,944
 
Doubtful accounts
           
269,858
 
Issuance of Stock for services and interest
   
75,000
     
68,350
 
Changes in assets and liabilities
               
Accounts receivable
   
(2,240,406
)
   
(2,050,154
)
Other current assets
   
(228,559
)
   
621,068
 
Other assets
   
(1,280,806
)
   
(544,793
)
Accounts payable and accrued expenses
   
303,191
     
959,032
 
                 
Net cash provided by operating activities
   
479,394
     
322,961
 
                 
Cash flows from investing activities:
               
                 
Purchase of fixed assets
   
(16,225
)
   
(16,865
)
Acquisition of assets (net of liabilities assumed of $1,832,000, notes payable assumed of
$3,268,000, contingent payments of $2,990,000 and issuance of common stock of $2,330,000)
           
(1,550,000
)
                 
Net cash used in investing activities
   
(16,225
)
   
(1,566,865
)
                 
Cash flows from financing activities:
               
                 
Proceeds from sales of common stock and exercise of warrants
   
1,124,750
     
300,000
 
(Decrease) increase in note payable - factor
   
(1,254,012
)
   
1,562,920
 
Payments of long-term debt
   
(271,683
)
   
(1,498,600
)
Proceeds from long term debt
     -      
840,000
 
                 
                 
Net cash provided by/(used in) financing activities
   
(400,945
   
1,204,320
 
                 
Net increase (decrease) in cash
   
62,224
     
(39,584
)
                 
Cash - Beginning of period
   
897,215
     
86,770
 
                 
Cash - End of period
 
$
959,439
   
$
47,186
 
                 
                 
Supplemental disclosure of cash flow information
               
Cash paid for:
               
Interest
 
$
989,901
   
$
1,776,229
 
Income taxes
 
$
-
   
$
-
 
                 
Noncash transactions
               
Acquisition of technology platform utilizing common stock & warrants
 
$
3,075,649
   
$
  -
 
Decrease in common stock payable/Issuance of shares
 
$
-
   
$
1,304,423
 
Payment of debt with equity
 
$
-
   
$
2,754,578
 
Noncash considerations for acquisitions
 
$
-
   
$
5,230,000
 
 
See notes to the consolidated financial statements
 
 
QUADRANT 4 SYSTEM CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1 –ORGANIZATION AND OPERATIONS

Organization

Quadrant 4 System Corporation (the “Company” or “Quadrant 4”) was incorporated in Florida on May 14, 1990, as Sun Express Group, Inc. and changed its business model and name on June 30, 2011. On April 25, 2013, the Florida Company did a statutory merger with its Illinois Company, Q4 Systems Corporation with the Illinois Company being the surviving entity. The surviving Illinois parent has 200,000,000 authorized shares of common stock with a par value of $0.001 per share. Quadrant 4 operates its business through its wholly owned subsidiaries and is transforming itself to a SMAC (Social – Mobile – Analytics – Cloud) company. The Company has significant presence in Health Insurance, Media, Retail and Financial Services verticals.

Operations

Quadrant 4 is a leading Platform-as-a-Service (PaaS) and Software-as-a-Service (SaaS) company. The Company develops, implements, and operates PaaS and SaaS systems, including qHIX for the health insurance markets; qBLITZ for the digital media business; and qSKU for retailers. These platforms have a built in proprietary set of SMAC (social media, mobility, analytics and cloud computing) components and focus on providing solutions for Fortune 500 companies.
 
NOTE 2 – BASIS OF PRESENTATION

The accompanying unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles and the rules and regulations under Regulation S-X of the U.S. Securities and Exchange Commission for Form 10-Q, and should be read in conjunction with the audited financial statements and notes thereto contained in the Annual Report on Form 10-K for Quadrant 4 System Corporation (the “Registrant” or the “Company”) for the year ended December 31, 2013. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements presentation.  In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods presented have been included.  Notes to the financial statements which would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal year ended December 31, 2013, as reported in the Form 10-K, have been omitted.

In preparing the interim unaudited consolidated financial statements, management was required to make certain estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures at the financial reporting date and throughout the periods being reported upon. Certain of the estimates result from judgments that can be subjective and complex and consequently actual results may differ from these estimates.  These financial statements should be read in conjunction with the financial statements of the Company together with the Company’s management discussion and analysis in Item 2 of this report and in the Company’s Form 10-K for the year ended December 31, 2013.  The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year.
 
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Consolidated Financial Statements

The consolidated financial statements include all the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates.

Fair Value of Financial Instruments

The Company considers the carrying amounts of financial instruments, including cash, accounts receivable, accounts payable and accrued expenses and notes payable to approximate their fair values because of their relatively short maturities.
 

Accounts and Unbilled Receivables

Accounts and unbilled receivables consist of amounts due from customers. The Company records a provision for doubtful receivables, if necessary, to allow for any amounts which may be unrecoverable, which is based upon an analysis of the Company’s prior collection experience, customer creditworthiness and current economic trends.

