SilverSun Technologies, Inc. - Quarter Report: 2016 March (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

 

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FORM 10-Q

 

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ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2016

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________

 

Commission File Number: 000-50302

(Exact name of registrant as specified in its charter)

Delaware	16-1633636
(State or other jurisdiction of incorporation)	(IRS Employer Identification No.)

5 Regent Street

(Address of principal executive offices)

(Registrant’s telephone number, including area code)

 

Indicate by check mark 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 past 12 months, and (2) has been subject to such filing requirements for the past 90 days.   Yes x No ☐

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 ☒    No  ☐

  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or 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	☐		Accelerated filer	☐
Non-accelerated filer	☐		Smaller reporting company	☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐    No ☒

 

As of May 13, 2016, there were 4,410,736 shares outstanding of the registrant’s common stock.  

 

SILVERSUN TECHNOLOGIES, INC.

 

TABLE OF CONTENTS

 

		Page No.
PART I.    FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (unaudited):	3
	Condensed Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015	3
	Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2016 and 2015	4
	Condensed Consolidated Statement of Equity for the Twelve Months Ended December 31, 2015 and the Three Months Ended March 31, 2016	5
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015	6
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	26
PART II.   OTHER INFORMATION
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 3.	Defaults Upon Senior Securities	27
Item 4.	Mine Safety Disclosures	27
Item 5.	Other Information	27
Item 6.	Exhibits	27

 

 

PART I – FINANCIAL INFORMATION 

Item 1.  Financial Statements

 

SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

 (Unaudited)

 

		March 31, 2016				December 31, 2015
ASSETS
Current assets:
Cash and cash equivalents		$	673,536			$	1,193,313
Accounts receivable, net of allowance of $375,000			2,576,863				2,477,301
Unbilled services			678,683				741,543
Prepaid expenses and other current assets			306,329				443,619
Deferred tax asset – current			38,000				38,000
Total current assets			4,273,411				4,893,776
Property and equipment, net			516,771				425,347
Intangible assets, net			2,500,954				2,571,537
Goodwill			401,000				401,000
Deferred tax assets			152,500				162,000
Deposits and other assets			29,889				29,889
Total assets		$	7,874,525			$	8,483,549
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	1,644,252			$	1,594,100
Accrued expenses			702,776				821,586
Accrued interest			16,661				14,817
Income taxes payable			301,632				250,284
Bank line of credit			-				-
Contingent consideration – current portion			125,650				128,434
Long term debt - current portion			301,681				300,033
Capital lease obligations – current portion			86,337				90,167
Deferred revenue			2,087,063				2,369,999
Total current liabilities			5,266,052				5,569,420
Contingent consideration net of current portion			241,740				272,213
Long term debt net of current portion			717,109				793,150
Capital lease obligations net of current portion			71,773				92,445
Convertible note payable			200,000				200,000
Total liabilities			6,496,674				6,927,228
Commitments and contingencies			-				-
Stockholders’ equity:
Preferred stock, $0.001 par value; authorized 1,000,000 shares			-				-
Series A Preferred Stock, $0.001 par value; authorized 2 shares  No shares issued and outstanding			-				-
Series B Preferred Stock, $0.001 par value; authorized 1 share No shares issued and outstanding			-				-
Common stock:
Par value $0.00001; authorized 75,000,000 shares 4,410,736  shares issued and outstanding			45				45
Additional paid-in capital			11, 945,701				12,198,448
Accumulated deficit			(10,567,895	)			(10,642,172	)
Total stockholders’ equity			1,377,851				1,556,321
Total liabilities and stockholders’ equity		$	7,874,525			$	8,483,549

 

 See accompanying notes to condensed consolidated financial statements.

 

SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

		Three Months Ended March 31,
		2016				2015
Revenues:
Software product, net		$	860,442			$	1,382,742
Service, net			6,923,859				5,100,372
Total revenues, net			7,784,301				6,483,114
Cost of revenues:
Product			444,894				637,509
Service			4,408,378				3,045,333
Total cost of revenues			4,853,272				3,682,842
Gross profit			2,931,029				2,800,272
Selling, general and administrative expenses :
Selling and marketing expenses			1,084,879				912,130
General and administrative expenses			1,518,933				1,187,814
Share based compensation			11,952				30,405
Depreciation and amortization			170,894				111,956
Total selling, general and administrative expenses			2,786,658				2,242,305
Income from operations			144,371				557,967
Other income (expense)
Interest expense, net			(19,246	)			(12,217	)
Other income			10,000				-
Total other income (expense)			(9,246	)			(12,217	)
Income before taxes			135,125				545,750
Provision for income taxes			60,848				24,583
Net income		$	74,277			$	521,167
Net income per common share – basic and fully diluted		$	0.02			$	0.13
Weighted average shares
Basic			4,410,736				4,042,317
Diluted			4,477,403				4,051,338

 

See accompanying footnotes to the condensed consolidated financial statements

 

SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE YEAR ENDED DECEMBER 31, 2015 AND THREE MONTHS ENDED MARCH 31, 2016

 

		Series A Preferred Stock								Series B Preferred Stock								Common Stock Class A								Additional Paid in				Accumulated Equity				Total Stockholders’
		Shares				Amount				Shares				Amount				Shares				Amount				Capital				(Deficit)				Equity
Balance at January 1, 2015			-			$	-				1			$	1				3,959,064			$	40			$	11,030,043			$	(11,016,477	)		$	13,607
Cancellation of preferred share			-				-				(1	)			(1	)			-				-				1				-				-
Issuance of common stock, net of fees			-				-				-				-				363,490				4				812,019				-				812,023
Roundup of fractional shares			-				-				-				-				8,698				-				-				-				-
Issuance of common stock for services			-				-				-				-				15,000				-				36,300				-				36,300
Issuance of stock for acquisition			-				-				-				-				64,484				1				259,225				-				259,226
Stock warrants in exchange for services			-				-				-				-				-				-				20,000				-				20,000
Share-Based Compensation			-				-				-				-				-				-				40,860				-				40,860
Net income			-				-				-				-				-				-				-				374,305				374,305
Balance at December 31, 2015			-			$	-				-			$	-				4,410,736			$	45			$	12,198,448			$	(10,642,172	)		$	1,556,321
Cash dividend			-				-				-				-				-				-				(264,699	)			-				(264,699	)
Share-Based Compensation			-				-				-				-				-				-				11,952				-				11,952
Net income			-				-				-				-				-				-				-				74,277				74,277
Balance at March 31, 2016			-			$	-				-			$	-				4,410,736			$	45			$	11,945,701			$	(10,567,895	)		$	1,377,851

 

The accompanying notes are an integral part of these consolidated financial statements. 

