SilverSun Technologies, Inc. - Quarter Report: 2018 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, 2018

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)

120 Eagle Rock Ave

(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 large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” accelerated filer” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

 

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 11, 2018, there were 4,501,755 shares outstanding of the registrant’s common stock.  

SILVERSUN TECHNOLOGIES, INC.

 

TABLE OF CONTENTS

 

 

 

PART I – FINANCIAL INFORMATION 

Item 1.  Financial Statements

 

SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

 (Unaudited) 

		March 31, 2018				December 31, 2017
ASSETS
Current assets:
Cash		$	1,807,171			$	2,235,347
Accounts receivable, net of allowance of $375,000			3,024,865				2,336,481
Unbilled services			706,963				428,208
Prepaid expenses and other current assets			344,146				403,911
Total current assets			5,883,145				5,403,947
Property and equipment, net			512,728				567,532
Intangible assets, net			2,743,360				2,640,457
Goodwill			401,000				401,000
Deferred tax assets			1,342,000				1,363,000
Deposits and other assets			36,312				36,312
Total assets		$	10,918,545			$	10,412,248
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Bank line of credit		$	-			$	-
Accounts payable			2,289,691				2,094,297
Accrued expenses			912,510				1,071,515
Accrued interest			14,062				16,283
Income taxes payable			100,052				97,097
Contingent consideration – current portion			54,667				63,380
Long term debt - current portion			194,485				257,846
Capital lease obligations – current portion			77,559				94,443
Deferred revenue			2,673,295				2,150,771
Total current liabilities			6,316,321				5,845,632
Contingent consideration net of current portion			26,056				42,255
Long term debt net of current portion			179,583				228,626
Capital lease obligations net of current portion			57,338				68,614
Total liabilities			6,579,298				6,185,127
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value; authorized 1,000,000 shares      No shares issued and outstanding			-				-
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      1 share issued and outstanding			1				1
Common stock, $0.00001 par value; authorized 75,000,000 shares      4,501,755 and 4,489,903 shares issued and outstanding			46				46
Additional paid-in capital			11,973,055				11,919,316
Accumulated deficit			(7,633,855	)			(7,692,242	)
Total stockholders’ equity			4,339,247				4,227,121
Total liabilities and stockholders’ equity		$	10,918,545			$	10,412,248

 

See accompanying notes to the unaudited condensed consolidated financial statements.

SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE YEAR ENDED DECEMBER 31, 2017 AND THREE MONTHS ENDED MARCH 31, 2018

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Three Months Ended March 31,
		2018				2017
Cash flows from operating activities:
Net income		$	58,387			$	153,853
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Deferred income taxes			21,000				120,000
Depreciation and amortization			71,138				55,986
Amortization of intangibles			71,496				114,850
Bad debt expense			15,974				-
Share-based compensation			8,433				8,966
Common stock for services			45,306				47,500
Warrants in exchange for services			-				19,923
Changes in assets and liabilities:
Accounts receivable			(704,358	)			235,015
Unbilled services			(278,755	)			(243,454	)
Prepaid expenses and other current assets			12,722				(3,994	)
Deposits and other assets			-				(13,353	)
Accounts payable			195,394				(295,441	)
Accrued expenses			(159,005	)			(138,623	)
Income tax payable			2,955				5,053
Accrued interest			184				185
Deferred revenues			522,524				67,051
Net cash (used in) provided by operating activities			(116,605	)			133,517
Cash flows from investing activities:
Purchase of property and equipment			(16,334	)			(64,928	)
Software development costs			(174,399	)			(128,671	)
Net cash used in investing activities			(190,733	)			(193,599	)
Cash flows from financing activities:
Payment of cash dividend			-				(89,566	)
Payment of contingent consideration			(24,912	)			(7,823	)
Payment of long term debt			(67,766	)			(76,041	)
Payment of capital lease obligations			(28,160	)			(26,608	)
Net cash used in financing activities			(120,838	)			(200,038	)
Net decrease in cash			(428,176	)			(260,120	)
Cash, beginning of period			2,235,347				1,621,049
Cash, end of period		$	1,807,171			$	1,360,929
Cash paid during period for:
Interest		$	6,505			$	8,276
Income taxes		$	-			$	825

SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

For the three months ended March 31, 2018:

For the three months ended March 31, 2017:

None

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

SilverSun Technologies, Inc. (“SilverSun”) and wholly owned subsidiary SWK Technologies, Inc. (“SWK” together with SilverSun, the “Company”) 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 was quoted on the Over-the-Counter Market Place (“OTCQB”) under the symbol “SSNT” until April 18, 2017. Since April 19, 2017, the Company has been listed and is traded on the NASDAQ Capital Market under the symbol “SSNT”.