Intangible Assets

Intangible assets are recorded at fair value and amortized on the straight-line method over the estimated useful lives of the related assets.

The carrying value of intangible assets are reviewed for impairment by management at least annually or upon the occurrence of an event which may indicate that the carrying amount may be greater than its fair value. If impaired, the Company will write-down such impairment. In addition, the useful life of the intangible assets will be evaluated by management at least annually or upon the occurrence of an event which may indicate that the useful life may have changed.
 
Customer lists are valued based on management’s forecast of expected future net cash flows, with revenues based on projected revenues from customers acquired and are being amortized over five years.

Acquired intellectual property is valued based on management’s forecast of expected future net cash flows, with revenue based on projected sales of these technologies and are amortized over five to seven years.

Software Costs

Costs that are related to the conceptual formulation and design of licensed software programs are expensed as incurred to research, development and engineering expenses; costs that are incurred to produce the finished product after technological feasibility has been established are capitalized as an intangible asset. Capitalized amounts are amortized on a straight-line basis over periods ranging up to five years and are recorded in amortization expense. The Company performs periodic reviews to ensure that unamortized program cost remain recoverable from future revenue. Cost to support or service licensed program are charged to cost of revenue as incurred.

Revenue Recognition

Revenue is recognized when there is persuasive evidence of an arrangement, the fee is fixed and determinable, performance of service has occurred and collection is reasonably assured.  Revenue is recognized in the period the services are provided.
 
Income (loss) per Common Share
 
Basic income (loss) per share is calculated using the weighted-average number of common shares outstanding during each period. Diluted income per share includes potentially dilutive securities such as outstanding options and warrants outstanding during each period.
 
Concentrations of Credit Risk
 
The Company maintains cash at various financial institutions, which at times, may be in excess of insured limits. The Company has not experienced any losses to date as a result of this policy and, in assessing its risk, the Companies’ policy is to maintain cash only with reputable financial institutions.
 
The Company’s largest customer represented 18% of consolidated revenues and 8% of accounts receivable for the nine months ended September 30, 2014.  No individual customer exceeded 10% of consolidated revenues for the nine months ended September 30, 2013.
 
Recent Accounting Pronouncements
 
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.
 
 
The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures).  We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in 2017.

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.

NOTE 4 – ACQUISITIONS

Teledata Technology Solutions, Inc.
 
Effective February 1, 2013, the Company acquired the assets of Teledata Technology Solutions, Inc. and its subsidiaries, Abaris, Inc., Alphasoft Services Corporation and TTS Consulting, Inc. (collectively “TTS”). Upon consummation of the transaction, whereby the Company acquired certain assets including but not limited to client contracts, trademarks, software technology, employees and other resources in exchange for: (i) the assumption of certain liabilities of $5,100,000; (ii) cash of $900,000; (iii) earn-out payments equal to $1,500,000 as defined in the Agreement; (iv) 3,000,000 common shares valued at $1,000,000.
 
Acquisition of Momentum Mobile, LLC
 
On February 26, 2013 (and amended on February 26, 2014) effective February 1, 2013 the Company completed acquisition of certain the assets of Momentum Mobile, LLC. The assets including client contracts and employees were transferred in exchange for: (i) cash of $400,000; (ii) earn-out payments up to $800,000 as defined in the Agreement; (iii) 1,075,000 common shares valued at $354,750.
 
Acquisition of BlazerFish, LLC
 
On February 26, 2013 effective February 1, 2013 (and as amended in September 2013) the Company completed acquisition of certain assets of BlazerFish, LLC. The assets including client contracts, intellectual property and employees were transferred in exchange for: (i) cash of $250,000; (ii) earn-out payments equal to $600,000 as defined in the Agreement; (iii) 6,700,000 common shares valued at $1,900,000.
 
The following table summarizes the consideration transferred for the three acquisitions and the estimated amounts of identified assets acquired and liabilities assumed on the effective date of the acquisitions:
 
Fair value of consideration transferred from the acquisitions:
               
   
TTS
   
Momentum
   
BlazerFish
   
Total
 
Cash
 
$
900,000
   
$
400,000
   
$
250,000
   
$
1,550,000
 
Common stock
   
1,000,000
     
354,750
     
1,900,000
     
3,254,750
 
Contingent payments
   
1,500,000
     
800,000
     
600,000
     
2,900,000
 
   
$
3,400,000
   
$
1,554,750
   
$
2,750,000
   
$
7,704,750
 
 
Recognized amounts of identifiable assets acquired and liabilities assumed:
         
Customer lists intangibles
 
$
7,650,000
   
$
1,554,750
   
$
85,000
   
$
9,289,750
 
Technology stack intangibles
   
850,000
     
-
     
2,665,000
     
3,515,000
 
Certain accounts payable and accrued liabilities
   
(1,832,000
)
   