 

 

SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 (Unaudited)

 

		Three Months Ended March 31,
		2016				2015
Cash flows from operating activities:
Net income		$	74,277			$	521,167
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred income taxes			9,500				(190,500	)
Depreciation and amortization			57,807				38,207
Amortization of intangibles			113,086				73,749
Share-based compensation			11,952				30,405
Changes in certain assets and liabilities:
Accounts receivable			(99,562	)			(207,182	)
Unbilled services			62,860				(288,055	)
Prepaid expenses and other current assets			137,290				(11,278	)
Deposits and other assets			-				(2,263	)
Accounts payable			50,152				119,279
Accrued expenses			(118,811	)			(103,612	)
Income tax payable			51,348				215,083
Accrued interest			1,844				(232	)
Deferred revenues			(282,936	)			255,990
Net cash provided by operating activities			68,807				450,758
Cash flows from investing activities:
Purchase of property and equipment			(149,231	)			(24,869	)
Software development costs			(42,503	)			-
Acquisition of new business			-				(80,000	)
Net cash used in investing activities			(191,734	)			(104,869	)
Cash flows from financing activities:
Proceeds from issuance of common stock and warrants, net of fees			-				812,023
Payment of cash dividend			(264,699	)			-
Repayment of contingent consideration			(33,257	)			-
Repayment of long term debt			(74,393	)			(62,360	)
Principal payments under capital leases obligations			(24,501	)			(19,508	)
Net cash (used in) provided by financing activities			(396,850	)			730,155
Net (decrease) increase in cash and cash equivalents			(519,777	)			1,076,044
Cash and cash equivalents – beginning of period			1,193,313				1,308,337
Cash and cash equivalents – end of period		$	673,536			$	2,384,381
Cash paid during period for:
Interest		$	17,402			$	13,143
Income taxes		$	40,849			$	22,136

 

See accompanying footnotes to the condensed consolidated financial statements.

 

 SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

For the three months ended March 31, 2016:

None

For the three months ended March 31, 2015:

The Company acquired certain assets of ATR for a $175,000 promissory note in addition to a cash payment of $80,000.

On March 29, 2015, Mr. Meller returned his one share of Series B Preferred to the Company and the Company cancelled the certificate. On March 29, 2015, subject to shareholder approval, the Board approved the cancellation of the Series B Preferred Certificate of Designation.

 

 

 

 

See accompanying footnotes to the condensed consolidated financial statements.

 

 

SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

SilverSun Technologies, Inc. (the “Company”) and wholly owned subsidiary SWK Technologies, Inc. (“SWK”) is a value added reseller and master developer for Sage Software’s Sage100/500 and ERP X3 financial and accounting software as well as the publisher of proprietary software solutions, including its own Electronic Data Interchange (EDI) software, “MAPADOC.”  The Company is also a managed network service provider, providing remote network monitoring services, business continuity, disaster recovery, data backup, and application hosting. The Company sells services and products to various industries including, but not limited to, manufacturers, wholesalers and distributors located throughout the United States. The Company is publicly traded and is currently quoted on the Over-the-Counter Market Place (“OTCQB”) under the symbol “SSNT.”

 

In May of 2014, the Company completed the purchase of selected assets of ESC Software, Inc. (“ESC”), a leading Arizona-based reseller of Sage Software and Acumatica applications. In 2015, the Company completed four additional acquisitions, 2000 SOFT, d/b/a Accounting Technology Resources (“ATR”), a Southern California based reseller of Sage Software applications, ProductiveTech, Inc. (“PTI”) located in Southern New Jersey, The Macabe Associates, Inc., (“Macabe”) a Washington based reseller of Sage Software and Acumatica applications, and Oates & Company, (“Oates”) a North Carolina reseller of Sage Software applications.

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of SilverSun Technologies, Inc. as of March 31, 2016, the results of operations and cash flows for the three months ended March 31, 2016 and 2015.  These results are not necessarily indicative of the results to be expected for the full year.

 

The financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC) and consequently have been condensed and do not include all of the disclosures normally made in an Annual Report on Form 10-K.  The December 31, 2015 balance sheet included herein was derived from the audited financial statements included in the Company’s annual report on Form 10-K. Accordingly, the financial statements included herein should be reviewed in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015 filed with the SEC on March 30, 2016.

On February 4, 2015 the Company effected a 1-for-30 reverse stock split of the outstanding common stock (the “Reverse Stock Split”) whereby every thirty (30) shares of outstanding common stock decreased to one (1) share of common stock. Similarly, the number of shares of common stock, par value $0.00001 (“Common Stock”) into which each outstanding option and warrant to purchase common stock is to be exercisable decreased on a 1-for-30 basis and the exercise price of each outstanding option and warrant to purchase common stock increased proportionately. The impact of this reverse stock split has been retroactively applied to the financial statements and the related notes.

 

During the three months ended March 31, 2016, there have been no material changes to the Company’s significant accounting policies than those previously disclosed in the Company’s Form 10-K for the year ended December 31, 2015.

 

 

 

SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

 

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

Goodwill is the excess of acquisition cost of an acquired entity over the fair value of the identifiable net assets acquired.  Goodwill is not amortized, but tested for impairment annually or whenever indicators of impairment exist. These indicators may include a significant change in the business climate, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of the business or other factors.

 

The purchased intangible assets are recorded at fair value using an independent valuation at the date of acquisition and are amortized over the useful lives of the asset using the straight-line amortization method. 

