The accompanying notes are an integral part of these consolidated financial statements.
SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 – DESCRIPTION OF BUSINESS
SilverSun Technologies, Inc. (“SilverSun” or 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 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”.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
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, 2017, the results of operations and cash flows for the three months ended March 31, 2017 and 2016. 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, 2016 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, 2016, filed with the SEC on March 24, 2017.
During the three months ended March 31, 2017, 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, 2016.
Principals of Consolidation
The consolidated financial statements include the accounts of SilverSun and its subsidiary SWK, which is wholly owned. All significant intercompany transactions and balances have been eliminated in consolidation.
SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
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
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, 2017 and 2016.
Definite Lived Intangible Assets and Long-lived Assets
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, 2017 and 2016.
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. 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)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Unbilled Services
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
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.
Cash and Cash Equivalents
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.
Concentrations
The Company maintains its cash and cash equivalents with various institutions, which exceed federally insured limits throughout the year. At March 31, 2017 and December 31, 2016, the Company had cash on deposit of approximately $1,043,676 and $1,280,695 respectively in excess of the federally insured limits of $250,000.
As of March 31, 2017, no one customer represented more than 10% of the total accounts receivable and unbilled services.
For the three months ended March 31, 2017 and 2016, our top ten customers accounted for 22% ($1,781,773) and 22% ($1,748,878), 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, 2017 and 2016, purchases from one supplier through a “channel partner” agreement were approximately 23% and 22% 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, 2017 and 2016, one supplier represented approximately 39% and 36% 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, 2017, the Company believes it has no significant risk related to its concentration of accounts receivable.
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
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)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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.
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 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 2014 to 2017 remain open to examination for both the U.S. federal and state jurisdictions.
There were no liabilities for uncertain tax positions at March 31, 2017 and December 31, 2016.
Fair Value Measurement
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.
Stock-Based Compensation
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.
SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recently Adopted Authoritative Pronouncements
In November 2015, the FASB issued ASU No. 2015-17,
Income Taxes (Topic 740): Balance Sheet Classifications of Deferred Taxes
, which requires that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by this amendment. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted and the standard may be applied either retrospectively or on a prospective basis to all deferred tax assets and liabilities. During the first quarter of 2017, the Company adopted this ASU and the appropriate reclassifications were made.
In March 2016, the FASB issued ASU No. 2016-09, Stock Compensation (Topic 718), which includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. The standard is effective for annual periods beginning after December 15, 2016. During the first quarter 2017, the Company adopted this ASU. The key effects of the adoption on the Company’s financial statements include that the Company will now recognize windfall tax benefits as deferred tax assets instead of tracking the windfall pool and recording such benefits in equity. Additionally, the Company has elected to recognize forfeitures as they occur rather than estimating them at the time of grant.
Recent Authoritative Pronouncements
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 April 2016, the FASB issued ASU No. 2016-10,
Revenue from Contracts with Customers: Identifying performance obligations and licensing,
to reduce the cost and complexity of applying the guidance on identifying promised goods or services around identifying performance obligations and implementation guidance on determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). The ASU will be effective for the Company in the first quarter of 2018. Early adoption is permitted as of annual and interim reporting periods beginning after December 15, 2016. The Company is evaluating the future impact of this ASU on the 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.
NOTE 3 – NET INCOME PER COMMON SHARE
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, 2017 and March 31, 2016 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 for the three months ended March 31, 2016. The debt was converted on December 9, 2016.
|
|
|
Three Months
Ended
|
|
|
Three Months
Ended
|
|
|
|
|
March 31, 2017
|
|
|
March 31, 2016
|
|
|
Basic net income per share computation:
|
|
|
|
|
|
|
|
Net income
|
|
$
|
153,853
|
|
|
$
|
74,277
|
|
|
Weighted-average common shares outstanding
|
|
|
4,486,153
|
|
|
|
4,410,736
|
|
|
Basic net income per share
|
|
$
|
0.03
|
|
|
$
|
0.02
|
|
|
Diluted net income per share computation:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
153,853
|
|
|
$
|
74,277
|
|
|
Weighted-average common shares outstanding
|
|
|
4,490,153
|
|
|
|
4,477,403
|
|
|
Total adjusted weighted-average shares
|
|
|
4,490,153
|
|
|
|
4,477,403
|
|
|
Diluted net income per share
|
|
$
|
0.03
|
|
|
$
|
0.02
|
|
SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 3 – NET INCOME PER COMMON SHARE
(Continued)
The following table summarizes securities that, if exercised, would have an anti-dilutive effect on earnings per share.
|
|
|
Three Months
March 31, 2017
|
|
|
Three Months
March 31,
2016
|
|
|
Stock options
|
|
|
133,576
|
|
|
|
183,576
|
|
|
Warrants
|
|
|
208,240
|
|
|
|
203,253
|
|
|
|
|
|
|
|
|
|
|
|
|
Total potential dilutive securities not included in income per share
|
|
|
341,816
|
|
|
|
386,829
|
|
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment is summarized as follows:
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
Leasehold improvements
|
|
$
|
56,429
|
|
|
$
|
30,557
|
|
|
Equipment, furniture and fixtures
|
|
|
1,783,494
|
|
|
|
1,744,439
|
|
|
|
|
|
1,839,923
|
|
|
|
1,774,996
|
|
|
Less: Accumulated depreciation
|
|
|
(1,364,779
|
)
|
|
|
(1,308,794
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
475,144
|
|
|
$
|
466,202
|
|
Depreciation and amortization expense related to these assets for the three months ended March 31, 2017 and 2016 was $55,986 and $57,807, respectively.