-
     
-
     
(1,832,000
)
Notes payable
   
(3,268,000
)
   
-
     
-
     
(3,268,000
)
   
$
3,400,000
   
$
1,554,750
   
$
2,750,000
   
$
7,704,750
 
 
Each of the acquisitions include certain contingent consideration arrangements that required quarterly cash payments beginning June 30, 2013 through June 30, 2015 if the respective entity’s revenue run rate (as defined in the agreements) is 75% or more of its defined base. The range of undiscounted amounts the Company could owe under these arrangements is between $0 and $2,900,000. The fair value of contingent consideration on the acquisition dates(s) of approximately $2,900,000 were estimated based on the projected revenues of each asset purchase through 2015. The calculations and projections are based on significant inputs not observable in the market, which ASC 820 refers to as level 3 inputs. Key assumptions include the maintenance of certain customers as well as utilizing certain technology across the Company’s existing client base. Decrease in the contingent considerations and a settlement of earn-out liabilities resulted in a reduction of the earn-out liability of $570,000 for the three months ended September 30, 2013 and $437,513 for the three months ended December 31, 2013.
 
 
The following unaudited proforma summary for the nine months ended September 30, 2013 presents consolidated information of the company as if these business combinations occurred on January 1, 2013 and includes the amortization of acquired intangibles:
 
Gross Sales:
 
$
29,704,752
 
         
Net Loss:
 
$
(2,791,846
 
On May 1, 2014, the Company acquired certain technology assets specific to media platforms for a total consideration of 4,444,445 shares priced at $0.45/share and 2 million warrants exercisable over 3 years, with an exercise price of $1/share. The value of the warrants, using Black Scholes model is $1,070,899.These assets are critical to executing the long-term sales contract that the Company signed effective May 1, 2014 to provide media platform services valued up to $50,000,000 over five years to an existing client.
 
NOTE 5 – INTANGIBLE ASSETS
 
As of September 30, 2014 and December 31, 2013, intangible assets consisted of the following:
 
   
September 30,
2014
   
December 31,
2013
 
Customer list – Q4 Consulting
 
$
7,131,196
   
$
7,131,196
 
Customer list – Q4 Solutions
   
5,461,000
     
5,461,000
 
Technology stack – Q4 Solutions
   
5,550,000
     
5,550,000
 
Technology stack – Empower HR
   
175,000
     
175,000
 
Customer list – Q4 Cloud
   
7,050,000
     
7,050,000
 
Technology stack – Q4 Cloud
   
850,000
     
850,000
 
Customer list – Q4 Mobility
   
1,639,750
     
1,615,000
 
Technology stack– Q4 Mobility
   
2,665,000
     
2,665,000
 
Technology stack– Q4 Media
   
3,070,899
     
-
 
     
33,592,845
     
30,497,196
 
Accumulated amortization
   
(18,044,093
)
   
(13,888,943
)
   
$
15,548,752
   
$
16,608,253
 
 
For the nine months ending September 30, 2014, the change in intangible assets was as follows:
 
Beginning of the year
 
$
16,608,253
 
Additions
   
3,095,649
 
Amortization
   
(4,155,150
)
End of the year
 
$
15,548,752
 
 
For quarters ending September 30, 2014 and 2013, amortization expense was $ 1,435,895 and $1,333,017, respectively.
 
NOTE 6 – NOTE PAYABLE - REVOLVER
 
As amended in February 2013, the Company entered into an agreement with a financing company providing a revolving line of credit. Under the agreement, the Company assigns certain accounts receivable, including purchased accounts receivable, to the financing company in return for a maximum line of credit of $6,500,000. The agreement is automatically renewable on the anniversary unless cancelled by the parties.  Fees under the agreement consist of a commitment fee of $65,000, a service fee of 0.825% per month, and interest at prime (at minimum of 5%) plus 2% per annum.  Early termination fees would apply for payoffs prior to the due date of January 31, 2016.
 
All borrowings under this revolving line of credit are collateralized by the accounts receivable and substantially all other assets of the Company.
 
 
NOTE 7 – LONG-TERM DEBT

Long-term debt consisted of the following:
 
   
September 30,
2014
   
December 31,
2013
 
Note payable due December 31, 2017, as extended, plus interest at 6.5% per annum (a)
 
$
3,117,538
   
$
3,117,538
 
Note 1 payable due February 6, 2015, as extended, plus interest at 16% per annum (b)
   
682,500
     
682,500
 
Note 2 payable due February 6, 2015, plus interest at 10% per annum  (b)
   
433,046
     
704,729
 
Note 3 payable due February 6, 2015, as extended, plus interest at 16% per annum (b)
   
1,585,500
     
1,585,500
 
                 
Total
   
5,818,584
     
6,090,267
 
Less: Current maturities
   
(2,701,046
)
   
(442,717
)
Total long-term debt
 
$
3,117,538
   
$
5,647,550
 
 
(a) In December 2013, $2 million of this debt was converted to 3,333,334 shares of common stock (at $0.60/share) with 1,666,667 warrants exercisable at $1/share through December 31, 2018. In March 2014, the note was extended to December 31, 2015 without any further considerations. On October 1, 2014, the note was extended to December 31, 2017 with the new interest rate at 6.5%. Additionally, 350,000 shares of common stock was granted as consideration for the extension. These shares have not been issued as of November 12, 2014.
 
