UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 

 
FORM 10-Q   
 

 
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: March 31, 2015

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to __________
 
Commission File Number: 000-50302

SILVERSUN TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)

Delaware
16-1633636
(State or other jurisdiction of incorporation)
(IRS Employer Identification No.)

5 Regent Street
Livingston, NJ 07039
(Address of principal executive offices)

(973) 396-1720
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months, and (2) has been subject to such filing requirements for the past 90 days.   Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.  Yes x    No  o
  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Large accelerated filer
¨
 
Accelerated filer
¨
         
Non-accelerated filer
¨
 
Smaller reporting company
x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ¨    No x
 
As of May 5, 2015, there were 4,331,252 shares outstanding of the registrant’s common stock.  
 
 
 

 
SILVERSUN TECHNOLOGIES, INC.
 
TABLE OF CONTENTS
 
   
Page No.
PART I.    FINANCIAL INFORMATION
 
     
Item 1.
3
 
3
 
4
  5
 
6
 
8
     
Item 2.
19
Item 3.
26
Item 4.
26
     
PART II.   OTHER INFORMATION
 
     
Item 1.
27
Item 1A.
27
Item 2.
27
Item 3.
27
Item 4.
27
Item 5.
27
Item 6.
27
 
 
 


PART I – FINANCIAL INFORMATION 
Item 1.  Financial Statements
 
SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 
ASSETS
 
March 31,
2015
   
December 31,
2014
 
             
Current assets:
           
Cash and cash equivalents
 
$
2,384,381
   
$
1,308,337
 
Accounts receivable, net of allowance of $125,000
   
2,304,636
     
2,097,454
 
Unbilled services
   
518,055
     
230,000
 
Prepaid expenses and other current assets
   
207,056
     
195,779
 
Deferred tax asset – current
   
38,000
     
38,000
 
                 
Total current assets
   
5,452,128
     
3,869,570
 
                 
Property and equipment, net
   
281,716
     
295,054
 
Intangible assets, net
   
990,732
     
809,481
 
Goodwill
   
56,000
     
56,000
 
Deferred tax assets
   
190,500
     
-
 
Deposits and other assets
   
28,988
     
26,725
 
                 
Total assets
 
$
7,000,064
   
$
5,056,830
 
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Current liabilities:
               
Accounts payable
 
$
1,512,820
   
$
1,393,541
 
Accrued expenses
   
690,544
     
794,157
 
Accrued interest
   
14,484
     
14,716
 
Income taxes payable
   
291,083
     
76,000
 
Long term debt - current portion
   
186,607
     
174,578
 
Capital lease obligations – current portion
   
58,103
     
65,269
 
Deferred revenue
   
2,471,104
     
2,215,114
 
                 
Total current liabilities
   
5,224,745
     
4,733,375
 
                 
Long term debt, net of current portion
   
343,537
     
242,926
 
Capital lease obligations, net of current portion
   
54,580
     
66,922
 
Total liabilities
   
5,622,862
     
5,043,223
 
                 
Commitments and contingencies
   
-
     
-
 
                 
Stockholders’ equity:
               
Preferred stock, $0.001 par value; authorized 1,000,000 shares
No shares issued and outstanding
   
-
     
-
 
Series A Preferred Stock, $0.001 par value; authorized 2 shares 
No shares issued and outstanding
   
-
     
-
 
Series B Preferred Stock, $.001 par value; authorized 1 share
0 and 1 share issued and outstanding
   
-
     
1
 
Common stock:
               
Par value $.00001; authorized 75,000,000 shares
4,331,252  and 3,959,064 shares issued and outstanding
   
44
     
40
 
                 
Additional paid-in capital
   
11, 872,468
     
11,030,043
 
Accumulated deficit
   
(10,495,310
)
   
(11,016,477
)
Total stockholders’ equity
   
1,377,202
     
13,607
 
                 
Total liabilities and stockholders’ equity
 
$
7,000,064
   
$
5,056,830
 
 
 See accompanying notes to condensed consolidated financial statements.
 
 
3

 
SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
   
Three Months Ended March 31,
 
   
2015
   
2014
 
    Revenues:
           
      Software product, net
 
$
1,382,742
   
$
609,970
 
   Service, net
   
5,100,372
     
4,314,655
 
Total revenues, net
   
6,483,114
     
4,924,625
 
                 
Cost of revenues:
               
   Product
   
637,509
     
327,402
 
   Service
   
3,045,333
     
2,492,179
 
Total cost of revenues
   
3,682,842
     
2,819,581
 
                 
Gross profit
   
2,800,272
     
2,105,044
 
                 
Selling, general and administrative expenses :
               
Selling and marketing expenses
   
912,130
     
732,275
 
General and administrative expenses
   
1,187,814
     
1,082,110
 
Share based compensation
   
30,405
     
11,284
 
Depreciation and amortization
   
111,956
     
77,733
 
Total selling, general and administrative expenses
   
2,242,305
     
1,903,402
 
                 
     Income from operations
   
557,967
     
201,642
 
                 
Other income (expense)
               
     Interest expense, net
   
(12,217
)
   