Property and equipment under capital leases are summarized as follows:
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
Equipment, furniture and fixtures
|
|
|
521,905
|
|
|
|
521,905
|
|
|
Less: Accumulated depreciation
|
|
|
(360,102
|
)
|
|
|
(335,672
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
161,803
|
|
|
$
|
186,233
|
|
NOTE 5 – INTANGIBLE ASSETS
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:
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
|
Estimated Useful Lives
|
|
|
Proprietary developed software
|
|
$
|
806,500
|
|
|
$
|
677,829
|
|
|
|
5
|
|
|
Intellectual property, customer list, and acquired contracts
|
|
|
3,069,551
|
|
|
|
3,069,551
|
|
|
|
5 - 15
|
|
|
Total intangible assets
|
|
$
|
3,876,051
|
|
|
$
|
3,747,380
|
|
|
|
|
|
|
Less: accumulated amortization
|
|
|
(1,431,119
|
)
|
|
|
(1,316,269
|
)
|
|
|
|
|
|
|
|
$
|
2,444,932
|
|
|
$
|
2,431,111
|
|
|
|
|
|
Amortization expense included in depreciation and amortization was $114,850 for the three months ended March 31, 2017 as compared to $113,086 for the three months ended March 31, 2016. Included in proprietary developed software is $406,827 for the three months ended March 31, 2017 and $42,503 for the three months ended March 31. 2016 not yet in service. The Company expects the proprietary developed software to be placed in service in 2018, and has included the amortization in the future amortization schedule accordingly.
SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 – INTANGIBLE ASSETS (Continued)
The Company expects future amortization expense to be the following:
|
|
|
Amortization
|
|
|
Balance of 2017
|
|
$
|
242,005
|
|
|
2018
|
|
|
317,555
|
|
|
2019
|
|
|
317,555
|
|
|
2020
|
|
|
299,565
|
|
|
2021
|
|
|
263,015
|
|
|
thereafter
|
|
|
1,005,237
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,444,932
|
|
NOTE 6 – LINE OF CREDIT AND LONG-TERM DEBT
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 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, 2017 and December 31, 2016 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. At March 31, 2017 the outstanding balance was $155,969.
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 ATR Note matures on February 1, 2018. Monthly payments are $5,012 including interest at 2% per year. At March 31, 2017 the outstanding balance was $59,503.
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 PTI 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, 2017 the outstanding balance was $408,141.
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 Oates 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, 2017 the outstanding balance was $93,496.
SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 6 – LINE OF CREDIT AND LONG-TERM DEBT (Continued)
At March 31, 2017, future payments of long term debt are as follows:
|
Remainder of 2017
|
|
$
|
230,636
|
|
|
2018
|
|
|
257,846
|
|
|
2019
|
|
|
154,727
|
|
|
2020
|
|
|
73,900
|
|
|
Total
|
|
$
|
717,109
|
|
NOTE 7 – CAPITAL LEASE OBLIGATIONS
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 10.4%.
At March 31, 2017, future payments under capital leases are as follows:
|
Remainder of 2017
|
|
$
|
73,815
|
|
|
2018
|
|
|
60,631
|
|
|
2019
|
|
|
1,785
|
|
|
Total minimum lease payments
|
|
|
136,231
|
|
|
Less amounts representing interest
|
|
|
(7,998
|
)
|
|
Present value of net minimum lease payments
|
|
|
128,233
|
|
|
Less current portion
|
|
|
(87,532
|
)
|
|
Long-term capital lease obligation
|
|
$
|
40,701
|
|
NOTE 8 – EQUITY
Equity
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.
On July 28, 2016 (the “Effective Date”), the Company entered into a Series B Preferred Stock Purchase Agreement (the “Preferred Stock Purchase Agreement”) with the Company’s Chief Executive Officer, Mr. Mark Meller, pursuant to which Mr. Meller was issued the only share of the Company’s authorized but unissued Series B Preferred Stock. Mr. Meller was issued one (1) share of Series B Preferred Stock for (i) $100 in cash and (ii) as partial consideration for Mr. Meller’s personal guarantee of the Revolving Demand Note. Each one (1) share of the Series B Preferred Stock shall have voting rights equal to (x) the total issued and outstanding Common Stock eligible to vote at the time of the respective vote divided by (y) forty-nine one-hundredths (0.49) minus (z) the total issued and outstanding Common Stock eligible to vote at the time of the respective vote. For the avoidance of doubt, if the total issued and outstanding Common Stock eligible to vote at the time of the respective vote is 5,000,000, the voting rights of the Series B Preferred Stock shall be equal to 5,204,082 (e.g. (5,000,000 / 0.49) – 5,000,000 = 5,204,082). The Series B Preferred Stock has the rights, privileges, preferences and restrictions set for in the Certificate of Designation (the “Certificate of Designation”) filed by the Corporation with the Secretary of State of the State of Delaware (“Delaware Secretary of State”) on September 23, 2011.
