Filing summary
Issuer and period: The supplied filing is SilverSun Technologies, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2014—not a QXO, Inc. filing. The company described its business as providing business software, consulting and managed IT services, and pursuing acquisitions. Amounts below are in U.S. dollars.
Financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $5.255 million | $3.871 million | $10.180 million | $7.915 million |
| Gross profit | $2.248 million | $1.607 million | $4.353 million | $3.242 million |
| Gross margin | 42.8% | 41.5% | 42.8% | 41.0% |
| Operating income | $132,729 | $77,339 | $334,371 | $208,979 |
| Net income | $59,890 | $62,185 | $180,631 | $177,715 |
For the six months, revenue increased 28.6% and operating income increased about 60%; net income rose about 1.6%. For Q2, revenue increased 35.8%, while net income declined about 3.7%. The filing reports basic and diluted earnings per share as $0.00 for all periods, rounded to cents.
- Cash flow: Six-month operating cash flow was $306,491, investing cash outflow was $10,344, and financing cash outflow was $120,498. Cash increased $175,649 to $938,541.
- Liquidity: Current assets were $3.360 million and current liabilities were $4.344 million, a working-capital deficit of about $984,000. Current liabilities included $2.079 million of deferred revenue.
- Debt: Reported long-term debt, including its current portion, totaled $539,217 at June 30. The company also had $20,000 payable to a related party and $83,890 in capital lease obligations. No balance was drawn on the $750,000 bank line; the filing reported the full amount available and covenant compliance.
- Other balance-sheet items: Total assets were $4.557 million, total liabilities were $4.675 million, and stockholders’ deficit was $117,638.
Changes, transactions and management commentary
Management attributed revenue growth primarily to the existing business, including software sales, Sage ERP X3 implementations, consulting, maintenance agreements and managed services. Higher consulting and managed-service revenue contributed to improved gross margins. Selling and marketing costs rose, and general and administrative costs increased 48.5% for the first half, mainly due to added employees and compensation-related costs.
On May 6, 2014, subsidiary SWK Technologies acquired certain assets of ESC Software for a $350,000 promissory note, bearing 2% interest and payable over 60 months. The note balance was $344,449 at quarter-end. ESC contributed approximately $124,000 of revenue and a $10,600 net loss after acquisition. The initial purchase-price allocation was recorded to intangible assets, primarily customer lists, pending an independent valuation. The transaction also included a three-year employment agreement with $162,000 annual base salary and 600,000 stock options at $0.15 per share, vesting over five years.
Management said it believed available cash, business growth, acquisitions and the credit line would provide adequate liquidity for at least the next 12 months, and expected no significant liquidity impact from the ESC acquisition. It also stated that acquisitions or investments may require cash or equity. No specific revenue or earnings guidance was provided.
Risks, controls and other notable items
- Disclosure controls and procedures were deemed ineffective because of limited finance staff and ineffective management review of complex transactions. Management was working on remediation and expected to complete its plan by year-end 2014, but gave no assurance of remediation.
- The bank facility is secured by substantially all company assets, guaranteed by the CEO, and expires July 31, 2015. The term loan also matures July 31, 2015.
- The company reported no material litigation, no material changes to previously disclosed risk factors, and no material off-balance-sheet arrangements.
- The filing describes forward-looking statements as subject to risks and uncertainties. The company was evaluating adoption of the new revenue-recognition standard, scheduled in the filing for January 1, 2017.
Important facts for investors to verify
- Confirm issuer identity: the filing is for SilverSun Technologies (ticker SSNT at the time), not QXO, Inc.
- Review the ESC acquisition’s final valuation, acquired customer relationships, and contribution to revenue and earnings.
- Track the working-capital deficit, deferred-revenue obligations, cash conversion and availability under the bank line.
- Assess repayment and refinancing needs for the term loan and credit facility due in 2015, along with the acquisition note and lease commitments.
- Follow remediation of the disclosed material weakness in disclosure controls and the effect of employee, acquisition and stock-compensation costs on profitability.