 

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly the financial position of the Company as of March 31, 2018, the results of operations and cash flows for the three months ended March 31, 2018 and 2017.  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, 2017 balance sheet included herein was derived from the audited consolidated financial statements included in the Company’s annual report on Form 10-K. Accordingly, the financial statements included herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the SEC on March 26, 2018.

 

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. No impairment losses were identified or recorded for the three months ended March 31, 2018 and 2017.

 

 

Software development costs are accounted for in accordance with ASC 985-20, Software — Costs of Software to be Sold, Leased or Marketed. Costs associated with the planning and designing phase of software development are expensed as incurred. Once technological feasibility has been determined, a portion of the costs incurred in development, including coding, testing and quality assurance, are capitalized until available for general release to clients, and subsequently reported at the lower of unamortized cost or net realizable value. Amortization is calculated on a solution-by-solution basis and is over the estimated economic life of the software. Amortization commences when a solution is available for general release to clients.

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. 

SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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, 2018 and 2017.

 

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers: Topic 606 which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of Topic 606 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. Topic 606 defines a five-step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation, among others. Topic 606 also provides guidance on the recognition of costs related to obtaining customer contracts.

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

 

 

Sales commissions relating to service revenues are considered incremental and recoverable costs of obtaining a project with our customer.  These commissions are calculated based on estimated revenue to be generated over the life of the project.  These costs are deferred and expensed as the service revenue is earned.  Commission expense is included in selling and marketing expenses in the accompanying condensed consolidated statements of income.

 

 

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.

 

SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company maintains its cash with various institutions, which exceed federally insured limits throughout the year.  At March 31, 2018 and December 31, 2017, the Company had cash on deposit of approximately $1,457,879 and $1,933,772, respectively, in excess of the federally insured limits of $250,000.

 

As of March 31, 2018, one customer represented approximately 17% of the total accounts receivable and unbilled services.

 

For the three months ended March 31, 2018 and 2017, our top ten customers accounted for 25% ($2,296,492) and 22% ($1,781,773), 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, 2018 and 2017, purchases from one supplier through a “channel partner” agreement were approximately 25% and 23% 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.

 

As of March 31, 2018 and December 31, 2017, one supplier represented approximately 34% and 37% of total accounts payable respectively.

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of accounts receivable and cash.  As of March 31, 2018, 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 primarily 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.  Accounts are written off when deemed uncollectable.

Property and equipment is stated at cost, net of accumulated depreciation and amortization.  Depreciation is computed using the straight-line method based upon the estimated useful lives of the assets, generally three to seven years.  Leasehold improvements are amortized using the straight-line method over the estimated useful lives or the term of the lease, whichever is shorter. 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)

 

The 2017 Tax Cuts and Jobs Act (“Tax Reform”) was enacted on December 22, 2017. The Tax Reform includes a number of changes in existing tax law impacting businesses including a permanent reduction in the U.S. federal statutory rate from 34% to 21%, effective on January 1, 2018. Under U.S. GAAP, changes in tax rates and tax law are accounted for in the period of enactment and deferred tax assets and liabilities are measured at the enacted tax rate. The rate reconciliation includes the Company’s assessment of the accounting under the Tax Reform which is preliminary and is based on information that was available to management at the time the unaudited condensed consolidated financial statements were prepared.

 

The Company files income tax returns in the U.S. federal and state jurisdictions. Tax years 2014 to 2018 remain open to examination for both the U.S. federal and state jurisdictions.

There were no liabilities for uncertain tax positions at March 31, 2018 or December 31, 2017.

 

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. The Company’s goodwill and intangibles are measured on a non-recurring basis using Level 3 inputs, as discussed in Note 5.

 

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 and expected term. Any changes in these highly subjective assumptions may significantly impact stock-based compensation expense.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers: Topic 606 which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of Topic 606 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. The ASU defines a five-step process to achieve the core principal and, in doing so, it is possible more judgement and estimates may be required within the revenue recognition process than are currently in use. The ASU was effective for the Company in the first quarter of 2018 using either of two methods: (1) retrospective application to each prior reporting period presented with the option to elect certain practical expedients or (2) retrospective application with the cumulative effect of initially applying the ASU recognized at the date of the initial application and providing certain disclosures. We adopted Topic 606 pursuant to the method (2) and we determined that any cumulative effect for the initial application did not require an adjustment to retained earnings at January 1, 2018.