 

The Company assesses potential impairment of its intangible assets and other long-lived assets when there is evidence that recent events or changes in circumstances have made recovery of an asset’s carrying value unlikely. Factors the Company considers important, which may cause impairment include, among others, significant changes in the manner of use of the acquired asset, negative industry or economic trends, and significant underperformance relative to historical or projected operating results. No impairment losses were identified or recorded for the three months ended March 31, 2016 and 2015.

 

Revenue is recognized when products are shipped, or services are rendered, evidence of a contract exists, the price is fixed or reasonably determinable, and collectability is reasonably assured.

Product Revenue

Software product revenue is recognized when the product is shipped to the customer. The Company treats the software component and the professional services consulting component as two separate arrangements that represent separate units of accounting. The arrangement consideration is allocated to each unit of accounting based upon that unit’s proportion of the fair value.  In a situation where both components are present, software sales revenue is recognized when collectability is reasonably assured and the product is delivered and has stand-alone value based upon vendor specific objective evidence.

Service Revenue

Service revenue is comprised of primarily professional service consulting revenue, maintenance revenue and other ancillary services provided. Professional service revenue is recognized as service time is incurred.

 

With respect to maintenance services, upon the completion of one year from the date of sale, the Company offers customers an optional annual software maintenance and support agreement for subsequent periods not exceeding one year. Maintenance and support agreements are recorded as deferred revenue and recognized over the respective terms of the agreements, which typically range from three months to one year and are included in services revenue in the Consolidated Statements of Income.

Shipping and handling costs charged to customers are classified as revenue, and the shipping and handling costs incurred are included in cost of sales.

 

 

SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

 

The Company recognizes revenue on its professional services as those services are performed or certain obligations are met. Unbilled services represents the revenue recognized but not yet invoiced. 

 

Deferred revenues consist of maintenance service, customer support services, including telephone support and deposits for future consulting services which will be earned as services are performed over the contractual or stated period, which generally ranges from three to twelve months.

The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The Company maintains cash balances at financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to federally insured limits. At times balances may exceed FDIC insured limits. The Company has not experienced any losses in such accounts.

 

The Company maintains its cash and cash equivalents with various institutions, which exceed federally insured limits throughout the year.  At March 31, 2016 and December 31, 2015, the Company had cash on deposit of approximately $376,721 and $895,727 respectively in excess of the federally insured limits of $250,000.

 

For the three months ended March 31, 2016 and 2015, our top ten customers accounted for 22% ($1,748,878) and 33% ($2,124,079), respectively, of our total revenues.  The Company does not rely on any one specific customer for any significant portion of our revenue.

 

For the three months ended March 31, 2016 and 2015, purchases from one supplier through a “channel partner” agreement were approximately 22% and 42% of cost of revenues, respectively.  This channel partner agreement is for a one year term and automatically renews for an additional one year term on the anniversary of the agreements effective date.

 

For the three months ended March 31, 2016 and 2015, one supplier represented approximately 36% and 27% of total accounts payable respectively.

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable and cash and cash equivalents.  As of March 31, 2016 the Company believes it has no significant risk related to its concentration of accounts receivable.

 

Accounts receivable consist primarily of invoices for maintenance and professional services. Full payment for software ordered by customers is due in advance of ordering from the software supplier. Payments for maintenance and support plan renewals are due before the beginning of the maintenance period. Terms under our professional service agreements are generally 50% due in advance and the balance on completion of the services.

 

The Company maintains an allowance for bad debt estimated by considering a number of factors, including the length of time the amounts are past due, the Company’s previous loss history and the customer’s current ability to pay its obligations.  

Property and equipment is stated at cost, net of accumulated depreciation.  Depreciation is computed using the straight-line method based upon the estimated useful lives of the assets, generally three to seven years.  Maintenance and repairs that do not materially add to the value of the equipment nor appreciably prolong its life are charged to expense as incurred.

 

 

SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss is included in the Consolidated Statements of Income.

Deferred income taxes reflects the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as net operating loss carryforwards. Deferred tax assets and liabilities are classified as current or non-current based on the classification of the related assets or liabilities for financial reporting, or according to the expected reversal dates of the specific temporary differences, if not related to an asset or liability for financial reporting. Valuation allowances are established against deferred tax assets if it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates or laws is recognized in operations in the period that includes the enactment date.

 

The Company has federal net operating loss (“NOL”) carryforwards which are subject to limitations under Section 382 of the Internal Revenue Code.

The Company files income tax returns in the U.S. federal and state jurisdictions. Tax years 2013 to 2016 remain open to examination for both the U.S. federal and state jurisdictions.

There were no liabilities for uncertain tax positions at March 31, 2016 and March 31, 2015.

 

The accounting standards define fair value and establish a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use on unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The hierarchy is as follows:

 

Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.

 

Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

 

Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs. 

The Company’s current financial assets and liabilities approximate fair value due to their short term nature and include cash, accounts receivable, accounts payable, and accrued liabilities.  The carrying value of longer term lease and debt obligations approximate fair value as their stated interest rates approximate the rates currently available.

 

Compensation expense related to share-based transactions, including employee stock options, is measured and recognized in the financial statements based on a determination of the fair value. The grant date fair value is determined using the Black-Scholes-Merton (“Black-Scholes”) pricing model. For employee stock options, the Company recognizes expense over the requisite service period on a straight-line basis (generally the vesting period of the equity grant). The Company’s option pricing model requires the input of highly subjective assumptions, including the expected stock price volatility, expected term, and forfeiture rate. Any changes in these highly subjective assumptions may significantly impact stock-based compensation expense.

SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

 

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to put most leases on their balance sheets by recognizing a lessee’s rights and obligations, while expenses will continue to be recognized in a similar manner to today’s legacy lease accounting guidance. This ASU could also significantly affect the financial ratios used for external reporting and other purposes, such as debt covenant compliance.  This ASU will be effective for us on January 1, 2019, with early adoption permitted. We are currently in the process of assessing the impact of this ASU on our consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which includes multiple provisions intended to simplify various aspects of the accounting for share-based payments, including treatment of excess tax benefits and forfeitures, as well as consideration of minimum statutory tax withholding requirements. The ASU will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016, with early application permitted in any interim or annual period. The Company is evaluating the future impact of this ASU on the consolidated financial statements.

