QXO, Inc. 10-Q

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 subsidiaries, SWK Technologies, Inc., Secure Cloud Services, Inc., and Critical Cyber Defense Corp. (collectively the “Company”, “we”, “our”, and “us”) 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, 2019, 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 unaudited condensed 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. Overview 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”), Human Capital Management (“HCM”), Warehouse Management Systems (“WMS”), Customer Relationship Management (“CRM”), and Business Intelligence (“BI”). Additionally, we have our own development staff building software solutions for various ERP enhancements. Our value-added services focus on consulting and professional services, specialized programming, training, and technical support. We have a dedicated Information Technology (“IT”) network services practice that provides managed services, cybersecurity, application hosting, disaster recovery, business continuity, cloud and other services. Our customers are nationwide, with concentrations in the New York/New Jersey metropolitan area, Arizona, Southern California, North Carolina, Washington, Oregon and Illinois. 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 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 cloud-based ERP solutions, we also have in our ERP portfolio 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. 25 Table of Contents 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 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 manage their business and 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. Network and Managed Services We provide comprehensive IT 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-site and off-site backups, complete encryption, and automatic failure testing. We also provide cybersecurity, application hosting, IT consulting and managed network 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. Results of Operations for the Three and Nine Months Ended September 30, 2020 and 2019. During the nine months ended September 30, 2020 the Company continued to expand its customer base, which prior to Covid-19, we believed would provide a basis for future growth, as revenues increased 4.83% from the same nine month period in the prior year. The Company will continue to monitor the Covid-19 situation as it pertains to the disruption of our business and growth in future quarters and will take steps to establish mitigation strategies in order to try and minimize risk of any potential downturn for shareholders as well the health, safety and wellbeing of its employees and customers. Revenues Revenues for the three months ended September 30, 2020 increased $51,287 (0.51%) to $10,159,152 as compared to $10,107,865 for the three months ended September 30, 2019. Revenues for the nine months ended September 30, 2020 increased $1,377,023 (4.83%) to $29,911,619 as compared to $28,534,596 for the nine months ended September 30, 2019. The increase for the three months ended September 30, 2020, can be attributed to the increase in consulting revenue offset by a decrease in software revenue while the increase for the nine months ended September 2020 can be attributed to both an increase in software sales and consulting revenue. Software sales decreased $228,726 (12.24%) to $1,639,245 for the three months ended September 30, 2020 as compared to $1,867,971 for the three months ended September 30, 2019 due to a decrease in timing for both software sales and third party software sales. For the nine months ended September 30, 2020 software sales increased $436,226 (8.90%) to $5,335,112 from $4,898,886 for the same period in 2019. The increase is attributable to increased sales of third party solutions which add functionality to customer’s existing systems. Service revenue increased by $280,013 to $8,519,907 for the three months ended September 30, 2020 from $8,239,894 for the same period in 2019, which represents an overall increase of 3.40%. Service revenue increased by $940,797 to $24,576,507 for the nine months ended September 30, 2020 from $23,635,710 for the same period in 2019, representing an overall increase of 3.98%. This increase is attributed to the increase in both consulting and subscription revenue. Gross Profit Gross profit for the three months ended September 30, 2020 increased $351,215 (9.49%) to $4,051,991 as compared to $3,700,776 for the three months ended September 30, 2019. For the three month period ended September 30, 2020, the overall gross profit percentage was 39.89% as compared to 36.61% for the period ended September 30, 2019. Gross profit for the nine months ended September 30, 2020 increased $887,459 (8.10%) to $11,842,804 as compared to $10,955,345 for the nine months ended September 30, 2019. For the nine month period ended September 30, 2020, the overall gross profit percentage was 39.59% as compared to 38.39% for the period ended September 30, 2019. 