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 the Company on January 1, 2019, with early adoption permitted. The Company is currently in the process of assessing the impact of this ASU on our consolidated financial statements.

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350), which includes provisions, intended to simplify the test for goodwill impairment. The standard is effective for annual periods beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not expect the adoption of this standard to have a significant impact on our financial position and results of operations.

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, 2018 and March 31, 2017 does not include all share equivalents as the exercise price of certain warrants and options exceeded the average market price of the common stock. 

 

		Three Months Ended				Three Months Ended
		March 31, 2018				March 31, 2017
Basic net income per share computation:
Net income		$	58,387			$	153,853
Weighted-average common shares outstanding			4,493,617				4,486,153
Basic net income per share		$	0.01			$	0.03
Diluted net income per share computation:
Net income		$	58,387			$	153,853
Weighted-average common shares outstanding			4,493,617				4,486,153
Incremental shares for stock options			4,000				4,000
Total adjusted weighted-average shares			4,497,617				4,490,153
Diluted net income per share		$	0.01			$	0.03

 

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

 

SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Property and equipment is summarized as follows:

 

 

Depreciation and amortization expense related to these assets for the three months ended March 31, 2018 and 2017 was $71,138 and $55,986, respectively. 

Property and equipment under capital leases are summarized as follows:

Intangible assets consist of proprietary developed software, intellectual property, customer lists and acquired contracts carried at cost less accumulated amortization and customer lists acquired at fair value less accumulated amortization. Amortization is computed using the straight-line method over the estimated useful lives.

 

The components of intangible assets are as follows:

 

 

SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The Company expects future amortization expense to be the following:

  

 

 

On July 21, 2016, SWK entered into a Revolving Demand Note (the “Revolving Demand Note”) by and between SWK and M&T Bank (“Lender”), a commercial lender. The Lender has agreed to loan SWK up to a principal amount of one million dollars. The interest rate on the Revolving Demand Note is a variable rate, equal to the “Prime Rate”, plus ninety-five one-hundredths percent (0.95%) per annum.  There is a minimum interest rate floor of four percent (4%). The Revolving Demand Note is secured by all SWK’s assets pursuant to a Security Agreement.  Furthermore, on July 21, 2016, the Company and its Chief Executive Officer, Mr. Mark Meller, individually, entered into Unlimited Guaranty agreements (the “Guaranty Agreements”) with the Lender. The line is also collateralized by substantially all of the assets of the Company.   Under the Guaranty Agreements, the Company and Mr. Meller personally, jointly and severally guaranteed the liabilities of SWK due and owing under the terms of the Revolving Demand Note. At March 31, 2018 and December 31, 2017 there were no borrowings under this note.

At March 31, 2018, future payments of long term debt are as follows:

 

SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

The Company has entered into lease commitments for equipment that meet the requirements for capitalization. The equipment has been capitalized and is included in the accompanying consolidated balance sheets.  The related obligations are based upon the present value of the future minimum lease payments with interest rates ranging from 7.1% to 9.0%.

 

At March 31, 2018, future payments under capital leases are as follows:

 

 

On January 18, 2018, the Company issued 100 shares of stock each to 10 non-executive employees of SWK valued at $3,830 based on the current market price at issuance date.

 

A summary of the status of the Company’s stock option plans for the fiscal years ended December 31, 2017 and the three months ending March 31, 2018 and changes during the years are presented below (in number of options):

 

 

As of March 31, 2018, the unamortized compensation expense for stock options was $62,102.  Unamortized compensation expense is expected to be recognized over a weighted-average period of 2.3 years.

SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 8 – EQUITY (Continued)

The following table summarizes the warrants transactions:

 

 

The recognized deferred tax asset is based upon the expected utilization of its benefit from future taxable income. The Company has federal net operating loss (“NOL”) carryforwards of approximately $6,849,000 as of March 31, 2018, which is subject to limitations under Section 382 of the Internal Revenue Code. These carryforward losses are available to offset future taxable income, and begin to expire in the year 2024 to 2034.

 

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:

 

		Three Months Ended
		March 31,				March 31,
		2018				2017
Current:
Federal		$	-			$	5,290
State and local			2,246				588
Total current tax provision			2,246				5,878
Deferred:
Federal			20,000				108,000
State and local			1,000				12,000
Total deferred tax provision			21,000				120,000
Total provision		$	23,246				125,878

 

SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

 

The Company leases its North Syracuse office space from its current CFO, Crandall Melvin III which expires on May 31, 2018. The monthly rent for this office space is $2,100. Total rent expense for the three months ended March 31, 2018 and 2017 was $6,300 and $6,300 respectively under this lease.

