Business context and reporting period
The supplied filing is SilverSun Technologies, Inc.’s Form 10-K for the fiscal year ended December 31, 2016—not a QXO, Inc. filing. It describes a provider of ERP and accounting software, proprietary EDI products, consulting and managed IT services, primarily for small and midsize businesses. The filing presents annual results; it does not provide standalone fourth-quarter 2016 results.
Financial performance and position
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $34.12 million | $27.64 million |
| Gross profit / margin | $12.73 million / 37.3% | $10.84 million / 39.2% |
| Operating income | $1.27 million | $0.36 million |
| Income before taxes | $1.21 million | $0.43 million |
| Income tax benefit (provision) | $2.22 million benefit | $0.06 million provision |
| Net income | $3.44 million | $0.37 million |
| Basic / diluted EPS | $0.78 / $0.77 | $0.09 / $0.09 |
| Operating cash flow | $1.79 million | $0.13 million |
| Cash and cash equivalents, year-end | $1.62 million | $1.19 million |
Service revenue was $29.41 million, up 25.7%; software product revenue was $4.71 million, up 11.2%. Recurring revenue from all sources was approximately 40.5% of total revenue. Year-end current assets were $5.27 million and current liabilities $5.11 million. Long-term debt, including current maturities, was approximately $793,000; capital lease obligations totaled approximately $155,000. The $1 million revolving demand facility had no balance outstanding at year-end. Stockholders’ equity was $4.97 million, compared with $1.56 million in 2015.
Material changes versus 2015
- Revenue rose 23.4%, and operating income increased to $1.27 million from $0.36 million. Four acquisitions completed in 2015 contributed $7.11 million of 2016 revenue; the company made no acquisitions in 2016.
- Gross margin declined to 37.3% from 39.2%; service margin fell to 35.7% from 37.1%, and software margin to 47.2% from 50.8%.
- Operating cash flow increased to $1.79 million from $0.13 million. Financing used $0.87 million, including debt repayments, contingent-consideration payments and a $0.26 million special dividend.
- Net income increased sharply, but included a $2.22 million tax benefit, principally from releasing valuation allowance against deferred tax assets. Income before tax was $1.21 million.
Outlook, risks and unusual items
Management gave no quantified revenue or earnings guidance. It expects to pursue organic growth and acquisitions, partnerships or investments, and stated it believes growth and available credit provide adequate liquidity for operating plans for at least 12 months. Acquisition funding and integration, competition, pricing pressure, recruiting and retaining skilled employees, and the ability to sustain profitable operations are risks.
- Management reported material weaknesses in internal controls over financial reporting: limited accounting resources and segregation of duties, and ineffective review of complex transactions. Disclosure controls were deemed ineffective at December 31, 2016. Management described remediation plans, including an independent assessment; the weaknesses were not reported to have caused material misstatements. The auditor’s opinion covered the financial statements, not internal-control effectiveness.
- The tax benefit depends on management’s expectations of future taxable income and use of net operating loss carryforwards, which are subject to Section 382 limitations. The filing reports approximately $6.65 million of federal NOL carryforwards.
- A new $1 million revolving demand note is secured by company assets; the CEO personally guaranteed it and received one Series B preferred share. That share has substantial voting rights under its terms. Verify its governance and control implications.
- The CEO’s amended employment agreement runs through September 2023, provides a $565,000 annual salary with 10% annual increases, and includes a change-of-control severance provision.
- Top ten customers accounted for 19% of revenue in both years. Sage represented approximately 24% of cost of revenue, and one supplier represented approximately 42% of accounts payable at year-end 2016.
- The company paid a $0.06-per-share special dividend in January 2016 and a $0.02-per-share dividend in January 2017; it stated that it did not presently intend to pay regular cash dividends in the foreseeable future.
Key facts for investors to verify
- Confirm the filing’s issuer and period: the document identifies SilverSun Technologies, Inc. and fiscal 2016, not QXO, Inc. or a standalone 2016 fourth quarter.
- Assess how much of reported net income reflects the noncash deferred-tax valuation-allowance release, and whether the related tax assets are ultimately realizable.
- Review progress in remediating the disclosed material weaknesses and the controls over complex transactions and financial reporting.
- Evaluate acquisition-related revenue and margins, recurring-revenue composition, and the sustainability of operating cash flow.
- Review debt maturities, the secured revolving facility and CEO guarantee, contingent consideration, and the liquidity outlook.
- Assess the Series B preferred share’s voting rights, related-party arrangements, customer and supplier concentrations, and potential dilution from outstanding options and warrants.