26 Table of Contents The gross profit attributed to software sales increased $42,416, or 6.67%, to $677,941 for the three months ending September 30, 2020 as compared to $635,525 in the three months ending September 30, 2019. This increase is due to sales of software with higher gross margins. Gross profit attributed to software sales increased $152,201, or 8.19%, to $2,011,251 for the nine months ending September 30, 2020 as compared to $1,859,050 in the nine months ending September 30, 2019. This increase is attributed to the increase in software sales for the period. The gross profit attributed to services increased $308,799, or 10.07%, to $3,374,050 for the three months ending September 30, 2020 as compared to $3,065,251 for the three months ending September 30, 2019, while gross profit attributed to services increased $735,258, or 8.08%, to $9,831,553 for the nine months ending September 30, 2020 as compared to $9,096,295 for the nine months ending September 30, 2019. This increase is attributed to both the increase in subscription and maintenance revenue for the period. Operating Expenses Selling and marketing expenses decreased $12,952 (0.73%) to $1,752,319 for the three months ending September 30, 2020 from $1,765,271 in the three months ending September 30, 2019. Selling and marketing expenses increased $353,428 (6.97%) to $5,427,115 for the nine months ended September 30, 2020 compared to $5,073,687 for the nine months ended September 30, 2019. This is due to both additional headcount as well as increased variable compensation as a result of increased sales. General and administrative expenses decreased $441,038 (17.87%) to $2,026,477 for the three months ending September 30, 2020 from $2,467,515 in the three months ending September 30, 2019. General and administrative expenses decreased $466,020 (7.06%) to $6,133,865 for the nine months ended September 30, 2020 as compared to $6,599,885 for the nine months ended September 30, 2019. This is primarily as a result of decreases in travel expenses as a result of less employees traveling during the pandemic, reduced credit card expenses as well as department changes for various employees, thereby reducing salary and benefit expense. Depreciation and amortization expense increased $948 for the three months ended September 30, 2020 to $179,057 as compared to $178,109 for the three months ended September 30, 2019. Depreciation and amortization expense decreased $10,271 for the nine months ended September 30, 2020 to $528,636 as compared to $538,907 for the nine months ended September 30, 2019. This decrease is due to some equipment being fully depreciated in 2020. Income (loss) from Continuing operations For the three months ended September 30, 2020, the Company had income from continuing operations of $55,205 as compared to loss from continuing operations of $949,873 for the three months ended September 30, 2019. The increase is primarily due to increased revenue, as well as less general and administrative expenses. For the nine months ended September 30, 2020, the Company had a loss from continuing operations of $203,396 as compared to loss from continuing operations of $1,547,609 for the nine months ended September 30, 2019. The decrease in loss is primarily due to increased revenue as well as less general and administrative expenses. Liquidity and Capital Resources The negative impact of Covid-19 on the economy creates tremendous uncertainty for the Company in the coming months and quarters. Recent government reports indicate that there are currently over 10 million people unemployed in the U.S., many of whom work at our customer’s businesses or businesses similar to our customers. The negative impact on our business is impossible to determine at this point, although it is likely that we will suffer negative consequences as many of these companies go out of business or decrease their technology spending. The current confusion in SBA guidance as to whether the Company, as a publicly-traded entity, was eligible to retain its PPP Loan means that we may need to rely on our own limited resources to weather the anticipated economic downturn. Our competitors, almost all of whom are privately-held, and able to avail themselves of the PPP program, will make it more difficult for the Company to compete in the marketplace. Management will continue to monitor developments, explore various cost-cutting measures, and explore other sources of funding, but there is no guarantee we will be successful in doing so. On July 31, 2020, the Company acquired certain assets of Prairie Technology Solutions Group, LLC (“Prairie Tech”) pursuant to an Asset Purchase Agreement. In consideration for the acquired assets, the Company paid $185,000 in cash and issued three promissory notes to Prairie Tech (“Prairie Tech Note 1”, “Prairie Tech Note 2” and “Prairie Tech Note 3”), each in the principal aggregate amount of $103,333 (collectively the “Prairie Tech Notes”). The Prairie Tech Notes bear interest at a rate of 4% per annum. Prairie Tech Note 1 has a term of one (1) year and is subject to downward adjustment based on whether certain revenue milestones are achieved. Prairie Tech Note 2 has a term of two (2) years and is also subject to downward adjustment based on whether certain revenue milestones are achieved. Prairie Tech Note 3 has a term of three (3) years and is not subject to a downward adjustment. 