(b) On February 6, 2013, in conjunction with the purchase of Teledata Technology Solutions, the Company issued the following notes:
 
Note 1: $682,500 note, requiring monthly interest payments at an annual rate of 16% on the unpaid principal balance, with an original maturity date of May 14, 2013.
Note 2: $1,000,000 note with an original maturity date of February 6, 2015, requiring 24 consecutive monthly principal payments of $10,000 plus any accrued interest at a rate of 10% on the unpaid principal balance.
Note 3: $1,585,000 note with an original maturity date of May 6, 2014, requiring 11 consecutive monthly principal payments of $75,000, in addition to one principal payment of $350,000 due on May 31, 2013. The note also requires monthly interest payments at a rate of 16% on the unpaid principal payments.
 
On March 17, 2014, the Company entered into a forbearance agreement with the lender, which extended the maturity dates of all three of the above notes to February 6, 2015. Under the terms of the forbearance agreement, all unpaid interest and fees were added to the outstanding principal balance of Note 2. The agreement calls for monthly payments of $75,000 to be applied first to the accrued and unpaid interest due under the terms of the Notes, on a pro rata basis, and then to the principal balance of Note 2, and then to the principal balance of Note 1 and/or Note 3, based on the discretion of the lender.

On October 29, 2014, the Company paid off all of these three notes through refinancing as explained in Note 12.
 
 
NOTE 8 – STOCKHOLDERS' EQUITY
 
Preferred Stock
 
The Company's board of directors may designate preferred stock with preferences, participations, rights, qualifications, limitations, restrictions, etc., as required.  No preferred shares are presently designated.
 
Stock Warrants
 
As of September 30, 2014, the Company has issued the following warrants for common stock:
 
Financing, acquisition and stock subscriptions
   
8,275,696
 
Note Extensions
   
2,843,064
 
Management
   
2,500,000
 
Debt conversion
   
1,666,667
 
Total Reserved
   
15,285,427
 

During the nine months ended September 30, 2014, 1,874,584 warrants were exercised totaling $1,124,750.
 
NOTE 9 – INCOME (LOSS) PER SHARE
 
The following table sets forth the computation of basic and diluted income (loss) per share:
 
   
For the 3 months ended September 30,
   
For the 6 months ended September 30,
 
   
2014
   
2013
   
2014
   
2013
 
Numerator:
                       
Net income (loss) available to common shareholders
 
$
172,100
   
$
(836,309
)
 
$
(308,676
)
 
$
(2,685,216
)
                                 
Denominator:
                               
Weighted average outstanding shares
                               
Basic
   
99,160,719
     
66,090,398
     
95,359,781
     
60,964,075
 
Income (Loss) per Share - Basic
 
$
0.00
   
$
(0.01
)
 
$
0.00
   
$
(0.04
)
                                 
Effect of dilutive common stock
   
3,976,400
     
-
     
-
     
-
 
Weighted average outstanding shares
                               
Diluted
   
103,137,119
     
66,090,398
     
95,359,781
     
60,964,075
 
Income (Loss) per share - Diluted
 
$
0.00
   
$
(0.01
)
 
$
0.00
   
$
(0.04
)
 
The Company excluded 11,309,027 and 15,285,427 potential shares attributable to outstanding stock warrants from the calculation of diluted earnings per share for the three and nine months ended September 30, 2014, respectively and 14,526,678 and 14,526,678 for the three and nine months ended September 30, 2013, respectively, because their inclusion would have been anti-dilutive.
 
NOTE 10 – CONTINGENCIES
 
In the normal course of business, the Company may become subject to claims or assessments. Such matters are subject to many uncertainties, and outcomes, which are not readily predictable with assurance. The Company has insurance to cover certain claims.
 
 
NOTE 11 – FOREIGN OPERATIONS

The Company’s headquarters and operations are located in the United States. However, the Company does have some key suppliers and subcontractors located in India.  The Company and its management team have no ownership, directly or indirectly, in these key suppliers and subcontractors.  Payments made to India suppliers and subcontractors were $1,805,000 and $975,000 for the three months ending September 30, 2014 and September 30, 2013, respectively and $4,648,000 and $1,840,000 for the nine months ending September 30, 2014 and September 30, 2013, respectively.