(9,990
)
Total other income (expense)
   
(12,217
)
   
(9,990
)
                 
Income before taxes
   
545,750
     
191,652
 
                 
Provision for income taxes
   
24,583
     
70,911
 
                 
Net income
 
$
 521,167
   
$
120,741
 
                 
Net income per common share – basic and fully diluted
 
$
0.13
   
$
0.03
 
Weighted average shares
               
     Basic
   
4,042,317
     
3,930,529
 
     Diluted
   
4,051,338
     
3,930,529
 
 
See accompanying footnotes to the condensed consolidated financial statements

 
4

 
SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED DECEMBER 31, 2014 AND THREE MONTHS ENDED MARCH 31, 2015
 
   
Series A
Preferred
Stock
   
Series B
Preferred
Stock
   
Common Stock
 Class A
   
Additional
Paid in
   
Accumulated
Equity
   
Total
Stockholders’
Equity
 
   
Shares
   
Amount
   
Shares
   
Amount
   
Shares
   
Amount
   
Capital
   
(Deficit)
   
(Deficit)
 
Balance at January 1, 2014
   
-
   
$
-
     
1
   
$
1
     
3,922,566
   
$
39
   
$
10,809,499
   
$
(11,209,378
)
 
$
(399,839
)
                                                                         
Common stock issued in a cashless exercise of warrants
   
-
     
-
     
-
     
-
     
4,167
     
-
     
(1
   
-
     
(1
Issuance of common stock for repayment of accrued liabilities
   
-
     
-
     
-
     
-
     
5,331
     
-
     
20,792
             
20,792
 
Share-Based Compensation
   
  -
     
  -
     
  -
     
  -
     
-
     
-
     
130,253
     
  -
     
130,253
 
                                                                         
Issuance of common stock for services
   
-
     
-
     
-
     
-
     
27,000
     
1
     
69,500
     
-
     
69,501
 
Net income
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
192,901
     
192,901
 
Balance at December 31, 2014
   
-
   
$
-
     
1
   
$
1
     
3,959,064
   
$
40
   
$
11,030,043
   
$
(11,016,477
)
 
$
13,607
 
                                                                         
Cancellation of preferred share
   
-
     
-
     
(1
)
   
(1
 )
   
-
     
-
     
1
     
-
     
-
 
Issuance of common stock, net of fees
   
-
     
-
     
-
     
-
     
363,490
     
4
     
812,019
     
-
     
812,023
 
Roundup of fractional shares
   
-
     
-
     
-
     
-
     
8,698
     
-
     
-
     
-
     
-
 
Share-Based Compensation
   
  -
     
  -
     
  -
     
  -
     
-
     
-
     
30,405
     
  -
     
30,405
 
Net income
   
-
     
-
     
-
     
-
     
-
     
-
     
-
     
521,167
     
521,167
 
                                                                         
Balance at March 31, 2015
   
-
   
$
-
     
-
   
$
-
     
4,331,252
   
$
44
   
$
11,872,468
   
$
(10,495,310
)
 
$
1,377,202
 
 
The accompanying notes are an integral part of these consolidated financial statements. 
 
 
5

 
SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 
   
Three Months Ended
 March 31,
 
   
2015
   
2014
 
Cash flows from operating activities:
           
Net income
 
$
521,167
   
$
120,741
 
Adjustments to reconcile net income to net cash provided by operating activities
               
Deferred income taxes
   
(190,500
)
   
24,110
 
Depreciation and amortization
   
38,207
     
28,330
 
Amortization of intangibles
   
73,749
     
49,402
 
Share-based compensation
   
30,405
     
11,284
 
Common stock issued in exchange for services
   
-
     
20,975
 
                 
Changes in assets and liabilities:
               
Accounts receivable
   
(207,182
)
   
(9,832
)
Unbilled services
   
(288,055
)
   
(25,000
)
Prepaid expenses and other current assets
   
(11,278
)
   
(62,477
)
Deposits and other assets
   
(2,263
)
   
-
 
Accounts payable
   
119,279
     
(62,031
)
Accrued expenses
   
(103,612
)
   
135,586
 
Income tax payable
   
215,083
     
-
 
Accrued interest
   
(232
)
   
(271
)
Deferred revenue
   
255,990
     
169,810
 
 Net cash provided by operating activities
   
450,758
     
400,627
 
                 
Cash flows from investing activities:
               
Purchase of property and equipment
   
(24,869
)
   
-
 
Acquisition of new business
   
(80,000
)
   
  -
 
Net cash (used in) in investing activities
   
(104,869
)
   
-
 
                 
Cash flows from financing activities:
               
Repayment of long-term debt
   
(62,360
)
   
(41,995
)
Principal payments under capital leases obligations
   
(19,508
)
   
(14,615
)
Issuance of common stock and warrants, net of fees
   
812,023
     
  -
 
Net cash provided by (used in) in financing activities
   
730,155
     
(56,610
)
                 
Net increase in cash and cash equivalents
   
1,076,044
     
344,017
 
                 
Cash and cash equivalents – beginning of period
   
1,308,337
     
762,892
 
                 
Cash and cash equivalents – end of period
 
$
2,384,381
   
$
1,106,909
 
                 
Cash paid during period for:
               
Interest
 
$
13,143
   
$
4,503
 
Income taxes
 
$
22,136
   
$
27,733
 
 
See accompanying footnotes to the condensed consolidated financial statements.
 
