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QFOR > SEC Filings for QFOR > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for QUADRANT 4 SYSTEMS CORP

Form 10-Q for QUADRANT 4 SYSTEMS CORP


13-Nov-2012

Quarterly Report


Item 2. 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, 2012 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

QUADRANT 4 SYSTEMS CORPORATION ("Quadrant 4 Systems", "we", "us", "our", or the "Company") is a publicly held company engaged in the information technology sector. The Company was incorporated by the Florida Department of State on May 9, 1990 as Sun Express Group, Inc. and operated a series of technology related businesses ranging from CCTV security systems to VOIP systems. In May 2010, the Company changed its business model and, in June 2010, the Company acquired a new business involving IT consulting. This consulting business was greater in size than the existing businesses; so the opportunity was treated by the Company as a material shift in its business model and disclosed in a Current Report on form 8-K on June 2010. At present, the Company has developed its business model in two wholly-owned subsidiaries, Quadrant 4 Consulting, Inc. and Quadrant 4 Solutions, Inc. via a series of acquisitions of several assets as described in the 10-K form filed for the period ending December 31, 2011.

The Company completed certain significant acquisitions in the previous two years following the reorganization of its business model, which are reflected in the accompanying financial statements. The Company is actively pursuing a business model that was changed and expanded in connection with the acquisition of assets and opportunities presented therein. Therefore, the significance of these recent acquisitions includes certain factors which represent risks and also require accentuation and explanation. The comparison to the previous year's third quarter is subject to this explanation.

The current operations of the Company consist of providing Information Technology (IT) and software-enabled services and consulting. The Company is focused on providing its services to companies in the Financial Services, Healthcare and Retail sectors. The Company intends to grow organically from the expansion of offerings and services to customers, most of which were acquired as relationships from acquisitions as well as the acquisition of new business relationships as part of its acquisition strategy.


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The financial statements being reported in this Quarterly Report are based on assets acquired within the past two years. The Company has a limited operating history with these assets, their management and the implementation of controls. There can be no assurance that the assets will continue to perform in the manner and to the degree indicated by the financial results disclosed for the recently-ending third quarter. The risks associated with recently-acquired assets are also discussed as a risk in the Company's annual report under Form 10-K.

Business Strategy

Quadrant 4 Systems Corporation plans to expand its focus in the Information Technology (IT) and Information Technology Enabled Services (ITES) market segments through a series of strategic business combinations. The Company intends to establish a full spectrum of IT services that include consulting, products and solutions specific to Healthcare, Retail and Financial Services industries and intends to grow organically to meet all of these service markets. To assist in the implementation of this new strategy, the Company intends to augment its present management and staffing, and, in furtherance of this plan, has undertaken discussions with certain individuals that bring significant existing experience and relationships in the chosen vertical segments to join the management team and/or participate in some advisory capacity at various levels.

Many US corporations have deferred upgrading and implementing IT infrastructure projects during the most-recent economic downturn. As a result, Quadrant 4 Systems believes that there is a pent-up demand for IT services that include consulting and implementation to help these clients remain efficient and competitive during the recovery time. The Company believes the best way to accomplish its strategic goals will be to initially seek to establish an IT services platform by acquiring a set of profitable assets with history, track record and satisfied client base. After building the initial platform to launch the new business plan, the Company believes that it will be able to rapidly grow in targeted sectors by attracting additional assets to the Company with subsequent acquisitions. The Company intends to exploit current market conditions where many small and medium size IT services companies (with revenues in the range of $5mm to $50mm), both public and privately held, with "marquee" client relationships would fit with the Company's strategic consolidation initiative. During the past year, the Company has identified and begun negotiations with several targets that qualify for Quadrant 4 Systems' criteria for acquisition and business combination.

Following acquisition of the projected assets and their integration, the Company intends to focus on organic growth both in adding additional revenues from existing clients and also adding new clients.

Core Business

Ultimately, the Company believes that it will focus its efforts as a provider of IT services and technology platforms. The Company intends to provide IT consulting services; managed services; software product architecture; software development, maintenance and outsourcing and industry-specific software solutions primarily to enterprises engaged in the Financial Services, Retail and Healthcare sectors.

Competition

While the Company currently operates in a highly competitive industry, we believe the Company will be able to compete effectively against well-capitalized competitors that have extensive experience, established distribution channels and facilities by building a scalable yet robust platform that allows the Company to be responsive to the needs of its customers with quality services with competitive pricing, a well-developed recruiting and retention model that ultimately provides a successful delivery to the customers.

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.