NOTE 12 – SUBSEQUENT EVENTS

On October 29, 2014, the Company refinanced its factoring facility and replaced it with a new Asset Based Lending (ABL) revolver facility that has a term of 36 months and a maximum line of $10,000,000 (Tem Million). The ABL was priced at 4.5% over 30-day LIBOR (with a minimum floor of 2%) plus an administrative fee of 0.1% per month on the outstanding balance and 0.084% per month on the unused portion of the revolver.

On October 29, 2014, the Company also obtained a term loan of $3,000,000 (3 Million). The term loan was priced at 8% over 30-day LIBOR (with a minimum floor of 2%) with a term of 36 months. The term loan will amortize over three years, more specifically, 25% in Year 1; 37.5% in Year 2 and 37.5% in Year 3. The Company will also issue 250,000 warrants priced at $0.60/share.
 
The Company incurred approximately $1.2 million in expenses that includes a 1% origination fee, due diligence and underwriting costs, legal fees, certain termination charges and intermediary fees.

The term loan was primarily used to pay off short term debt. The new facility will reduce approximately $500,000 in debt service annually.

 
Management’s Discussion and Analysis of Financial Condition and Results of Operation
 
The following discussion should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this report.
 
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
 
This Form 10-Q for the quarter ending September 30, 2013 contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amending, and Section 21E of the Securities Exchange Act of 1934, as amending. Forward-looking statements may be identified by the use of forward-looking terminology, such as “may”, “shall”, “could”, “expect”, “estimate”, “anticipate”, “predict”, “probable”, “possible”, “should”, “continue”, or similar terms, variations of those terms or the negative of those terms. The forward-looking statements specified in the following information have been compiled by our management on the basis of assumptions made by management and are considered by management to be reasonable. Our future operating results, however, are impossible to predict and no representation, guaranty, or warranty is to be inferred from those forward-looking statements.
 
The assumptions used for purposes of the forward-looking statements specified in the following information represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives require the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and, accordingly, no opinion is expressed on the achievability of those forward-looking statements. No assurance can be given that any of the assumptions relating to the forward-looking statements specified in the following information are accurate, and we assume no obligation to update any such forward-looking statements.
 
Overview

We are a leading Platform-as-a-Service (PaaS) and Software-as-a-Service (SaaS) company. The Company develops, implements, and operates PaaS and SaaS systems, including qHIX for the health insurance markets; qBLITZ for the digital media business; and qSKU for retailers. These platforms have a built in proprietary set of SMAC (social media, mobility, analytics and cloud computing) components and focus on providing solutions for Fortune 500 companies. Please visit www.qfor.com for further information 

Competition

The intensely competitive IT services market includes a large number of participants and is subject to rapid change. This market includes participants from a variety of market segments, including:

·  
systems integration firms
·  
contract programming companies
·  
application software companies
·  
traditional large consulting firms
·  
professional services groups of computer equipment companies and
·  
facilities management and outsourcing companies

Our direct competitors include, among others, Cognizant, Accenture, Capgemini, Computer Sciences Corporation, HCL Technologies, HP Enterprise (formerly Electronic Data Systems), IBM Global Services, Infosys Technologies, Tata Consultancy Services and Wipro. In addition, we compete with numerous smaller local companies offering specific technologies and services in specific industry segments we operate. 
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Company is actively executing on its business model which consists of delivery of consulting services in the targeted market segments.  The nature of our model involves engaging employees and consultants to provide services to our customers with billing accrued and due in normal billing cycles.  We incur debt to meet payroll obligations, the largest component of our expenses, and service debt with the payments received from our customers.  Many of our employees and consultants are assisted in the immigration process which process is an expense component.  The Company utilizes few major capital items in the delivery of its services and requires no significant plant expenses beyond ordinary commercial office space for both use by the employees on a limited basis and the back-office support for those employees.  Our financial statements reflect primarily income from billing for our consulting services and expenses incurred to pay employees and consultants, including financing to meet payroll in anticipation of receipt of billing income from customers as well as general administration expenses to manage the Company.
 
 
Results of Operations

The revenues and expenses reflect the assets acquired and new businesses acquired during the past two years.