 
6

 
 SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

For the three months ended March 31, 2015:

The Company acquired certain assets of ATR for a $175,000 promissory note in addition to a cash payment of $80,000.

On March 29, 2015, Mr. Meller returned his one share of Series B Preferred to the Company and the Company cancelled the certificate. On March 29, 2015, subject to shareholder approval, the Board approved the cancellation of the Series B Preferred Certificate of Designation.
 

For the three months ended March 31, 2014:

None

 

 
 
See accompanying footnotes to the condensed consolidated financial statements.
 
 
7

 
SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)

NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Description of Business
 
SilverSun Technologies, Inc. (the “Company”) and wholly owned subsidiary SWK Technologies, Inc. (“SWK”) is a value added reseller and master developer for Sage Software’s Sage 100/500 and ERP X3 financial and accounting software as well as the publisher of 20 proprietary software solutions, including its own proprietary Electronic Data Interchange (EDI) software, “MAPADOC”.  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 is currently quoted on the OTCQB marketplace (“QTCQB”) under the symbol “SSNT.”

In May 2014, the Company completed the purchase of selected assets of ESC Software (“ESC”), a leading Arizona-based reseller of Sage Software and Acumatica applications. ESC’s customers and business products and services have been integrated into the infrastructure of SWK. 

In March of 2015, the Company completed the purchase of selected assets of 2000 SOFT, d/b/a Accounting Technology Resources (“ATR”).  ATR’s customers and business products and services have been integrated into the infrastructure of SWK.
 
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, 2015, the results of operations and cash flows for the three months ended March 31, 2015 and 2014.  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, 2014 balance sheet included herein was derived from the audited financial statements included in the Company’s annual report on Form 10-K as of that date. Accordingly, the financial statements included herein should be reviewed in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014 filed with the SEC on March 31, 2015.

On February 4, 2015 the Company effected the Reverse Stock Split and every thirty (30) shares of outstanding Common Stock decreased to one (1) share of Common Stock. Similarly, the number of shares of Common Stock into which each outstanding option and warrant to purchase Common Stock is to be exercisable decreased on a 1-for-30 basis and the exercise price of each outstanding option and warrant to purchase Common Stock increased proportionately. The impact of this reverse stock split has been retroactively applied to the financial statements and the related notes.
 
During the three months ended March 31, 2015, 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, 2014.
 
Principals of Consolidation

The consolidated financial statements include the accounts of SilverSun Technologies, Inc. and subsidiary, of which is wholly owned. All significant intercompany transactions and balances have been eliminated in consolidation.
 
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.
 
 
8


SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
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.
 
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, 2015 and 2014.
 
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.
 
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.
 
 
9

 
SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
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, 2015 and December 31, 2014, the Company had cash on deposit of approximately $1,876,839 and $1,029,941 respectively in excess of the federally insured limits of $250,000.
 
For the three months ended March 31, 2015 and 2014, our top ten customers accounted for 33% ($2,124,079) and 20% ($990,367), 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, 2015 and 2014, purchases from one supplier through a “channel partner” agreement were approximately 42% and 45% of cost of revenues, respectively.  This channel partner agreements 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, 2015 and 2014, one supplier represented approximately 27% and 28% 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, 2015 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.
 
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.
 
 
9

 
SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
 
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 calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations. The Company recognizes liabilities for uncertain tax positions if the weight of available evidence indicates that it is more likely than not that the position will not be sustained upon a tax examination with a tax examination being presumed to occur. The Company recognizes interest and penalties as incurred in finance income (expense), net in the Consolidated Statements of Income.

There were no liabilities for uncertain tax positions at March 31, 2015 and 2014.

Reclassifications
 
Certain prior year amounts have been reclassified to conform to the current year presentation.  The reclassifications have had no effect on the financial position, operations or cash flows for the period ended March 31, 2014.

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.
 
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, expected term, and forfeiture rate. Any changes in these highly subjective assumptions significantly impact stock-based compensation expense.
 
 
10


SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standard Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” (“ASU 2014-09”). ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. This ASU is effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. Accordingly, the Company will adopt this ASU on January 1, 2017. Companies may use either a full retrospective or modified retrospective approach to adopt this ASU and management is currently evaluating which transition approach to use. The Company is currently assessing the impact that adopting this new accounting guidance will have on its consolidated financial statements and footnote disclosures.  In April 2015 the FASB proposed delaying the effective date by one year for public companies.
 
No other recently issued accounting pronouncements had or are expected to have a material impact on the Company’s consolidated financial statements.

Principals of Consolidation

The consolidated financial statements include the accounts of SilverSun Technologies, Inc. and subsidiary, of which is wholly owned. All significant intercompany transactions and balances have been eliminated in consolidation.
 