 

The Company leases its Seattle office space from Mary Abdian, an employee of SWK, which expires September 30, 2018. The monthly rent for this office space is $3,090 and increases 3% each year. Total rent expense for the three months ended March 31, 2018 and 2017, pursuant to this lease, was $9,548 and $9,270 respectively.

 

As of March 31, 2018, long term debt and contingent consideration are considered related party liabilities as holders are current employees of the Company, see Note 6 and Note 11.

Operating Leases

 

Our main office was located at 5 Regent Street, Livingston, NJ 07039 where we had 6,986 square feet of office space at a monthly rent of $7,400. The lease expired on December 31, 2016 and was subsequently extended for two months ending February 28, 2017. On March 1, 2017, the Company entered into a new operating lease agreement for its main office located at 120 Eagle Rock Avenue, East Hanover, NJ 07936. The main office premises consists of 5,129 square feet of office space at a monthly rent starting at $8,762 and escalating to $10,044 per month by the end of the term April 30, 2024. On September 11, 2017, the Company entered into an operating lease agreement for an additional 1,870 square feet of office space at 120 Eagle Rock Ave, East Hanover, NJ commencing October 1, 2017 with a monthly rent of $3,506 for a period of one year.

The Company has a lease, with a one-year extension, for office space at 6834 Buckley Road, North Syracuse, New York, at a monthly rent of $2,100.  The lease expired on May 31, 2015 and was subsequently extended for a three-year term commencing June 1, 2015 and ending May 31, 2018. 

The Company leases 2,700 square feet of office space in Skokie, Illinois with a monthly rent of $3,000. This lease expires April 30, 2018. The lease is not being renewed.

The Company leases 702 square feet of office space in Minneapolis, MN with a monthly rent of $1,560 a month. This lease expired March 31, 2018. This lease has converted to a month to month payment.

The Company leases 2,105 square feet of office space in Phoenix, AZ starting at $1,271 and escalating to $2,894 per month by the end of the term September 30, 2019.

The Company leases 1,500 square feet of office space in Seattle, WA with a monthly rent of $3,000 a month.  The lease expires September 30, 2018.

The Company leased 3,422 square feet of office space in Greensboro, NC with a monthly rent of $4,182 a month. The lease expired February 28, 2017 and was extended after reducing the rental space to 2,267 square feet at a monthly rent of $2,765 per month. The extension expires February 28, 2020.

The Company leases 1,745 square feet of office space in Santa Ana, CA with a monthly rent of $3,225 per month escalating to $3,402 per month by the end of the lease term, April 30, 2018. This lease is not being renewed.

SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

On January 12, 2017, the Company entered into an operating lease agreement for its south New Jersey office commencing March 1, 2017. The company leases 6,115 square feet of office space in Thorofare, NJ starting at $4,591 and escalating to $5,168 per month by the end of the term February 28, 2022.

 

Total rent expense under these operating leases for the three months ended March 31, 2018 and 2017 was $108,549 and $111,241, respectively.

The following is a schedule of approximate future minimum rental payments for operating leases subsequent to the year ended December 31, 2017.

 

Contingent Consideration

On October 1, 2015, SWK entered into an Asset Purchase Agreement (the “Macabe Purchase Agreement”) with The Macabe Associates, Inc., (“Macabe”), a Washington corporation and Mary Abdian and John Nicholson in their individual capacity as Shareholders. 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. 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 year period after the acquisition. The Company estimated this contingent consideration to be approximately $417,971 at acquisition. Certain payments were made in each of these contingent consideration components, resulting in a remaining balance of $80,723 as of March 31, 2018. The Company estimates that the contingent consideration will be fully paid by September 30, 2019.

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 its wholly owned subsidiary SWK Technologies, Inc. (the “Company”, “we”, “us” and “our”) 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, 2017, 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 consolidated 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 consolidated financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our consolidated 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, 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, 2018 the Company continued to expand its customer base and growth trend which we believe will provide a basis for future growth.

 

1)	Revenues increased 16.3% from the same three month period in the prior year.

2)	Income from operations decreased to $88,322 as compared to $288,192 for the same three month period in the prior year.

3)	Net income was $58,387 as compared to $153,853 for the same three month period in the prior year.

 

Revenues

 

Revenues for the three months ended March 31, 2018 increased $1,307,502 (16.3%) to $9,310,074 as compared to $8,002,572 for the three months ended March 31, 2017. Software sales increased by $728,156 to $1,635,061 for the three months ended March 31, 2018 from $906,905 for the same period in 2017 for an overall increase of 80.3%.  Service revenue increased by $579,346 to $7,675,013 for the three months ended March 31, 2018 from $7,095,667 for the same period in 2017 for an overall increase of 8.2%. This is attributed to an increase in project consulting services.