   
Three months ending September 30,
             
   
2014
   
2013
   
Increase/ (Decrease)
   
Percent
 
Revenue
 
$
13,235,883
   
$
9,142,740
   
$
4,093,143
     
45%
 
Cost of Revenue
   
(9,753,971
)
   
(6,526,156
)
   
3,227,815
     
49%
 
Gross Margin
   
3,481,912
     
2,616,584
     
865,328
     
33%
 
General and administrative expenses
   
(1,557,970
)
   
(1,597,638
)
   
39,668
     
-2%
 
Amortization of intangible assets
   
(1,437,395
)
   
(1,333,267
)
   
(104,128
)
   
8%
 
Interest, legal judgment and derivative expense
   
(314,447
)
   
(521,988
)
   
207,541
     
-40%
 
                                 
Net Profit/(loss)
 
$
172,100
   
$
(836,309
)
 
$
1,008,409
     
121%
 
  
   
Nine months ending September 30,
             
   
2014
   
2013
   
Increase/ (Decrease)
   
Percent
 
Revenue
 
$
35,437,197
   
$
28,147,799
   
$
7,289,398
     
26%
 
Cost of Revenue
   
(26,328,458
)
   
(20,751,501
)
   
5,576,957
     
27%
 
Gross Margin
   
9,108,739
     
7,396,298
     
1,712,441
     
23%
 
General and administrative expenses
   
(4,267,864
)
   
(3,938,469
)
   
(329,395
)
   
8%
 
Amortization of intangible assets
   
(4,159,650
)
   
(3,832,944
)
   
(326,706
)
   
9%
 
Interest, legal judgment and derivative expense
   
(989,901
)
   
(2,310,101
)
   
1,320,200
     
-48%
 
                                 
Net loss
 
$
(308,676
)
 
$
(2,685,216
)
 
$
2,376,540
     
-89%
 

Comparison of Three Months and Nine Months Ending September 30, 2014 and 2013

REVENUES

Revenues for the third quarter ending September 30, 2014 totaled $13,235,883 compared to $9,142,740 of revenue during the same period in 2013 representing an increase in revenues of $4,093,143 or 45% over the previous third quarter. The increase in revenues were primarily due to signing up a large media client and additional new clients. The revenues were comprised of managed services, subscription fees and software development services.
 
Revenues for the nine months ending September 30, 2014 totaled $35,437,197compared to $28,147,799 of revenue during the same period in 2013 representing an increase in revenues of $7,289,398 or 26% over the previous nine month period in 2013. The increase in revenues were primarily due to signing up a large media client and additional new clients. The revenues were comprised of managed services, subscription fees and software development services.
 
COST OF REVENUES

Cost of revenue for the third quarter ending September 30, 2014 totaled $9,753,971 compared to cost of revenue of $6,526,156 during the same period in 2013. The increase in cost of revenue of $3,227,815 or 49% over the previous third quarter was due primarily to the increase in revenues in 2014. Cost of revenue is comprised primarily of the direct costs of employee and contract labor and related expenses.
 
Cost of revenue for the nine months ending September 30, 2014 totaled $26,328,458 compared to cost of revenue of $20,751,501 during the same period in 2013.The increase in cost of revenue of $5,576,957 or 27% over the previous third quarter, was due primarily to the increase in revenues in the third quarter of 2014. Cost of revenue is comprised primarily of the direct costs of employee and contract labor and related expenses.
 

GROSS MARGIN

The increase in gross margin of $865,328 or 33% over the previous third quarter, resulted primarily from increased revenues, the gross margin percentage decreased to approximately 26% in the third quarter of 2014 from 29% in the third quarter of 2013.
 
The increase in gross margin of $1,712,441 or 23% over the previous nine month period, resulted primarily from increased revenues, the gross margin percentage stayed consistent at 26% for the nine month period in 2014 and 2013.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general & administrative expenses for the third quarter ending September 30, 2014 totaled $1,557,970 compared to selling, general & administrative expenses of $1,597,638 during the same period in 2013. The decrease in selling, general & administrative expenses of $39,668 or 2% over the previous third quarter was due to overall consolidating of selling, general & administrative expenses during this quarter in all business units.

Selling, general & administrative expenses for the nine months ending September 30, 2014 totaled $4,267,864 compared to selling, general & administrative expenses of $3,938,469 during the same period in 2013.The increase in selling, general & administrative expenses of $329,395 or 8% over the previous nine month period, was due to increase in selling, general & administrative expenses related to media and healthcare business units.

AMORTIZATION OF INTANGIBLE ASSETS

Amortization expense for the third quarter ending September 30, 2014 totaled $1,437,395 compared to $1,333,267 during the same period in 2013. There is slight increase in amortization expense of $104,128 was due to acquisitions that occurred during the previous quarter. Amortization periods on the acquired intangibles range from 5 – 7 years.
 
Amortization expense for the nine months ending September 30, 2014 totaled $4,159,650 compared to $3,832,944 during the same period in 2013. The increase in amortization expense of $326,706 was due to the additional amortization expense from intangible assets acquired during 2014 and the 2013 acquisitions which were effective February 1, 2013. Amortization periods on the acquired intangibles range from 5 – 7 years.
 
INTEREST, LEGAL JUDGMENT AND DERIVATIVE EXPENSE
 
Interest costs for the third quarter ending September 30, 2014 totaled $314,447 compared to $521,988 during the same period in 2013. The decrease in interest costs of $207,541 or 40% over the previous third quarter was due to decrease in long-term debt and decrease in note payable-revolver. During the same period in 2013, derivative expense incurred were $402,411 and $570,000 of income was recorded as forfeiture of earn out.
 