 

No other recently issued accounting pronouncements had or are expected to have a material impact on the Company’s consolidated financial statements.

 

The Company’s basic income per common share is based on net income for the relevant period, divided by the weighted average number of common shares outstanding during the period.  Diluted income per common share is based on net income, divided by the weighted average number of common shares outstanding during the period, including common share equivalents, such as outstanding option and warrants to the extent they are dilutive. The computation of diluted income per share for the three months ended March 31, 2016 and March 31, 2015 does not include share equivalents as all warrants and options exceeded the average market price of the common stock. Convertible debt is included below, based on if-converted method.                              

 

		Three Months Ended				Three Months Ended
		March 31, 2016				March 31, 2015
Basic net income per share computation:
Net income		$	74,277			$	521,167
Weighted-average common shares outstanding			4,410,736				4,042,317
Basic net income per share		$	0.02			$	0.13
Diluted net income per share computation:
Net income		$	74,277			$	521,167
Weighted-average common shares outstanding			4,477,403				4,051,338
Total adjusted weighted-average shares			4,477,403				4,051,338
Diluted net income per share		$	0.02			$	0.13

 

 

SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

 

 

The following table summarizes securities that, if exercised, would have an anti-dilutive effect on earnings per share.

 

		Three Months March 31, 2016				Three Months March 31, 2015
Stock options			183,576				30,000
Warrants			203,253				185,078
Total potential dilutive securities not included in income per share			368,829				215,078

 

Property and equipment is summarized as follows:

 

		March 31, 2016				December 31, 2015
Leasehold improvements		$	30,557			$	30,557
Equipment, furniture and fixtures			1,620,499				1,471,268
			1,651,056				1,501,825
Less: Accumulated depreciation			(1,134,285	)			(1,076,478	)
Property and equipment, net		$	516,771			$	425,347

 

Depreciation and amortization expense related to these assets for the three months ended March 31, 2016 and 2015 was $57,807 and $38,207, respectively. 

Property and equipment under capital leases are summarized as follows:

		March 31, 2016				December 31, 2015
Equipment, furniture and fixtures			433,536				433,536
Less: Accumulated depreciation			(257,029	)			(232,228	)
Property and equipment, net		$	176,507			$	201,308

The components of intangible assets are as follows:

 

		March 31, 2016				December 31, 2015				Estimated Useful Lives
Proprietary developed software		$	408,414			$	365,911				5
Intellectual property, customer list, and acquired contracts			3,069,551				3,069,551				5 - 15
Total intangible assets		$	3,477,965			$	3,435,462
Less: accumulated amortization			(977,011	)			(863,925	)
		$	2,500,954			$	2,571,537

 

Amortization expense included in depreciation and amortization was $113,086 for the three months ended March 31, 2016 as compared to $73,749 for the three months ended March 31, 2015. Included in proprietary developed software is $42,503 not yet in service.

 

 

SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

The Company expects future amortization expense to be the following:

  

		Amortization
Balance of 2016		$	339,258
2017			355,796
2018			260,737
2019			260,738
2020			243,512
thereafter			1,040,913
Total		$	2,500,954

 

On August 1, 2013, the Company obtained a line of credit (the “Credit Line”) and a two year term loan from the bank (the “Term Loan”). The Credit Line expired on July 31, 2015 and was automatically renewed for an additional year. The Credit Line includes a borrowing base calculation tied to accounts receivable with a maximum availability of $750,000 at prime plus 1.75% interest (5.25% at March 31, 2016).  The Credit Line is collateralized by substantially all of the assets of the Company and guaranteed by the Company’s Chief Executive Officer, Mr. Meller.  The Credit Line requires the Company to pay a monitoring fee of $1,000 monthly. The Company was in compliance with all covenants related to the Credit Line at March 31, 2016.

 

On May 6, 2014, SWK acquired certain assets of ESC, Inc. pursuant to an Asset Purchase Agreement for a promissory note in the aggregate principal amount of $350,000 (the “ESC Note”). The ESC Note matures on April 1, 2019. Monthly payments are $6,135 including interest at 2% per year. At March 31, 2016 the outstanding balance was $225,708. 

 

On March 11, 2015, SWK acquired certain assets of 2000 SOFT, Inc. d/b/a Accounting Technology Resource (ATR) pursuant to an Asset Purchase Agreement for cash of $80,000 and a promissory note for $175,000 (the “ATR Note”). The note matures on February 1, 2018.  Monthly payments are $5,012 including interest at 2% per year. At March 31, 2016 the outstanding balance was $117,828.

 

On July 6, 2015, SWK acquired certain assets of ProductiveTech Inc. (PTI) pursuant to an Asset Purchase Agreement for cash of $500,000 and a promissory note for $600,000 (the “PTI Note”).  The note is due in 60 months from the closing date and bears interest at a rate of two and one half (2.5%) percent.  Monthly payments including interest are $10,645. At March 31, 2016 the outstanding balance was $524,105.

 

On October 19, 2015, SWK acquired certain assets of Oates & Company, LLC (Oates) pursuant to an Asset Purchase Agreement for cash of $125,000 and a promissory note for $175,000 (the “Oates Note”).  The note is due in three years from the closing date and bears interest at a rate of two (2%) percent.  Monthly payments including interest are $5,012. At March 31, 2016 the outstanding balance was $151,149. 

 

Additionally in connection with the purchase agreement, the Company issued a Convertible Note for $200,000. The Convertible Note is due January 1, 2017 and bears interest at a rate of one (1%) percent. The quarterly interest payments are computed on the basis of 365-day year from the date of this note until paid. The Company’s may, at its sole and exclusive option, convert, at any time until payment in full of this Note, all or any part of the principal amount of the Note plus accrued interest, into shares of the Company’s Common Stock, at the price per share equal to $3.00 per share.

