On June 29, 2017 and October 19, 2017, Q4 and it’s wholly owned subsidiary, Stratitude Corporation, respectively, filed Chapter 11 bankruptcy cases, as previously noted on SEC filings made at that time (collectively, the “Companies” or the “Chapter 11 Cases”). The Chapter 11 Cases are being jointly administered.
The commencement of each of the Chapter 11 Cases was directly attributable to filing of a federal criminal complaint against the Q4’s two key officers, directors, and persons in control of a majority of the outstanding Q4 common stock, Nandu Thondavadi (“Thondavadi”), the Companies’ then-Chief Executive Officer, and Dhru Desai (“Desai”), the Companies’ then-Chairman of the Board and Chief Financial Officer (collectively, the “Criminal Defendants”). On November 29, 2016, the United States Department of Justice (“DOJ”) caused a criminal complaint to be filed against the Criminal Defendants, which matter remains pending in the United States District Court for the Northern District of Illinois, Eastern Division (the “District Court”), entitled United States of America v. Nandu Thondavadi and Dhru Desai, Case No. 16CR772 (the “Criminal Action”). The Criminal Action arises out of alleged violations of, inter alia, federal securities laws and interstate wire laws, specifically alleging that the Criminal Defendants violated Title 18, United States Code, §1343 (wire fraud), and Title 18, United States Code, §1350 (corporate officers’ certification of financial reports that do not fairly present, in all material respects, the financial condition of Q4), and also alleging that Thondavadi violated Title 18, United States Code, §1001 (false statements). The Criminal Defendants were arrested on November 30, 2016, by the U.S. Federal Bureau of Investigation for alleged securities and related fraud, all as more fully set forth in the Criminal Action.
On or about December 1, 2016, the Companies received a Default Notice and Reservation of Rights under Credit Agreement letter from the Companies’ senior secured lender, BMO Harris Bank, N.A. (“BMO”), advising the Companies that certain events of default had occurred under the applicable loan documentation as a result of, among other things, the commencement of the Criminal Action against the Criminal Defendants. A similar letter was received on or about that day from the Companies’ junior secured lender, BIP Quadrant 4 System Debt Fund I, LLC (“BIP”) (collectively, the “Notice of Default Letters”) (BMO and BIP are hereinafter collectively, the “Secured Lenders”).
On December 5, 2016, the Criminal Defendants both resigned as officers, directors and employees of the Companies (“Criminal Defendants Resignations”). On or about December 12, 2016, with the support of BMO and Q4’s then-remaining members of its Board of Directors (Philip Firrek – Chairman, Dr. Thomas E. Sawyer, and Eric Gurr), Robert H. Steele (“Steele”) was appointed as Q4’s Chief Executive Officer.
Following the issuance of the Notice of Default Letters, representatives of, and prior insolvency counsel and current securities litigation counsel for, the Companies engaged in negotiations with BMO to address the events of default and the attendant issues of the Companies’ former CEO and CFO being charged with criminal fraud. Among the topics addressed were the means of a possible disposition of the Companies’ business units and other assets in the best interests of the Companies’ creditors and other interested parties, the nature and extent of the Companies’ necessary funding needs, an initial determination of the Companies’ assets and liabilities, the hiring of financial consultants and investment bankers, the election of additional Board members and appointment of new officers in light of the Criminal Defendants Resignations. In addition, following the Criminal Defendants Resignations, and under the direction of Messrs. Steele, Firrek and Sawyer, Q4 immediately began to cooperate closely with the DOJ and SEC in their continuing investigations as to the civil and criminal matters related to the Criminal Action.
On or about March 16, 2017, the Companies entered into a 60-day forbearance arrangement with BMO to continue the stabilization of the Companies’ business and exploration for prospective buyers of the Companies’ various Business Units (the “Forbearance Agreement”). The Forbearance Agreement, among other things, required the Companies to operate under budgets approved by BMO; elect Mr. Michael A. Silverman as Q4’s Chief Restructuring Officer (“Silverman”); appoint Messrs. Steele and Silverman, and Mr. Bradley A. Buxton to fill vacancies on the Board conditioned upon a necessary directors’ and officers’ liability insurance policy being obtained (which had been placed into effect); and maintain the engagements of Silverman Consulting, Inc. (“Silverman Consulting”) and Livingstone Partners LLC (“Livingstone”) as the Companies’ financial consultants and investment bankers, respectively. As of that date, Messrs. Steele, Silverman and Buxton joined Messrs. Firrek and Sawyer as members of the Board.
As of the date hereof, and as more fully described below, all of the Companies’ business units have been sold or disposed of as going concerns pursuant to orders of the Bankruptcy Court (“Bankruptcy Court”) entered in the Chapter 11 Cases. The gross proceeds received and to be received from court approved sales/liquidation of the Companies’ business assets in the Chapter 11 Cases are in excess of $26,000,000.00. The Companies do not have any ongoing business operations and all tangible and intangible personal property assets utilized in the operation of the Companies’ businesses have been sold and/or liquidated pursuant to prior orders of the Bankruptcy Court.
On June 1, 2018, the Companies and the Official Committee of Unsecured Creditors in the Chapter 11 Cases filed their Joint Plan of Liquidation of Quadrant 4 System Corporation and Stratitude, Inc. and the Official Committee of Unsecured Creditors [ECF No. 407] (the “Plan”), and theirDisclosure Statement for Joint Plan of Liquidation of Quadrant 4 System Corporation and Stratitude, Inc. and the Official Committee of Unsecured Creditors [ECF No. 408] (the “Disclosure Statement”). The Bankruptcy Court has set a hearing to determine the adequacy of the Disclosure Statement on Thursday, July 12, 2018 at 11:00 a.m. (Central time), before the Honorable Jack B. Schmetterer, Judge for the United States Bankruptcy Court for the Northern District of Illinois, Eastern Division, in Courtroom 682 of the Dirksen Federal Building, 219 South Dearborn Street, Chicago, Illinois 60604.
The Plan provides for the sale, liquidation or other disposition of all assets in the Companies’ estates in order that creditor distributions can be maximized and accomplished as soon as is practicable after the Plan’s confirmation. If confirmed, the Plan will establish a liquidating trust to be administered under the direction of a third party, independent trustee (the “Liquidating Trustee”) pursuant to the terms of a liquidating Trust agreement, attached as an exhibit to the Plan (the “Liquidating Trust Agreement”). The Liquidating Trustee is charged with overseeing and directing the sale, liquidation or other disposition of all of the Companies’ remaining assets (primarily, potential causes of action in favor of the Companies) and the complete distribution of proceeds to the creditors in the Chapter 11 Cases in accordance with the priorities established under the Bankruptcy Code and applicable law, and pursuant to the terms and conditions of the Plan and the Liquidating Trust Agreement. All distributions under the Plan will be strictly in accordance with the “Absolute Priority Rule” under the Bankruptcy Code, which provides that no junior class of claims or equity interests will receive any distribution until all senior classes are paid in full. For example, Q4 cannot receive any distributions on account of its ownership of Stratitude until all Stratitude creditors are paid in full, and similarly, Q4 equity interest holders cannot receive any distributions on account of the Q4 stock holdings unless all of Q4’s creditors are paid in full.