Interest costs, legal judgment and derivative expenses for the nine months ending September 30, 2014 totaled $989,901 compared to $2,310,101 during the same period in 2013. The decrease of $1,320,200 or 57% over the previous nine month period was due to decrease in long-term debt, the decrease in note payable-revolver and a $692,000 legal judgment recorded and paid in 2013.
 
NET PROFIT/LOSS
 
The Company reported a net profit of $172,100 for the third quarter ending September 30, 2014 compared to net loss of $836,309 for the same period in 2013.The increase of $1,008,409 or 121% over the previous third quarter, was due to increase in revenues and corresponding gross margin and decrease in legal settlement, interest and amortization in the current period as compared to the prior period.
 
The Company reported a net loss of $308,676 for the nine months ending September 30, 2014 compared to net loss of $2,685,216 for the same period in 2013. The decrease of $2,376,540 or 89% over the previous nine month period is due to increase in revenues and corresponding gross margins and decrease in interest costs in the current period as compared to the prior period.
 
 
EBITDA

Earnings before interest, taxes, depreciation and amortization (“EBITDA”) for the third quarters ending September 30, 2014 and September 30, 2013 is calculated as follows:
 
   
September 30, 2014
   
September 30, 2013
 
Net Income / (Loss) (GAAP Basis)
 
$
172,100
   
$
(836,309
Interest, legal judgment and derivative expense
   
314,447
     
521,988
 
Amortization and depreciation expense
   
1,437,395
     
1,333,267
 
Income Taxes
   
-
     
-
 
EBITDA
 
$
1,923,942
   
$
1,018,946
 
 
EBITDA for the nine months ending September 30, 2014 and September 30, 2013 is calculated as follows:
 
   
September 30, 2014
   
September 30, 2013
 
Net Loss (GAAP Basis)
 
$
(308,676
 
$
(2,685,216
)
Interest, legal judgment and derivative expense
   
989,901
     
2,310,101
 
Amortization and depreciation expense
   
4,159,650
     
 3,832,944
 
Income Taxes
   
-
     
-
 
EBITDA
 
$
4,840,875
   
$
3,457,829
 
 
EBITDA for the three months ending September 30, 2014 increased by $904,996 or 89% over the previous three months and EBITDA for nine months period ending September 30,2014 increased by $1,383,046 or 40% over the previous nine-month period. 
 
LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2014, we had an accumulated deficit of $13,687,014 as compared to $13,378,338 at December 31, 2013.  As of September 30, 2014, we had a working capital deficit of $1,914,683 as compared to $3,138,366 at December 31, 2013.

We have no material commitments for capital expenditures.

Net cash provided in operations for the nine months ending September 30, 2014 was $479,394 as compared to net cash provided by operations of $322,961 primarily relating to changes in Accounts receivable and accounts payable.

Net cash used in investing activity for the nine months ending September 30, 2014 was $16,225 as compared to net cash used $1,566,865 during the previous nine month primarily relating to the Acquisitions of businesses during 2013.

Net cash used in financing activities for the nine months ending September 30, 2014 was $400,945. Net cash provided by financing activities during the nine months ending September 30, 2013 was $1,204,320. 2013 noted $300,000 in proceeds from common stock, $840,000 proceeds in long term debt whereas in 2014 proceeds from sale of common stock and exercise of warrants of $1,124,750 was primarily used to pay long term debt and pay down the line of credit.
 
Liquidity.    The Company is continuing to expand its IT business operations through acquisitions and organic internal growth.  Acquisitions of target company assets will require additional financing.  Currently the Company anticipates that additional financing to fund these acquisitions of assets will be provided by sales of stock or borrowings.  Also, the Company is exploring alternatives for its trade receivable factoring which carries a very high interest rate.  Refinancing of this receivable factoring financing will reduce the Company’s interest expenses thereby increasing the Company’s liquidity position.
 
On October 29, 2014, the Company refinanced its factoring facility and replaced it with a new Asset Based Lending (ABL) revolver facility that has a term of 36 months and a maximum line of $10,000,000 (Tem Million). On October 29, 2014, the Company also obtained a term loan of $3,000,000 (3 Million). The term loan was priced at 8% over 30-day LIBOR (with a minimum floor of 2%) with a term of 36 months.

The Company believes its resources are adequate to fund its current operations for the next 12 months.
 
Off Balance Sheet Arrangements
 
There are no off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
 
 
Impact of Inflation

We believe that inflation has not had a material impact on our results of operations for the nine months ending September 30, 2014.  We cannot assure you that future inflation will not have an adverse impact on our operating results and financial condition.