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. The computation of diluted income per share for the three months ended March 31, 2015 does not include share equivalents as all warrants and options exceeded the average market price of the common stock for the three months ended March 31, 2015.                                
 
   
Three Months
Ended
   
Three Months 
Ended
 
   
March 31, 2015
   
March 31, 2014
 
Basic net income per share computation:
           
Net income
 
$
521,167
   
$
120,741
 
Weighted-average common shares outstanding
   
4,042,317
     
3,930,529
 
Basic net income per share
 
$
0.13
   
$
0.03
 
Diluted net income per share computation:
               
Net income
 
$
521,167
   
$
120,741
 
Weighted-average common shares outstanding
   
4,051,338
     
3,930,529
 
Total adjusted weighted-average shares
   
4,051,338
     
3,930,529
 
Diluted net income per share
 
$
0.13
   
$
0.03
 
 
 
11

 
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, 2015
   
Three Months
March 31, 2014
 
Stock options
   
30,000
     
86,241
 
Warrants
   
185,078
     
25,000
 
                 
Total potential dilutive securities not included in income per share
   
215,078
     
111,241
 
 
NOTE 4 PROPERTY AND EQUIPMENT

Property and equipment is summarized as follows:

   
March 31, 2015
   
December 31, 2014
 
Leasehold improvements
 
$
30,557
   
$
30,557
 
Equipment, furniture and fixtures
   
1,200,247
     
1,175,378
 
     
1,230,804
     
1,205,935
 
Less: Accumulated depreciation
   
(949,088
)
   
(910,881
)
                 
 Property and equipment, net
 
$
281,716
   
$
295,054
 
 
Depreciation and amortization expense related to these assets for the three months ended March 31, 2015 and 2014 was $38,207 and $28,330, respectively. 
Property and equipment under capital leases are summarized as follows:

   
March 31, 2015
   
December 31, 2014
 
Equipment, furniture and fixtures
   
297,080
     
297,080
 
Less: Accumulated depreciation
   
(163,862
)
   
(143,376
)
                 
 Property and equipment, net
 
$
133,218
   
$
153,704
 
 
 
12


SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)

NOTE 5 – INTANGIBLE ASSETS

Intangible assets consist of developed intellectual property 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 five year estimated useful lives.

The components of intangible assets are as follows:
                                                                 
   
March 31, 2015
   
December 31, 2014
 
Proprietary developed software
 
$
365,911
   
$
365,911
 
Intellectual property, customer list, and acquired contracts
   
1,243,000
     
988,000
 
                 
Total intangible assets
 
$
1,608,911
   
$
1,353,911
 
Less: accumulated amortization
   
(618,179
   
(544,430
   
$
990,732
   
$
809,481
 

The estimated remaining useful lives for proprietary developed software is 5 years. The estimated remaining useful lives for intellectual property and customer lists is 5 years.
 
Amortization expense included in depreciation and amortization was $73,749 for the three months ended March 31, 2015 as compared to $49,402 for the three months ended March 31, 2014.

The Company expects future amortization expense to be the following:
 
 
   
Amortization
 
Balance of 2015
 
$
234,190
 
2016
   
321,782
 
2017
   
219,235
 
2018
   
124,175
 
2019
   
84,975
 
thereafter
   
6,375
 
         
Total
 
$
990,732
 
 
NOTE 6 – LINE OF CREDIT, TERM LOAN AND PROMISSORY NOTES

On August 1, 2013, the Company obtained a line of credit and term loan from the bank. The line of credit is for two years and expires on July 31, 2015. The agreement included a borrowing base calculation tied to accounts receivable with a maximum availability of $750,000 at prime plus 1.75% interest (5% at March 31, 2015).  The line is collateralized by substantially all of the assets of the Company and guaranteed by the Company’s Chief Executive Officer, Mr. Meller.  The credit facility requires the Company to pay a monitoring fee of $1,000 monthly. At March 31, 2015, the Company was in compliance with the required financial covenants the fixed charge ratio and debt to net worth. As of March 31, 2015, the availability under this line was $750,000. 
 
The term loan is for $350,000 for two years and matures on July 31, 2015. Monthly payments are $15,776 including interest at 8%. The term loan is collateralized by substantially all of the assets of the Company and is guaranteed by the Company’s Chief Executive Officer, Mr. Meller.  At March 31, 2015 the outstanding balance was $61,076.
 
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”) and matures on April 1, 2019. Monthly payments are $6,135 including interest at 2% per year. At March 31, 2015 the outstanding balance was $294,068
 
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 note matures on February 1, 2018.  Monthly payments are $5,012 including interest at 2% per year. At March 31, 2015 the outstanding balance was $175,000.
 
 
13

 
SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)

NOTE 6 – LINE OF CREDIT, TERM LOAN AND PROMISSORY NOTES (Continued)
 
At March 31, 2015, future payments of long term debt are as follows:
 
Remainder of 2015
 
$
154,989
 
2016
   
127,427
 
2017
   
129,999
 
2018
   
87,209
 
2019
   
30,520
 
Total
 
$
530,144
 

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 property and equipment, net in the accompanying balance sheets.  The related obligations are based upon the present value of the future minimum lease payments with interest rates ranging from 8.5% to 11.0%.