 

SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

At March 31, 2015, future payments of long term debt are as follows:

 

Remainder of 2016		$	225,640
2017			506,677
2018			257,846
2019			154,727
2020			73,900
Total		$	1,218,790

 

At March 31, 2016, future payments under capital leases are as follows:

 

Remainder of 2016		$	74,070
2017			74,200
2018			23,695
Total minimum lease payments			171,965
Less amounts representing interest			(13,855	)
Present value of net minimum lease payments			158,110
Less current portion			(86,337	)
Long-term capital lease obligation		$	71,773

On March 10, 2015, March 23, 2015 and March 24, 2015, the Company entered into subscription agreements (the “Subscription Agreements”) with certain investors (the “Investors”) providing for the issuance and sale by the Company (the “Offering”) of an aggregate of 363,490 shares (the “Shares”) of Common Stock and warrants (the “Investor Warrants”) to purchase an aggregate of 181,745 shares of Common Stock (the “Warrant Shares”). Each Investor Warrant to purchase one share of Common Stock was sold at a price of $0.01 and has an exercise price of $5.30 per share. The gross proceeds raised was $1,543,015 less expenses relating to the Offering of $730,992, resulting in net proceeds to the Company of $812,023.

 

On March 29, 2015, Mr. Meller returned his one share of Series B Preferred Stock (the “Series B Preferred”) to the Company and with the approval of the majority of the Company’s stockholders and the Board of Directors the Series B Preferred Stock was canceled in its entirety.

 

On April 29, 2015 the Board approved entering into a consulting agreement with Christopher IR for investor relation services.  In addition to cash payments for services, the Company issued 15,000 shares of Common Stock at $2.42 per share or $36,300.

On July 6, 2015 the Company in relation to the acquisition of certain assets of PTI had issued 64,484 shares of Common Stock at $4.032 per share for a value of $260,000. The stock price was based on the average close price of SSNT stock for the five trading days immediately preceding the closing date. 

 

On January 11, 2016, the Company announced the payment of a $0.06 special cash dividend per share of Common Stock. The dividend payments were paid out on January 20, 2016 for an aggregate amount of $264,699, which reduced additional paid in capital.

 

SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

 

In March 2015, the Company granted 10,000 incentive stock options with an exercise price of $4.00 per option to a certain non-executive employee under the 2004 Stock Incentive Plan. The Company recognizes compensation cost on awards on a straight-line basis over the vesting period, approximately five years. The Company estimated the fair value of each option using the Black Scholes option-pricing model with the following weighted-average assumptions: expected dividend yield of 0.0%, risk-free interest rate of 1.6%, volatility at 263.18% and an expected life of 5 years. As a result, the Company estimated the value of these options at $39,875.

In October 2015, the Company issued to the shareholders of Macabe 25,000 incentive stock options with an exercise price of $3.66. Options will vest over five years at the rate of 20% per annum. The Company estimated the fair value of each option using the Black Scholes option-pricing model with the following weighted-average assumptions: expected dividend yield of 0.0%, risk-free interest rate of 1.37%, volatility at 332.76% and an expected life of 5 years. As a result, the Company estimated the value of these options at $91,482.

The Company uses judgment in estimating the amount of stock-based awards that are expected to be forfeited. If actual forfeitures differ significantly from the original estimate, stock-based compensation expense and the results of operations could be impacted.

 

A summary of the status of the Company’s stock option plans for the fiscal years ended December 31, 2015 and the three months ending March 31, 2016 and changes during the years are presented below (in number of options):

 

		Number of Options				Average Exercise Price			Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding options at January 1, 2015			163,846			$	4.65		2.5 years		$	-0-
Options granted			35,000				3.76		4.2 years
Options canceled/forfeited			(15,270	)		$	4.61
Outstanding options at December 31, 2015			183,576			$	4.49		2.7 years		$	-0-
Options granted			-
Options exercised			-
Options canceled/forfeited			-
Outstanding options at March 31, 2016			183,576				4.49		2.7 years		$	-0-
Vested Options:
March 31, 2016;			127,907			$	4.68		1.9 years		$	-0-
December 31, 2015:			119,243			$	4.70		2.0 years		$	-0-

 

For the three months ended March 31, 2016 the unamortized compensation expense for stock options was $80,504.  Unamortized compensation expense is expected to be recognized over a weighted-average period of three years. 

 

 

On January 29, 2015 the Company granted 3,333 warrants with a fair value of approximately $19,969, which immediately vested, to Joseph Macaluso as part of his compensation for agreeing to join the Board of Directors. The estimated fair value of the warrant has been calculated based on a Black-Scholes pricing model using the following assumptions: a) fair market value of stock of $6.00; b) exercise price of $6.00; c) Dividend yield of 0%; d) Risk free interest rate of 1.42%; e) expected volatility of 284.28%; f) Expected life of 5 years. 

On March 9, 2015 the Company granted 18,175 warrants with a fair value of approximately $73,356, which immediately vested, to Alexander Capital, LP as partial compensation for acting as placement agent. The estimated fair value of the warrant has been calculated based on a Black-Scholes pricing model using the following assumptions: (a) fair market value of stock of $4.05; (b) exercise price of $5.088; (c) Dividend yield of 0%; (d) Risk free interest rate of 1.66%; (e) expected volatility of 263.67%; and (f) Expected life of 5 years.

 

 

SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

 

		Warrants Outstanding				Weighted Average Exercise Price
Balance, January 1, 2015			-			$	-
Granted			203,253			$	5.29
Exercised			-			$	-
Canceled			-			$	-
Outstanding and Exercisable December 31, 2015			203,253			$	5.29
Granted			-			$	-
Exercised			-			$	-
Canceled			-			$	-
Outstanding and Exercisable March 31, 2016			203,253			$	5.29

 

 

During 2015 SWK completed four acquisitions. On March 11, 2015 SWK entered into an Asset Purchase Agreement with 2000 SOFT, Inc. d/b/a ATR, a California corporation. On July 6, 2015 SWK entered into an Asset Purchase Agreement with ProductiveTech (“PTI”), a south New Jersey corporation. As of March 31, 2016, the prior owners of PTI owed the Company $32,199 related to amounts collected by the prior owners subsequent to acquisition but owed to the Company and this amount is included in prepaid expenses and other current assets. On October 1, 2015 SWK entered into an Asset Purchase Agreement with The Macabe Associates, Inc., a Washington corporation. On October 19, 2015 SWK entered into an Asset Purchase Agreement with Oates & Company, a North Carolina reseller. As of March 31, 2016, the prior owners of Oates owed the Company $63,170 related to amounts collected by the prior owner subsequent to acquisition but owed to the Company and this amount is included in prepaid expenses and other current assets.