Gross Profit

 

Gross profit for the three months ended March 31, 2018 increased $553,689 (16.3%) to $3,940,738 as compared to $3,387,049 for the three months ended March 31, 2017. For the period ended March 31, 2018, the overall gross profit percentage was 42.3% as compared to 42.3% for the period ended March 31, 2017.   The gross profit attributed to software sales increased $285,204 to $757,200 for the three months ending March 31, 2018 from $471,996 in the three months ending March 31, 2017.  The mix of products being sold by the Company changes from time to time which causes the overall gross margin percentage to vary. The gross profit attributed to services increased $268,485 for the three months ending March 31, 2018 from the three months ending March 31, 2017. The gross profit percentage attributed to services increased to 41.5% in 2018 from 41.1% in 2017.

Operating Expenses

 

Selling and marketing expenses increased $449,717 (39.2%) to $1,596,373 for the three months ended March 31, 2018 compared to $1,146,656 for the three months ended March 31, 2017 due to increased sales personnel and travel expenses.

 

General and administrative expenses increased $354,693 (20.8%) to $2,059,669 for the three months ended March 31, 2018 as compared to $1,704,976 for the three months ended March 31, 2017 primarily as a result of increases in payroll and related expenses associated with the addition of management personnel.

 

During the three months ended March 31, 2018, the Company recognized $8,433 of share-based compensation expense as a result of the granting of stock options to some of its non-executive employees as compared to $8,966 for the same three month period in 2017.

 

Income from Operations

For the three months ended March 31, 2018, the Company had income from operations of $88,322 as compared to income from operations of $288,192 for the same period in 2017.

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.

 

On July 21, 2016, SWK entered into a Revolving Demand Note (the “Revolving Demand Note”) by and between SWK and M&T Bank (“Lender”), a commercial lender. The Lender has agreed to loan SWK up to a principal amount of one million dollars. The interest rate on the Revolving Demand Note shall be a variable rate, equal to the “Prime Rate”, plus ninety-five one-hundredths percent (0.95%) per annum.  There is a minimum interest rate floor of four percent (4%). The Revolving Demand Note is secured by all of SWK’s assets pursuant to a Security Agreement.  Furthermore, on July 21, 2016, the Company and Mr. Mark Meller, individually, entered into Unlimited Guaranty agreements (the “Guaranty Agreements”) with the Lender. The line is also collateralized by substantially all of the assets of the Company.  Under the Guaranty Agreements, the Company and Mr. Meller personally, jointly and severally guaranteed the liabilities of SWK due and owing under the terms of the Revolving Demand Note. At March 31, 2018 and December 31, 2017 there were no borrowings under this note. 

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 and at March 31, 2018 the outstanding balance was $84,822. On July 6, 2015, SWK acquired certain assets of ProductiveTech Inc. (PTI) pursuant to an Asset Purchase Agreement (the “PTI Purchase Agreement”) for cash of $500,000 and a promissory note for $600,000 (the “PTI Note”).  The PTI Note matures July 1, 2020.  Monthly payments are $10,645 including interest at 2.5% per year and at March 31, 2018 the outstanding balance was $289,246. 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 and additional consideration. 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 $80,723 as of March 31, 2018.

During the three months ended March 31, 2018, the Company had a net decrease in cash of $428,176.  The Company’s principal sources and uses of funds were as follows:

 

Cash (used in) provided by operating activities

The Company used $116,605 in cash from operating activities for the three months ended March 31, 2018 as compared to generating $133,517 of cash for operating activities for the same period in 2017. This use of cash is attributed to the increase in accounts receivable and unbilled services.

 

Cash used in investing activities

Investing activities for the three months ended March 31, 2018 used cash of $190,733 as compared to using cash of $193,599 for the same period in 2017. This use of cash is attributed to purchases of property and equipment and costs related to the internal development of software.

Cash used in financing activities

 

Financing activities for the three months ended March 31, 2018 used cash of $120,838 as compared to using cash of $200,038 for the same period in 2017. The decrease was due primarily to payments of a cash dividend in the prior year compared to the current 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, 2018.  

 

 

During the three months ended March 31, 2018 or for fiscal 2017, 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

 

 

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, 2017, filed with the SEC on March 26, 2018.

 

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

 

Other than disclosed above in the financial statements and footnotes, 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

 

 

* 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.

 

 

 

 

 

 

 

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