At March 31, 2015, future payments under capital leases are as follows:
 
Remainder of 2015
 
$
52,399
 
2016
   
47,785
 
2017
   
24,281
 
Total minimum lease payments
   
124,465
 
Less amounts representing interest
   
(11,782
)
Present value of net minimum lease payments
   
112,683
 
Less current portion
   
(58,103
)
Long-term capital lease obligation
 
$
54,580
 

NOTE 8– EQUITY

Equity

In March 2015, 363,490 shares of common stock were sold at a price of $4.24 per share and 181,745 warrants were sold at a price of $.01. The gross proceeds raised was $1,543,015 and underwriting and expenses relating to the offering of $730,992, resulting in net proceeds to the Company of $812,023.

On March 29, 2015, Mr. Meller returned his one share of Series B Preferred to the Company and the Company cancelled the certificate. On March 29, 2015, subject to shareholder approval, the Board approved the cancellation of the Series B Preferred Certificate of Designation.
 
Options

In February 2014, the Company granted 50,000 incentive stock options with an exercise price of $4.50 per option to certain non-executive employees under the 2004 Stock Incentive Plan. Approximately 25,000 of the options vest immediately with the remaining 50% vesting ratably over a three-year period. The Company estimated the fair value of each option using the Black Scholes option-pricing model with the following weighted-average assumptions: expected dividend yield of 0.0%, risk-free interest rate of 0.71%, volatility at 353.95% and an expected life of 5 years. The Company estimates the forfeiture rate based on historical data. Based on an analysis of historical information, the Company has applied a forfeiture rate of 15%. As a result, the Company estimated the value of these options at $115,488.
 
In May 2014, the Company granted 20,000 incentive stock options with an exercise price of $4.50 per option to a non – executive employee under the 2004 Stock Incentive Plan. The Company recognizes compensation cost on awards on a straight-line basis over the vesting period, approximately five years. The Company estimated the fair value of each option using the Black Scholes option-pricing model with the following weighted-average assumptions: expected dividend yield of 0.0%, risk-free interest rate of 1.68%, volatility at 328.76% and an expected life of 5 years. The Company estimates the forfeiture rate based on historical data. Based on an analysis of historical information, the Company has applied a forfeiture rate of 15%. As a result, the Company estimated the value of these options at $77,981. 
 
 
14

 
SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)

NOTE 8–  EQUITY (Continued)
 
In July 2014, the Company granted 10,000 incentive stock options with an exercise price of $4.50 per option to a certain non-executive employee under the 2004 Stock Incentive Plan. Options vest immediately. The Company estimated the fair value of each option using the Black Scholes option-pricing model with the following weighted-average assumptions: expected dividend yield of 0.0%, risk-free interest rate of 1.0%, volatility at 323.81% and an expected life of 5 years. As a result, the Company estimated the value of these options at $44,987.

In March 2015, the Company granted 10,000 incentive stock options with an exercise price of $4.00 per option to a certain non-executive employee under the 2004 Stock Incentive Plan. The Company recognizes compensation cost on awards on a straight-line basis over the vesting period, approximately five years. The Company estimated the fair value of each option using the Black Scholes option-pricing model with the following weighted-average assumptions: expected dividend yield of 0.0%, risk-free interest rate of 1.6%, volatility at 263.18% and an expected life of 5 years. As a result, the Company estimated the value of these options at $39,875.

The Company uses judgment in estimating the amount of stock-based awards that are expected to be forfeited. If actual forfeitures differ significantly from the original estimate, stock-based compensation expense and the results of operations could be impacted.
 
A summary of the status of the Company’s stock option plans for the fiscal years ended December 31, 2014 and the three months ending March 31, 2015 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, 2014
    89,116     $ 4.80  
3.4 years
  $ -0-  
Options granted
    80,000       4.50  
4.3 years
       
Options exercised
    -                    
Options canceled/forfeited
    (5,270 )   $ 4.80            
                           
Outstanding options at December 31, 2014
    163,846     $ 4.65  
2.5 years
  $ -0-  
Options granted
    10,000     $ 4.00  
4.9 years
       
Options exercised
    -                    
Options canceled/forfeited
    -                    
                           
Outstanding options at March 31, 2015
    173,846       4.62  
2.9 years
  $ -0-  
                           
Vested Options:
                         
   March 31, 2015;
   
109,321
    $
2.56
 
1.4 years
  $ -0-  
   December 31, 2014:
    115,653     $ 4.65  
1.8 years
  $ -0-  
 
For the three months ended March 31, 2015 the unamortized compensation expense for stock options was $115,000.  Unamortized compensation expense is expected to be recognized over a weighted-average period of three years. 
 
Warrants
 
On January 29, 2015 the Company granted 3,333 warrants with a fair value of approximately $19,969, which immediately vested, to Joseph Macaluso 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 $6.00; b) exercise price of $6.00; 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. 