 

 SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

 

 

 

The foregoing amounts are management’s estimates and the actual results could differ from those estimates. Future profitability in this competitive industry depends on continually obtaining and fulfilling new profitable sales agreements and modifying products.  The inability to obtain new profitable contracts could reduce estimates of future profitability, which could affect the Company’s ability to realize the deferred tax assets.

 

Income tax provision (benefit):

 

		Three Months Ended
		March 31,				March 31,
		2016				2015
Current:
Federal		$	45,943			$	191,831
State and local			5,405				23,252
Total current tax provision			51,348				215,083
Deferred:
Federal			8,550				8,473
State and local			950				1,027
Release of valuation allowance			-				(200,000	)
Total deferred tax provision (benefit)			9,500				(190,500	)
Total provision		$	60,848				24,583

For the year three months ended March 31, 2016, the Company’s Federal and State provision requirements were calculated based on the estimated tax rate. The Federal effective rate is higher than the statutory rate primarily due to Incentive Stock Options (ISO) expense which is generally never tax deductible for the Company. The provision for the three months ended March 31, 2016 was $60,848. The effective tax rate consists primarily of the 40% federal statutory tax rate and a blended 5% state and local tax rate.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 (Unaudited)

 

 

Operating Leases

 

Total rent expense under these operating leases for the three months ended March 31, 2016 and 2015 was $87,379 and $46,702, respectively.

The following is a schedule of approximate future minimum rental payments for operating leases subsequent to the year ended December 31, 2015.

 

Remainder 2016		$	237,869
2017			178,916
2018			98,704
2019			26,046
		$	541,535

 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations,

 

This quarterly report on Form 10-Q and other reports filed by SilverSun Technologies, Inc. and Subsidiary (the “Company”) from time to time with the U.S. Securities and Exchange Commission (the “SEC”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management.  Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof.  When used in the filings, the words “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan,” or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements.  Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks contained in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015, relating to the Company’s industry, the Company’s operations and results of operations, and any businesses that the Company may acquire.  Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.

 

Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements.  Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.

 

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made.  These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result.  The following discussion should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this report.

We are a business application, technology and consulting company providing strategies and solutions to meet our clients’ information, technology and business management needs. Our services and technologies enable customers to manage, protect and monetize their enterprise assets whether on-premise or in the “Cloud”. As a value added reseller of business application software, we offer solutions for accounting and business management, financial reporting, Enterprise Resource Planning (“ERP”), Warehouse Management Systems (“WMS”), Customer Relationship Management (“CRM”), and Business Intelligence (“BI”). Additionally, we have our own development staff building software solutions for Electronic Data Interchange (“EDI”), time and billing, and various ERP enhancements. Our value-added services focus on consulting and professional services, specialized programming, training, and technical support. We have a dedicated network services practice that provides managed services, hosting, business continuity, cloud, email and web services. Our customers are nationwide, with concentrations in the New York/New Jersey metropolitan area, Chicago, Dallas, Arizona, Southern California, North Carolina and Washington.

Our core business is divided into the following practice areas:

 

ERP (Enterprise Resource Management) and Accounting Software

 

We are a value-added reseller for a number of industry-leading ERP applications. We are a Sage Software Authorized Business Partner and Sage Certified Gold Development Partner. We believe we are among the largest Sage ERP X3 partners in North America, with a sales and implementation presence complemented by a scalable software development practice for customizations and enhancements. Due to the growing demand for true cloud-based ERP solutions, we have added two (2) industry leading applications to our ERP portfolio: (1) NetSuite ERP, among the world’s leading cloud ERP solutions; and (2) Acumatica, a browser-based ERP solution that can be offered on premise, in the public cloud, or in a private cloud. We develop and resell a variety of add-on solutions to all our ERP and accounting packages that help customize the installation to our customers’ needs and streamline their operations.

 

Value-Added Services for ERP

 

We go beyond simply reselling software packages; we have a consulting and professional services organization that manages the process as we move from the sales stage into implementation, go live, and production. We work inside our customers’ organizations to ensure all software and Information Technology (“IT”) solutions are enhancing their business needs. A significant portion of our services revenue comes from continuing to work with existing customers as their business needs change, upgrading from one version of software to another, or providing additional software solutions to help them grow their revenue. We have a dedicated help desk team that fields hundreds of calls every week. Our custom programming department builds specialized software packages as well as “off the shelf” enhancements and time and billing software.

 

EDI (Electronic Data Interchange) Software and Services

 

EDI is the computer to computer exchange of standard business documents, such as purchase orders and invoices, in electronic format. A standard file format is established for each kind of document in order to facilitate the exchange of data across a variety of platforms and programs. We have a proprietary software solution, MAPADOC, which is fully integrated with the Sage ERPs. MAPADOC allows businesses to dramatically cut data entry time by eliminating duplicate entries and reduces costly errors with trading partners. MAPADOC is the only EDI solution that is built within the framework of the Sage ERPs, allowing customers to stay within one application to get their job done.

 

Network and Managed Services

 

We provide comprehensive network and managed services designed to eliminate the IT concerns of our customers. Businesses can focus on their core strengths rather than technology issues. We adapt our solutions for virtually any type of business, from large national and international product and service providers, to small businesses with local customers. Our business continuity services provide automatic on and off site backups, complete encryption, and automatic failure testing. We also provide email and web security, IT consulting, managed network, and emergency IT services. Our focus in the network and managed services practice is to focus on industry verticals in order to demonstrate our ability to better understand our customers’ needs.