27 Table of Contents On October 1, 2020, the Company acquired certain assets of Computer Management Services, LLC (“CMS”) pursuant to an Asset Purchase Agreement. In consideration for the acquired assets, the Company paid $470 in cash and issued a promissory note to CMS in the principal aggregate amount of $170,000. The CMS Note is due in 36 months from the closing date and bears interest at a rate of two (2%) percent per annum. Monthly payments including interest are $4,869. On October 1, 2020, the Company entered into an At Market Issuance Sales Agreement (the “2020 At Market Agreement”) with a sales agent (the “Sales Agent”) under which the Company may issue and sell shares of its common stock having an aggregate offering price of up to $3,489,499 from time to time through the Sales Agent. Sales of the Company’s common stock through the Sales Agent, if any, will be made by any method that is deemed an “at the market” offering as defined by the U.S. Securities and Exchange Commission. The Company will pay to the Sales Agent a commission rate equal to 3.0% of the gross proceeds from the sale of any shares of common stock sold through the Sales Agent under the 2020 At Market Agreement. The Company has not issued any common stock pursuant to the 2020 At Market Agreement. The Company currently has no line of credit or other credit facility with any lender. As of September 30, 2020, the Company has $1,175,900 notes outstanding from acquisitions occurring between 2014 and 2020. Future payments on these notes are as follows: Remainder of 2020 $ 84,378 2021 445,096 2022 396,714 2023 249,712 Total $ 1,175,900 During the nine months ended September 30, 2020, the Company had a net decrease in cash of $1,585,806. The Company’s principal sources and uses of funds were as follows: Cash provided by (used in) operating activities of continuing operations Operating activities for the nine months ended September 30, 2020 provided cash of $247,135 as compared to using cash of $1,201,035 for the same period in 2019. This increase in cash is primarily due to a decrease in the net loss for the period. Cash provided by investing activities of continuing operations Investing activities for the nine months ended September 30, 2020 provided cash of $867,005 as compared to $9,965,623 for the same period in 2019. This decrease in cash is due to proceeds received from the sale of the EDI practice in August 2019. Cash used in financing activities of continuing operations Financing activities for the nine months ended September 30, 2020 used cash of $2,699,946 as compared to $715,675 for the same period in 2019. The use was due primarily to the payment of the cash dividend in January 2020. Cash flows from discontinued operations Operating activities for discontinued operations for the nine months ended September 30, 2020 provided cash of $0 as compared to $899,537 for the same period in 2019. This is due to the fact that the EDI practice was sold in August 2019, providing eight months of operating activities in 2019. Investing activities of discontinued operations for the nine months ended September 30, 2020 used cash of $0 as compared to $127,678 for the same period in 2019. This was due to having no software being put into production in 2020 as a result of the EDI practice being sold in 2019. 28 Table of Contents The Company believes that as a result of the growth in business, and the funds available from the sale of its Mapadoc division, it has adequate liquidity to fund its operating plans for at least the next twelve months, provided however, that the Company cannot currently quantify the uncertainty related to the recent pandemic and its effects on the business in the coming quarters. The belief that the Company has sufficient liquidity may be incorrect as the impact of Covid-19 becomes clearer over the coming months and quarters. There was no significant impact on the Company’s operations as a result of inflation for the nine months ended September 30, 2020. Off Balance Sheet Arrangements During the nine months ended September 30, 2020 or for fiscal 2019, 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.