On March 9, 2015 the Company granted 18,175 warrants with a fair value of approximately $73,356, which immediately vested, to Alexander Capital, LP as partial compensation for acting as placement agent. 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 $4.05; b) exercise price of $5.088; c) Dividend yield of 0%; d) Risk free interest rate of 1.66%; e) expected volatility of 263.67%; f) Expected life of 5 years. 
 
 
15

 
 SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)

NOTE 8–  EQUITY (Continued)
 
On March 23, 2015 the Company granted 181,745 warrants with a fair value of approximately $638,630, which immediately vested, to those that purchased common stock as part of the offering. 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 $3.53; b) exercise price of $5.30; c) Dividend yield of 0%; d) Risk free interest rate of 1.41%; e) expected volatility of 258.39%; f) Expected life of 5 years.

The following table summarizes the warrants transactions:
 
   
Warrants
Outstanding
   
Weighted Average
Exercise Price
 
             
Balance, January 1, 2014
   
25,001
   
$
5.20
 
Granted
   
-
   
$
-
 
Exercised
   
8,333
   
$
3.60
 
Canceled
   
16,668
   
$
4.20
 
Outstanding and Exercisable December 31, 2014
   
-
   
$
-
 
                 
Granted
   
203,252
   
$
5.29
 
Exercised
   
-
   
$
-
 
Canceled
   
-
   
$
-
 
Outstanding and Exercisable March 31, 2015
   
203,252
   
$
5.29
 
 
NOTE 9 – BUSINESS COMBINATION
 
On May 6, 2014 SWK entered into an Asset Purchase Agreement with ESC, Inc. d/b/a ESC Software, an Arizona corporation, and Alan H. Hardy and Michael Dobberpuhl in their individual capacity as Shareholders. SWK acquired certain assets of ESC (as defined in the Purchase Agreement). In full consideration for the acquired assets, the Company issued a promissory note in the aggregate principal amount of $350,000.   The purchase was initially allocated, based on the Company’s estimate of fair value, to intangible assets, which are expected to consist primarily of customers lists with an estimated life of five years. Upon completion of an independent valuation, the allocation of the purchase price to customer lists was modified from $350,000 to $294,000, with the excess purchase consideration being allocated to goodwill.
 
The following summarizes the purchase price allocation:
 
Customer List
 
$
294,000
 
Goodwill
   
56,000
 
Fair value of net assets acquired
 
$
350,000
 
         
Note to shareholders for acquisition
 
350,000
 
Total purchase price
 
$
350,000
 
 
Acquisition costs were approximately $7,500, which are included in general and administrative expenses.
 
On March 11, 2015 SWK entered into an Asset Purchase Agreement with 2000 SOFT, Inc. d/b/a ATR, a California corporation, and Karen Espinoza McGarrigle in her individual capacity as Shareholder. SWK acquired certain assets of ATR (as defined in the Purchase Agreement). In consideration for the acquired assets, the Company issued a promissory note in the aggregate principal amount of $175,000 and paid cash of $80,000.   As additional consideration, the Company will pay 10% of the net margin on maintenance renewals for former ATR customers for the first twelve months and 5% of the net margin on maintenance renewals for the following twelve months. The purchase was initially allocated, based on the Company’s estimate of fair value, to intangible assets, which are expected to consist primarily of customers lists with an estimated life of five years. Upon completion of an independent valuation, the allocation of the purchase price to customer lists will be modified accordingly and acquisition costs disclosed.
 
 
16



 SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)

NOTE 9– BUSINESS COMBINATION (Continued)
 
The following unaudited pro forma information does not purport to present what the Company’s actual results would have been had the acquisitions occurred on January 1, 2014, nor is the financial information indicative of the results of future operations. The following table represents the unaudited consolidated pro forma results of operations for the three months ended March 31, 2015 and 2014 as if the acquisition occurred on January 1, 2014. Operating expenses have been increased for the amortization expense associated with the estimated fair value adjustment as of March 31, 2015 of expected definite lived intangible assets.
 
Pro Forma
 
Three Months Ended
March 31, 2015
   
Three Months Ended 
March 31, 2014
 
Net sales
 
$
6,706,718
   
$
5,861,911
 
Operating expenses
   
2,312,471
     
2,148,915
 
Income  before taxes
   
561,336
     
277,360
 
Net income
 
$
531,454
   
$
174,737
 
Basic and diluted income per common share
 
$
0.13
   
$
0.10
 
 
The Company’s condensed consolidated financial statements for the three months ending March 31, 2015 include the actual results of ESC since the date of acquisition, May 6, 2014 and the actual results of ATR since the date of acquisition, March 11, 2015. The three months ended March 31, 2015 pro-forma results above include two months of results of ATR and for the period ended March 31, 2014 pro-forma results above include three months of pro-forma results for both ESC and ATR. For the three months ended March 31, 2015 the ESC operations had a net income before taxes of $37,592 that was included in the Company’s Condensed Consolidated Statement of Income, which consisted of approximately $318,108 in revenues and $280,516 in expenses.  For the three months ended March 31, 2015 the ATR operations had a net income before taxes of $4,841 that was included in the Company’s Condensed Consolidated Statement of Income, which consisted of approximately $90,951 in revenues and $86,110 in expenses.
  