 

During the three months ended March 31, 2016 the Company continued to expand its customer base and growth trend which we believe will provide a basis for future growth.

 

1)	Revenues increased 20.1% from the same three month period in the prior year.

2)	Income from operations decreased to $144,371 as compared to $557,967 for the same three month period in the prior year.

3)	Net income was $74,277 as compared to $521,167 for the same three month period in the prior year.

 

Revenues

 

Gross Profit

 

Gross profit for the three months ended March 31, 2016 increased $130,757 (4.7%) to $2,931,029 as compared to $2,800,272 for the three months ended March 31, 2015. For the period ended March 31, 2016, the overall gross profit percentage was 37.7% as compared to 43.2% for the period ended March 31, 2015.   The gross profit attributed to software sales decreased $329,685 to $415,548 for the three months ending March 31, 2016 from $745,233 in the three months ending March 31, 2015.  The mix of products being sold by the Company changes from time to time and sometimes causes the overall gross margin percentage to vary. The gross profit attributed to services increased $460,442 for the three months ending March 31, 2016 from the three months ending March 31, 2015 primarily due to the implementations of larger scale accounting systems. The gross profit percentage attributed to services decreased to 36.3% in 2016 from 40.3% in 2015.

 

 

Operating Expenses

 

General and administrative expenses increased $331,119 (27.9%) to $1,518,933 for the three months ended March 31, 2016 as compared to $1,187,814 for the three months ended March 31, 2015 primarily as a result of increases in payroll and related expenses associated with the addition of management personnel and incremental costs associated with the acquisition of ATR, PTI, Macabe and Oates.

 

During the three months ended March 31, 2016, the Company recognized $11,952 of share-based compensation expense as a result of the granting of stock options to some of its non-executive employees as compared to $30,405 for the same three month period in 2015.

Depreciation and amortization expense increased $58,938 for the three months ended March 31, 2016 to $170,894 as compared to $111,956 for the period ended March 31, 2015. This increase is primarily attributed to the increase in amortization associated with the intangible assets acquired from the ATR, PTI, Macabe, and Oates acquisitions in 2015.

Income from Operations

For the year three months ended March 31, 2016, the Company had income from operations of $144,371 as compared to income from operations of $557,967 for the same period in 2015.

Income Taxes

 

Net Income

 

 

We are currently seeking additional operating income opportunities through potential acquisitions or investments. Such acquisitions or investments may consume cash reserves or require additional cash or equity.  Our working capital and additional funding requirements will depend upon numerous factors, including: (i) strategic acquisitions or investments; (ii) an increase to current company personnel; (iii) the level of resources that we devote to sales and marketing capabilities; (iv) technological advances; and (v) the activities of competitors.

 

In addition to developing new products, obtaining new customers and increasing sales to existing customers, management plans to increase its business and profitability by entering into collaboration agreements, buying assets, and acquiring companies in the business software and information technology consulting and managed services market with solid revenue streams and established customer bases that generate positive cash flow.

 

In October 2011, the Company obtained a line of credit from a bank. This line included a borrowing base calculation tied to accounts receivable with a maximum availability of $750,000.  On August 1, 2013, the Company negotiated a new line of credit (the “Credit Line”) and a two year term loan from the bank (the “Term Loan”). The term of the Credit Line was for two years and expired on July 31, 2015 and was automatically renewed . The agreement included a borrowing base calculation tied to accounts receivable with a maximum availability of $750,000 at prime plus 1.75% interest (currently 5.25%).  The Credit Line is collateralized by substantially all of the assets of the Company and is guaranteed by the Company’s Chief Executive Officer, Mr. Meller.  The Credit Line requires the Company to pay a monitoring fee of $1,000 monthly. At March 31, 2016, the Company was in compliance with the required financial covenants, the fixed charge ratio and debt to net worth. As of March 31, 2016, the availability under this Credit Line was $750,000. 

 

 

On October 1, 2015 SWK entered into an Asset Purchase Agreement with The Macabe Associates, Inc., (“Macabe”), a Washington corporation and Mary Abdian and John Nicholson in their individual capacity as Shareholders (the “Macabe Purchase Agreement”). SWK acquired certain assets and liabilities of Macabe (as defined in the Macabe Purchase Agreement). In consideration for the acquired assets, the Company paid $21,423 in cash. As additional consideration, the Company will pay $5,500 cash twelve months from closing and $5,500 cash twenty four months from closing on the net-to-SWK revenues for Software and Maintenance sales if certain estimates are met for a total of $11,000 and was recorded as part of the contingent consideration included in the purchase price. Additionally, the Company will pay 35% of the net margin on software maintenance renewals for former Macabe customers for the first twelve months, and then 30%, 25% and 20% of the net margin on software maintenance renewals for the following three years. The Company will also pay 50% the first year, and 40%, 30% and 20% the three years after on the net margin on EASY Solution Maintenance, new software & license to existing Macabe customers and EASY Solutions software and maintenance sales to new customers. On any former Macabe customers migrating to Netsuite, X3 or Acumatica, the Company will pay 50% of the net margin of the sale after applicable costs and commissions for the three years period after the acquisition. The Company estimated this contingent consideration to be approximately $417,971 at acquisition and which is included in the purchase price. Certain payments were made in each of these contingent consideration components, resulting in a remaining balance of $360,710 as of March 31, 2016.

During the three months ended March 31, 2016, the Company had a net decrease in cash of $519,777.  The Company’s principal sources and uses of funds were as follows:

 

Cash provided by operating activities

Cash used in investing activities

Cash used in financing activities

 

Financing activities for the three months ended March 31, 2016 used cash of $396,850 as compared to generating cash of $730,155 for the same period in 2015. The decrease was due primarily to the payment of a cash dividend and $812,000 provided by equity raise in prior year.

 

The Company believes that as a result of the growth in business, and the availability of its Credit Line, it has adequate liquidity to fund its operating plans for at least the next twelve months.

There was no significant impact on the Company’s operations as a result of inflation for the three months ended March 31, 2016.  

