Filing summary
Important identity note: The request identifies QXO, Inc., but the supplied Form 10-Q is for SilverSun Technologies, Inc. (OTCBB: SSNT), for the quarter ended September 30, 2012. This summary reflects the filing provided, not QXO.
Business context and reporting period
SilverSun provides business software, ERP implementation, consulting, programming, training, technical support, and network services. Its products include Sage software, proprietary MAPADOC EDI software, and HighTower solutions. The report covers the three and nine months ended September 30, 2012, with comparisons to the corresponding 2011 periods.
In June 2012, its subsidiary acquired selected assets and obligations of HighTower, a Sage reseller and software publisher. The stated consideration was $741,598: $441,964 cash and $299,634 in assumed deferred-revenue obligations. The purchase-price allocation was preliminary and subject to an independent valuation.
Financial results and liquidity
| Metric | Three months ended September 30, 2012 | Nine months ended September 30, 2012 | Comparable 2011 |
|---|---|---|---|
| Revenue | $3.47 million | $9.45 million | $2.37 million and $7.83 million |
| Gross profit | $1.39 million | $3.87 million | $1.01 million and $3.38 million |
| Gross margin | 40.0% | 40.9% | 42.6% and 43.2% |
| Operating income (loss) | $119,212 | $(886,160) | $10,643 and $329,678 |
| Net income (loss) attributable to SilverSun | $102,808 | $(939,414) | $(24,652) and $2.71 million |
Third-quarter revenue rose 46.2% year over year; nine-month revenue rose 20.7%. Management attributed growth to HighTower and increased sales and maintenance agreements from the existing business. Gross margin declined year over year, which management attributed to sales mix. Nine-month results included $1.13 million of share-based compensation; 2011 results included a $2.23 million debt-extinguishment gain and a $362,035 derivative revaluation gain.
For the first nine months, operating cash flow was $153,463, investing cash flow was $(655,299), and financing cash flow was $369,454. Cash declined $132,382 to $101,340. Accounts receivable increased to $1.67 million from $881,217 at year-end. At September 30, current assets were $1.92 million and current liabilities $3.65 million, a working-capital deficit of approximately $1.73 million.
The company had $403,008 outstanding on a receivables-based line of credit, with $346,992 stated availability under its $750,000 maximum. The rate was 6%; substantially all assets secured the facility, and the CEO personally guaranteed it. The company also reported $74,369 of current capital-lease obligations, $20,000 of related-party notes payable, and a $7,054 related-party convertible note. It reported compliance with credit-facility covenants.
Material changes and unusual items
- HighTower contributed approximately $366,000 revenue and $159,000 net income in the quarter, and approximately $768,000 revenue and $350,000 net income for the nine-month period, according to the filing.
- SilverSun acquired the remaining 20% of SWK Technologies in exchange for 22,664,678 SilverSun common shares. It also converted Series A preferred shares and related-party convertible debt into common stock.
- Common shares outstanding increased from 4,456,912 at December 31, 2011, to 116,950,933 at September 30, 2012. The nine-month weighted-average basic share count was 114,873,304.
- The filing reports $719,267 of expense associated with employee conversions of portions of the CEO’s convertible note and $412,587 of option-related compensation for the nine months. It also reports $1,131,854 total share-based compensation in the statements.
Outlook, risks, and contingencies
Management said it intended to pursue acquisitions, partnerships, and investments, and stated that growth, acquisitions, and credit-line availability were expected to provide adequate liquidity for operating plans for at least the next 12 months. No quantified earnings or revenue guidance was provided. Management cautioned that forward-looking statements are subject to risks, including those disclosed in the 2011 Form 10-K. It reported no material litigation, no material change in previously disclosed risk factors, and no material off-balance-sheet arrangements. Disclosure controls were judged effective; no material change in internal control was reported.
Important facts for investors to verify
- Confirm the issuer: the supplied filing is SilverSun Technologies, not QXO, Inc.
- Reconcile cash-flow figures: the financial statements show investing cash flow of $(655,299) and financing cash flow of $369,454, while MD&A states $(679,399) and $393,554, respectively. The statement figures reconcile to the reported $132,382 cash decline.
- Review the substantial increase in shares and the terms, valuation, and dilution effects of debt and preferred-stock conversions, the SWK minority-interest exchange, and employee options.
- Assess liquidity and working-capital risk, including the cash balance, receivables growth, borrowing-base availability, collateral pledge, and CEO guarantee.
- Review the final HighTower purchase-price allocation and expected amortization; the reported allocation was preliminary.