NOTE 10 - 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 $7,442,000 as of March 31, 2015, 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 2025 to 2030. 
 
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 (benefit):
 
   
Three Months Ended
 
   
March 31,
   
March 31,
 
   
2015
   
2014
 
Current:
           
               Federal
 
$
191,831
   
$
46,801
 
               State and local
   
23,252
     
-
 
                 
               Total current tax provision
   
215,083
     
46,801
 
                 
Deferred:
               
               Federal
   
8,473
     
24,110
 
               State and local
   
1,027
     
-
 
               Release of valuation allowance
   
(200,000)
     
-
 
              
               
               Total deferred tax provision (benefit)
   
(190,500)
     
24,110
 
                 
Total provision
 
$
  24,583
     
70,911
 
 
 
17


 SILVERSUN TECHNOLOGIES, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)

NOTE 10 - INCOME TAXES (Continued)
 
For the year three months ended March 31, 2015, 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 which is generally never tax deductible for the Company. The provision for the three months ended March 31, 2015 was $215,083. The effective tax rate consists primarily of the 34% federal statutory tax rate and a blended 4% state and local tax rate.

For the three months ended March 31, 2015, the Company’s Federal and State provision requirements were offset by the reversal of a portion of the valuation allowance, totaling $560,000, no longer deemed necessary, and recorded a net tax benefit of $200,000, which represents a reduction in its valuation allowance on tax attributes that are expected to be utilized based on management’s assessment and evaluation of historical and projected income.

NOTE 11 – SUBSEQUENT EVENTS

On April 29, 2015 the Board approved entering into a consulting agreement with Christopher Roberts IR for the provision of investor relations services.  In addition to cash payments for services, the Company issued 15,000 shares of common stock at $2.24 per share.
 
 
18

 
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 Subsidiary (the “Company”) 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, 2014, 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 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 financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our 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”), Warehouse Management Systems (“WMS”), Customer Relationship Management (“CRM”), and Business Intelligence (“BI”). Additionally, we have our own development staff building software solutions for Electronic Data Interchange (“EDI”), time and billing, and various ERP enhancements. Our value-added services focus on consulting and professional services, specialized programming, training, and technical support. We have a dedicated network services practice that provides managed services, hosting, business continuity, cloud, email and web services. Our customers are nationwide, with concentrations in the New York/New Jersey metropolitan area, Chicago, Dallas, Arizona and Southern California.
 
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. Forty-five percent of our customer base consists of Sage ERP X3, Sage 100 ERP, Sage 500 ERP, and Sage BusinessWorks customers. We believe we are among the largest Sage ERP X3 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 true cloud-based ERP solutions, we have added two (2) industry leading applications to our ERP portfolio: (1) NetSuite ERP, among the world’s leading cloud ERP solutions; and (2) 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.
 
 
19

 
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 Information Technology (“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 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, time and billing software, and a cloud solution dedicated to the craft brewing industry.
 
EDI (Electronic Data Interchange) Software and Services
 
EDI is the computer to computer exchange of standard business documents, such as purchase orders and invoices, in electronic format. A standard file format is established for each kind of document in order to facilitate the exchange of data across a variety of platforms and programs. We have a proprietary software solution, MAPADOC, which is fully integrated with the Sage ERPs. MAPADOC allows businesses to dramatically cut data entry time by eliminating duplicate entries and reduces costly errors with trading partners. MAPADOC is the only EDI solution that is built within the framework of the Sage ERPs, allowing customers to stay within one application to get their job done.
 
Network and Managed Services
 
We provide comprehensive 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 and off site backups, complete encryption, and automatic failure testing. We also provide email and web security, IT consulting, managed network, and emergency IT 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.
 
 
20

 
Results of Operations for the Three Months Ended March 31, 2015 and 2014.
 
During the three months ended March 31, 2015 the Company continued to expand its customer base and growth trend which we believe will provide a basis for future growth.
 
  
1) Revenues increased 31.6% from the same three month period in the prior year.
  
2) Income from operations increased to $557,967 as compared to $201,642 for the same three month period in the prior year.
  
3) Net income was $521,167 as compared to $120,741 for the same three month period in the prior year.
 
4) As a result of an increase in sales and marketing expense, we continue to lay the foundation for continued growth.
  
5) Sales of the Company’s proprietary, cloud-based business management solutions created specifically for the U.S. craft brewery and distribution industry has continued to increase since its introduction to market in early 2012; and the number of new sales prospects continues to climb.
  
6) Continued to book significant orders for Sage ERP X3.

Revenues
 
Revenues for the three months ended March 31, 2015 increased $1,558,489 (31.6%) to $6,483,114 as compared to $4,924,625 for the three months ended March 31, 2014.   Software sales increased by $772,772 to $1,382,742 in 2015 from $609,970 in 2014 for an overall increase of 126.7%.  This increase was primarily due to an increase in sales of our accounting software products, such as Sage ERP X3, cloud solutions Netsuite and Acumatica, and Accellos Warehouse Management.  Service revenue increased by $785,717 to $5,100,372 in 2015 from $4,314,655 in 2014 for an overall increase of 18.2%. The overall increases are primarily due to the continued successful sales and marketing efforts and very competitive pricing, and the Company’s strategy to increase its business by seeking additional opportunities through potential acquisitions, partnerships or investments.