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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,
                                                                                    Increase/
                                            2012                   2011             (Decrease)          Percent
Revenue                               $       6,532,571       $    7,834,869     $    (1,302,298)            -17%
Cost of Revenue                             (5,051,425)          (6,088,508)          (1,037,083)            -17%
Gross Margin                                  1,481,146            1,746,361            (265,215)            -15%
General and administrative expenses           (992,609)            (465,753)              526,856            113%
Amortization of intangible assets           (1,011,560)          (1,122,627)            (111,067)            -10%
Interest and derivative expense               (391,765)            (368,810)               22,955              6%

Net loss                              $       (914,788)       $    (210,829)      $       703,959            334%




                                        Nine months ending September 30,
                                                                                  Increase/
                                            2012                  2011            (Decrease)         Percent
Revenue                               $      19,917,130      $   21,837,195     $  (1,920,065)             -9%
Cost of Revenue                            (15,737,113)        (17,023,329)        (1,286,216)             -8%
Gross Margin                                  4,180,017           4,813,866          (633,849)            -13%
General and administrative expenses         (2,517,544)         (1,436,039)          1,081,505             75%
Amortization of intangible assets           (3,034,681)         (2,878,338)            156,343              5%
Interest and derivative expense             (1,231,798)         (1,194,174)             37,624              3%

Net loss                              $     (2,604,006)      $    (694,685)     $    1,909,321            275%

Comparison of Three Months and Nine months Ending September 30, 2012 and 2011

REVENUES

Revenues for the third quarter ending September 30, 2012 totaled $6,532,571 compared to $7,834,869 of revenue during the same period in 2011. The decrease in revenues of $1,302,298, or 17% over the previous third quarter, was primarily due to several client projects starting later in the quarter. Also in order to mitigate risks and exposure, company began reducing resource allocation and projects on a large customer account and moving the resources to new clients. The resource redeployment strategy coupled with later implementation of customer projects has led to the temporary reduction of revenue for the third quarter.

Revenues were comprised of service-related sales of software programming, consulting and development services.

Revenues for the nine months ending September 30, 2012 totaled $19,917,130 compared to $21,837,195 during the same period in 2011. The decrease in revenues of $1,920,065, or 9% over the previous nine month period in 2011, was primarily due to several client projects starting later in the quarter. Also in order to mitigate risks and exposure, the Company began reducing resource allocation and projects on a large customer account and moving the resources to new clients. The resource redeployment strategy coupled with later implementation of customer projects has led to the temporary reduction of revenue for the third quarter. The decrease in revenues for the first nine months of 2012 was the result of a focus of sales with longer selling cycles and several client projects starting later in the third quarter but was partially offset by stronger than anticipated revenues in the first quarter of 2012.


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Revenues were comprised of service-related sales of software programming, consulting and development services.

COST OF REVENUES

Cost of revenue for the third quarter ending September 30, 2012 totaled $5,051,425 compared to $6,088,508 during the same period in 2011. The decrease in cost of revenue of $1,037,083, or 17% over the previous third quarter, was due primarily to the reduction in revenues in the third quarter of 2012. 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, 2012 totaled $15,737,113 compared to $17,023,329 during the same period in 2011. The decrease in cost of revenue of $1,286,216, or 8% over the previous nine months, was due primarily to the reduction of revenues in the third quarter of 2012 offset by higher than projected revenues in the first quarter of 2012. Cost of revenue is comprised primarily of the direct costs of employee and contract labor and related expenses.

GROSS MARGIN

The decrease in gross margin of $265,215, or 15% over the previous third quarter, resulted primarily from decreased revenues, the gross margin percentage increased from approximately 22% in the third quarter of 2011 to 23% in the third quarter of 2012. This increase was due to decreased costs of new customer projects.

The decrease in gross margin of $633,849, or 13% over the previous nine month period, resulted primarily from decreased revenues, the gross margin percentage remained approximately 21% (decreasing from 22% to 21% over the previous nine month period). The decrease was due to higher new customer project costs in the third quarter offset partially by lower cost of revenues in the first quarter.

SELLING, GENERAL AND ADMINISTATIVE EXPENSES

Selling, general & administrative expenses for the third quarter ending September 30, 2012 totaled $992,609 compared to $465,753 during the same period in 2011. The increase in selling, general & administrative expenses of $526,856 or 113% over the previous third quarter was due to increased costs of integrating the acquisitions and building new vertical sales force during the third quarter of 2012.

Selling, general & administrative expenses for the nine months ending September 30, 2012 totaled $ 2,517,544 compared to $1,436,039 during the same period in 2011. The increase in selling, general & administrative expenses of $1,081,505, or 75% over the previous third quarter, was due to increased costs associated with integration and building new sales force.