CRITICAL ACCOUNTING POLICIES
 
A summary of significant accounting policies is included in Note 3 to the unaudited financial statements included elsewhere in this Report and in Note 2 to the financial statements included in our Annual Report filed under Form 10-K for the year ending December 31, 2013. We believe that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about our operating results and financial condition.  The following are a summary of the significant accounting estimates and policies that we believe are most critical to aid in fully understanding and evaluating our reported financial results.
 
Critical Accounting Estimates and Policies

General

The Consolidated Financial Statements of the Company are prepared in accordance with U.S. generally accepted accounting principles, which require management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, net revenue and expenses, and the disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates with the audit committee of our Board of Directors.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. Management believes the following critical accounting policies reflect the significant estimates and assumptions used in the preparation of the Consolidated Financial Statements.

A summary of significant accounting policies is included in Note 3 to the consolidated financial statements included elsewhere in this Report. We believe that the application of these policies on a consistent basis enables us to provide useful and reliable financial information about our operating results and financial condition.  The following are a summary of the significant accounting estimates and policies.

Estimates.  The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates.   We have made estimates for doubtful accounts of accounts receivable, fair values of our customer lists and the estimated useful lives for the amortization of our customer lists.   Management believes that the accounting estimates employed and the resulting balances are reasonable; however, actual results may differ from these estimates under different assumptions or conditions.  The most significant accounting estimates inherent in the preparation of our financial statements include estimates as to the value of customer lists and other intangible assets, values which are not readily apparent from other sources.

Fair Value of Financial Instruments.  The Company considers the carrying amounts of financial instruments, including cash, accounts receivable and accounts payable and accrued expenses to approximate their fair values because of their relatively short maturities and notes payable.

Accounts and Unbilled Receivables.  Accounts and unbilled receivables consist of amounts due from customers. The Company records a provision for doubtful receivables, if necessary, to allow for any amounts which may be unrecoverable, which is based upon an analysis of the Company’s prior collection experience, customer creditworthiness and current economic trends.
 
Intangible Assets.  Intangible assets are recorded at fair value and amortized on the straight-line method over the estimated useful lives of the related assets.  The carrying value of intangible assets are reviewed for impairment by management at least annually or upon the occurrence of an event which may indicate that the carrying amount may be greater than its fair value. If impaired, the Company will write-down the intangible assets for such impairment. In addition, the useful life of the intangible assets will be evaluated by management at least annually or upon the occurrence of an event which may indicate that the useful life may have changed.  Customer lists were valued based on management’s forecast of expected future net cash flows, with revenues based on projected revenues from customers acquired and are being amortized over five years.
 
 
Revenue Recognition.  Revenue is recognized when it has persuasive evidence of an arrangement, the fee is fixed and determinable, performance of service has occurred and collection is reasonably assured. Revenue is recognized in the period the services are provided.

Software Development Costs. Software development costs related to architecting, developing and testing large scale software platforms are capitalized. The capitalized costs are depreciated when these platforms begin delivering meaningful revenues.
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
Not required.  

Controls and Procedures
 
Evaluation of disclosure controls and procedures.  

The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, respectively, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on such evaluation, the Company’s principal executive officer and principal financial officer, respectively, have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective.

Changes in internal control over financial reporting.   There has been no change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the 1934 Act) during the third quarter of fiscal 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
 
 
 
 
PART II. OTHER INFORMATION
 
Legal Proceedings

We are not currently subject to any other legal proceedings, nor, to our knowledge, is any other legal proceeding threatened against us.  From time to time, we may be a party to certain legal proceedings in the ordinary course of business, including proceedings relating to the enforcement of our rights under contracts.  While the outcome of these legal proceedings, if any, cannot be predicted with certainty, we do not expect that these proceedings will have a material effect upon our financial condition or results of operations.
 
Risk Factors
 
Not required.
 
Unregistered Sales of Equity Securities and Use of Proceeds
 
During the nine months ended September 30, 2014, 1,874,584 warrants were exercised totaling $1,124,750.
 
Item 3.
Defaults Upon Senior Securities
 
None
 
Mine Safety Disclosures
  
Not applicable.

Other Information
 
None
 
Exhibits
 
Item 601 of Regulation S-K
 
Exhibit No.:
 
Exhibit
31.1
 
   
31.2
 
   
32.1
 
     
101
 
 
The following financial information from Quadrant 4 System Corporation’s Quarterly Report on Form 10-Q for the quarter ending September 30, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets at September 30, 2014 (unauditied) and December 31, 2013; (ii) Consolidated Statements of Income (Unaudited) for the three and nine months ending September 30, 2014 and 2013, (iii) Consolidated Statements of Cash Flows (Unaudited) for the three months ending September 30, 2014 and 2013.
 
 
 
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
   
QUADRANT 4 SYSTEM CORPORATION
     
November 12, 2014
 
By:
 
/s/ Dhru Desai                                                            
       
Dhru Desai
       
Chief Financial Officer and Director
 
 
 
 
 
20