 

The discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate these estimates, including those related to bad debts, inventory obsolescence, intangible assets, and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of certain assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.

For the three months ended March 31, 2016, there have been no new significant accounting policies or accounting pronouncements from those disclosed in our annual 10-K for the year ended December 31, 2015.

 

We have identified below the accounting policies, revenue recognition and software costs, related to what we believe are most critical to our business operations and are discussed throughout Management’s Discussion and Analysis of Financial Condition or Plan of Operation where such policies affect our reported and expected financial results.

Revenue Recognition

Revenue is recognized when products are shipped, or services are rendered, evidence of a contract exists, the price is fixed or reasonably determinable, and collectability is reasonably assured.

Product Revenue

Software product revenue is recognized when the product is shipped to the customer. The Company treats the software component and the professional services consulting component as two separate arrangements that represent separate units of accounting. The arrangement consideration is allocated to each unit of accounting based upon that unit’s proportion of the fair value.  In a situation where both components are present, software sales revenue is recognized when collectability is reasonably assured and the product is delivered and has stand-alone value based upon vendor specific objective evidence.

Service Revenue

Service revenue is comprised of primarily professional service consulting revenue, maintenance revenue and other ancillary services provided as described below. Professional service revenue is recognized as service is incurred.

With respect to maintenance services, upon the completion of one year from the date of sale, the Company offers customers an optional annual software maintenance and support agreement for subsequent one-year periods. Maintenance and support agreements are recorded as deferred revenue and recognized over the respective terms of the agreements, which typically range from three months to one year and are included in service revenue in the Consolidated Statement of Income.

 

Shipping and handling costs charged to customers are classified as revenue, and the shipping and handling costs incurred are included in cost of sales.

 

 

The Company recognizes revenue on its professional services as those services are performed or certain obligations are met.

 

Goodwill

 

Goodwill is the excess of acquisition cost of an acquired entity over the fair value of the identifiable net assets acquired.  Goodwill is not amortized, but tested for impairment annually or whenever indicators of impairment exist. These indicators may include a significant change in the business climate, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of the business or other factors.

Intangible Assets

The values assigned to intangible assets were based on an independent valuation. Purchased intangible assets are amortized over the useful lives based on the estimate of the use of economic benefit of the asset using the straight-line amortization method. 

The Company assesses potential impairment of its intangible assets when there is evidence that recent events or changes in circumstances have made recovery of an asset’s carrying value unlikely. Factors the Company considers important, which may cause impairment include, among others, significant changes in the manner of use of the acquired asset, negative industry or economic trends, and significant underperformance relative to historical or projected operating results. 

Income taxes

 

Deferred income taxes reflects the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as operating loss carryforwards. Deferred tax assets and liabilities are classified as current or non-current based on the classification of the related assets or liabilities for financial reporting, or according to the expected reversal dates of the specific temporary differences, if not related to an asset or liability for financial reporting. Valuation allowances are established against deferred tax assets if it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates or laws is recognized in operations in the period that includes the enactment date.

Off Balance Sheet Arrangements

 

During the three months ended March 31, 2016 or for fiscal 2015, we did not engage in any material off-balance sheet activities or have any relationships or arrangements with unconsolidated entities established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities nor do we have any commitment or intent to provide additional funding to any such entities.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

We do not hold any derivative instruments and do not engage in any hedging activities.

 

Item 4.  Controls and Procedures

 

(a) Evaluation of Disclosure Controls and Procedures

 

Pursuant to Rule 13a-15(b) under the Exchange Act, the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Principal Executive Officer (“PEO”) and Principal Financial Officer (“PFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) and 15d-15 under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s PEO and PFO concluded that the Company’s disclosure controls and procedures were not effective due to our limited finance staff, and the ineffective management review of complex transactions to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s PEO and PFO, as appropriate, to allow timely decisions regarding required disclosure.

Notwithstanding the material weakness, management believes that the condensed consolidated financial statements which are included in this Quarterly Report on Form 10-Q fairly present, in all material respects, the financial position of the Company at March 31, 2016 in conformity with U.S. generally accepted accounting principles.

Remediation

We are currently in the process of executing a plan of action to remediate the material weaknesses identified above. However, we cannot be assured that these weaknesses will be remediated or that other material weaknesses will not be discovered.

(b) Changes in Internal Control over Financial Reporting

There have been no changes in our internal controls over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act) during the quarter ended March 31, 2016, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II – OTHER INFORMATION

Item 1.     Legal Proceedings

We are not currently involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect on our financial condition.

 

Item 1A.  Risk Factors

 

We believe there are no changes that constitute material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on March 30, 2016.

 

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds

 

Other than disclosed above, there were no unregistered sales of equity securities that were not otherwise disclosed in a current report on Form 8-K.

 

Item 3.     Defaults upon Senior Securities

 

There has been no default in the payment of principal, interest, sinking or purchase fund installment, or any other material default, with respect to any indebtedness of the Company.

 

Item 4.     Mine Safety Disclosures

Not Applicable.

 

Item 5.     Other Information

 

There is no other information required to be disclosed under this item which has not been previously reported.

Item 6.     Exhibits

 

31.1		Certification by the Principal Executive Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).*
31.2		Certification by the Principal Financial Officer of Registrant pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Rule 13a-14(a) or Rule 15d-14(a)).*
32.1		Certification by the Principal Executive Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2		Certification by the Principal Financial Officer pursuant to 18 U.S.C. 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema
101.CAL		XBRL Taxonomy Extension Calculation Linkbase
101.DEF		XBRL Taxonomy Extension Definition Linkbase
101.LAB		XBRL Taxonomy Extension Label Linkbase
101.PRE		XBRL Taxonomy Extension Presentation Linkbase

 

* Filed herewith

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.

 

		SILVERSUN TECHNOLOGIES, INC.
Dated: May 16, 2016		By:	/s/ Mark Meller
			Mark Meller
			Principal Executive Officer
		By:	/s/ Crandall Melvin III
			Crandall Melvin III
			Principal Accounting Officer

 

 

 

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