AMORTIZATION AND WRITE-DOWN OF INTANGIBLE ASSETS

Amortization expense for the third quarter ending September 30, 2012 totaled $1,011,560 compared to $1,122,627 during the same period in 2011. The decrease in amortization expense of $111,067 was materially insignificant since full amortization of the March 1, 2011 acquisition occurred during the third quarter of 2011. Amortization periods on the acquired intangibles range from 5 - 7 years.


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Amortization expense for the nine months ending September 30, 2012 totaled $3,034,681 compared to $2,878,338 during the same period in 2011. The increase in amortization expense of $156,343 was due to the additional amortization expense from intangible assets (customer lists and software technology and frameworks) acquired in connection with the acquisition of Quadrant 4 Solutions, Inc., the business entity acquired by the Company in 2011. Amortization periods on the acquired intangibles range from 5 - 7 years.

INTEREST AND DERIVATIVE EXPENSE

Financing and interest costs and derivative expenses for the third quarter ending September 30, 2012 totaled $391,765 compared to $368,810 during the same period in 2011. The increase in financing, interest costs and derivative expenses of $22,955, or 6% over the previous third quarter was due to additional interest costs.

Financing and interest costs and derivative expenses for the nine months ending September 30, 2012 totaled $1,231,798 compared to $1,194,174 during the same period in 2011. The increase in financing and interest costs of $37,624, or 3% over the previous nine month period, was due to increased interest on notes payable and long-term debt to finance the Company's acquisitions and the note payable-revolver and amortization of debt discount.

NET LOSS

The Company reported a net loss of $914,788 for the third quarter ending September 30, 2012 compared to $210,829 for the same period in 2011. The increase of $703,959, or 334% over the previous third quarter, was due to lower revenues, a decrease in gross profit margin and increase in selling, general and administrative expenses, in the current period as compared to the prior period.

The Company reported a net loss of $2,604,006 for the nine months ending September 30, 2012 compared to $694,685 for the same period in 2011. The increase of $1,909,321 or 275% over the previous nine month period due to lower revenues, a decrease in gross profit margin, an increase in selling, general and administrative expenses and an increase in amortization and 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, 2012 and September 30, 2011 is
calculated as follows:

                                 September 30, 2012        September 30, 2011
        Net Loss (GAAP Basis)     $         (914,788 )        $      (210,829)
        Interest expense                     391,765                   368,810

        Amortization expense               1,011,560                 1,122,627

        Income Taxes                               -                         -
        EBITDA                    $          488,537          $      1,280,608

Earnings before interest, taxes, depreciation and amortization ("EBITDA") for the nine months ending September 30, 2012 and September 30, 2011 is calculated as follows:

                                 September 30, 2012        September 30, 2011
        Net Loss (GAAP Basis)     $       (2,604,006 )        $       (694,685 )
        Interest expense                   1,298,466                 1,194,174

        Amortization expense               3,034,681                 2,878,338

        Income Taxes                               -                         -
        EBITDA                    $        1,729,141          $      3,377,827

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) for the third quarter ending September 30, 2012 decreased by $725,409 or 57% over the previous third quarter as a result of increased first year integration and administrative expenses incurred in the acquisition of a new business entity on March 1, 2011.

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) for the nine months ending September 30, 2012 decreased by $1,648,686 or 49% over the previous nine month period decreased as a result of increased first year integration and administrative expenses incurred in the acquisition of a new business entity on March 1, 2011.


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LIQUIDITY AND CAPITAL RESOURCES

At September 30, 2012, we had an accumulated deficit of $6,162,291 as compared to $3,558,285 at December 31, 2011. As of September 30, 2012, we had a working capital deficit of $2,476,148 as compared to $1,158,369 at December 31, 2011.

We have no material commitments for capital expenditures.

Net cash provided by operations for the nine months ending September 30, 2012 was $152,352 as compared to $1,061,072 for the nine months ending September 30, 2011. The decrease in cash used in operating activities in 2012 compared to w011 was primarily due to decrease in revenue and cost of revenue during nine months period ending September 30, 2012.

Net cash used in financing activities for the nine months ending September 30, 2012 was $1,221,851 as compared to $1,028,928 for the nine months ending September 30, 2011. The increase in cash used in financing activities in 2012 compared to 2011 was due primarily to increased collections and receipt of convertible debt proceeds in late 2011 that were utilized to pay down other debt, offset in part by an increase in proceeds from the sale of stock in 2011.

The Company was reliant on proceeds from the sale of stock in 2011 and proceeds from borrowings to provide working capital. A tightening of capital markets can reduce or eliminate funding sources causing a decrease in our liquidity and an inability to generate revenues from new lending activities.

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.

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, 2012. 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, 2011. 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.


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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 . . .

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