On January 23, 2017, the Company announced the payment of a $0.02 special cash dividend per share of Common Stock. The dividend payments were paid out on January 31, 2017 for an aggregate amount of $89,566, which reduced additional paid in capital.
On January 27, 2017, the Company issued 100 shares of stock each to 125 non-executive employees of SWK.
SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 8 – EQUITY
(Continued)
Options
A summary of the status of the Company’s stock option plans for the fiscal years ended December 31, 2016 and the three months ending March 31, 2017 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, 2016
|
|
|
183,576
|
|
|
$
|
4.49
|
|
2.7 years
|
|
|
$
|
-0-
|
|
|
Options granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Options canceled/forfeited
|
|
|
(40,000
|
)
|
|
$
|
4.50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at December 31, 2016
|
|
|
143,576
|
|
|
$
|
4.33
|
|
1.6 years
|
|
|
$
|
-0-
|
|
|
Options granted
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options canceled/forfeited
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at March 31, 2017
|
|
|
143,576
|
|
|
|
4.33
|
|
1.3 years
|
|
|
$
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested Options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017;
|
|
|
105,575
|
|
|
$
|
4.46
|
|
0.7 years
|
|
|
$
|
-0-
|
|
|
December 31, 2016:
|
|
|
103,575
|
|
|
$
|
4.47
|
|
1.0 years
|
|
|
$
|
-0-
|
|
As of March 31, 2017 the unamortized compensation expense for stock options was $103,295. Unamortized compensation expense is expected to be recognized over a weighted-average period of three years.
Warrants
On March 27, 2017, the Company granted 4,988 warrants with a fair value of approximately $19,923, which immediately vested, to John Schachtel 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 $4.00; b) exercise price of $4.01; 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.
The following table summarizes the warrants transactions:
|
|
|
Warrants
Outstanding
|
|
|
Weighted Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2016
|
|
|
203,253
|
|
|
$
|
5.29
|
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
Canceled
|
|
|
-
|
|
|
$
|
-
|
|
|
Outstanding and Exercisable December 31, 2016
|
|
|
203,253
|
|
|
$
|
5.29
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
4,988
|
|
|
$
|
4.01
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
Canceled
|
|
|
-
|
|
|
$
|
-
|
|
|
Outstanding and Exercisable March 31, 2017
|
|
|
208,240
|
|
|
$
|
5.26
|
|
SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 9 – INCOME TAXES
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 $6,296,000 as of March 31, 2017, 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 2026 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,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Current:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
5,290
|
|
|
$
|
45,943
|
|
|
State and local
|
|
|
588
|
|
|
|
5,405
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current tax provision
|
|
|
5,878
|
|
|
|
51,348
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
108,000
|
|
|
|
8,550
|
|
|
State and local
|
|
|
12,000
|
|
|
|
950
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax provision
|
|
|
120,000
|
|
|
|
9,500
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision
|
|
$
|
125,878
|
|
|
|
60,848
|
|
For the three months ended March 31, 2017, 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 and 50% of general meals and entertainment which are not deductible. The provision for the three months ended March 31, 2017 was $125,878. The effective tax rate consists primarily of the 40% federal statutory tax rate and a blended 5% state and local tax rate.
NOTE 10 – RELATED PARTY TRANSACTIONS
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, 2017 and 2016 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, 2017 and 2016 pursuant to this lease was $9,270 and $9,000 respectively.
As of March 31, 2017, long term debt and contingent consideration are considered related party liabilities as holders are current employees of the company, see Note 6.
SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 11 – COMMITMENTS
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 will consist 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.
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 Company leases 702 square feet of office space in Minneapolis, MN with a monthly rent of $1,560 a month. This lease expires March 31, 2018.
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.
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, 2017 and 2016 was $111,241 and $87,379, respectively.
The following is a schedule of approximate future minimum rental payments for operating leases subsequent to the year ended December 31, 2016.
|
Remainder 2017
|
|
$
|
276,292
|
|
|
2018
|
|
|
297,326
|
|
|
2019
|
|
|
228,671
|
|
|
2020
|
|
|
177,763
|
|
|
2021
|
|
|
176,288
|
|
|
thereafter
|
|
|
287,301
|
|
|
|
|
$
|
1,443,641
|
|
SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 11 – COMMITMENTS (Continued)
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 years 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 $203,891 as of March 31, 2017. The Company estimates that the contingent consideration will be fully paid by June 30, 2020.
NOTE 12 – SUBSEQUENT EVENTS
On April 24, 2017, the Company announced the payment of a $0.02 special cash dividend per share of Common Stock. The amount of Common Stock outstanding on April 24, 2017 was 4,489,903. The dividend payments announced in April will be paid out on May 10, 2017 for an aggregate amount of $89,816, which will be applied against additional paid in capital.