Gross Profit
 
Gross profit for the three months ended March 31, 2015 increased $695,228 (33%) to $2,800,272 as compared to $2,105,044 for the three months ended March 31, 2014. The increase in overall gross profit for this period is attributed to the increase in revenues from existing business, including the revenues from the ESC acquisition.  For the period ended March 31, 2015, the overall gross profit percentage was 43.2% as compared to 42.7 % for the period ended March 31, 2014.   The gross profit attributed to software sales increased $462,665 to $745,233 for 2015 from $282,568 in 2014 which resulted in an increase in the gross profit percentage from 46% to 54%. The mix of products being sold by the Company changes from time to time and sometimes causes the overall gross margin percentage to vary. The gross profit attributed to services increased $233,051 from 2014 to 2015 primarily due to the implementations of larger scale accounting systems. The gross profit percentage attributed to services decreases to 40% in 2015 from 42% in 2014. In addition, the Company will often enter into agreements with former resellers to take over their customers in exchange for being paid a commission for a period of time. The Company currently has 12 of these arrangements in place, which had the result of reducing the Company’s reported gross profit percentage by less than 0.39% for the three months ended March 31, 2015 and less than 0.86% for the three months ended March 31, 2014.
  
Operating Expenses
 
Selling and marketing expenses increased $179,855 (24.6%) to $912,130 for the three months ended March 31, 2015 compared to $732,275 for the three months ended March 31, 2014 due to increased sales personnel and travel expenses as a result of an increase in sales activity.

General and administrative expenses increased $105,704 (9.8%) to $1,187,814 for the three months ended March 31, 2015 as compared to $1,082,110 for the three months ended March 31, 2014 primarily as a result of increases in payroll and related expenses associated with the addition of management personnel and incremental costs associated with the acquisition of ESC and ATR.
 
During the three months ended March 31, 2015, the Company recognized $30,405 of share-based compensation expense as a result of the granting of stock options to some of its non-executive employees as compared to $11,284 for the same three month period in 2014.

Depreciation and amortization expense increased $34,223 for the three months ended March 31, 2015 to $111,956 as compared to $77,733 for the period ended March 31, 2014. This increase is primarily attributed to the increase in amortization associated with the intangible assets acquired from the ESC acquisition in 2014.

Income from Operations

For the year three months ended March 31, 2015, the Company had income from operations of $577,967 as compared to income from operations of $201,642 for the same period in 2014. 
 
 
21

 
Income Taxes
 
For the year three months ended March 31, 2015, 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 which is generally never tax deductible for the Company. The provision for the three months ended March 31, 2015 was $215,083. The effective tax rate consists primarily of the 34% federal statutory tax rate and a blended 4% state and local tax rate.
 
For the three months ended March 31, 2015, the Company’s Federal and State provision requirements were offset by the reversal of a portion of the valuation allowance no longer deemed necessary, and recorded a net tax benefit of $200,000, which represents a reduction in its valuation allowance on tax attributes that are expected to be utilized based on management’s assessment and evaluation of historical and projected income.
 
Net Income
 
For year three months March 31, 2015, the Company had net income of $521,167 as compared to a net income of $120,741 for the three months ended March 31, 2014 for the reasons mentioned above.  
 
Liquidity and Capital Resources
 
We are currently seeking additional operating income opportunities through potential acquisitions or investments. Such acquisitions or investments may consume cash reserves or require additional cash or equity.  Our working capital and additional funding requirements will depend upon numerous factors, including: (i) strategic acquisitions or investments; (ii) an increase to current company personnel; (iii) the level of resources that we devote to sales and marketing capabilities; (iv) technological advances; and (v) the activities of competitors.
 
In addition to developing new products, obtaining new customers and increasing sales to existing customers, management plans to increase its business and profitability by entering into collaboration agreements, buying assets, and acquiring companies in the business software and information technology consulting market with solid revenue streams and established customer bases that generate positive cash flow.
 
In October 2011, the Company obtained a line of credit from a bank. The agreement included a borrowing base calculation tied to accounts receivable with a maximum availability of $750,000.  On August 1, 2013, the Company negotiated a new line of credit and term loan from the bank. The term of the line of credit is for two years and expires on July 31, 2015. The agreement included a borrowing base calculation tied to accounts receivable with a maximum availability of $750,000 at prime plus 1.75% interest (currently 5%).  The line is collateralized by substantially all of the assets of the Company and is guaranteed by the Company’s Chief Executive Officer, Mr. Meller.  The credit facility requires the Company to pay a monitoring fee of $1,000 monthly. At March 31, 2015, the Company was in compliance with the required financial covenants, the fixed charge ratio and debt to net worth. As of March 31, 2015, the availability under this line was $750,000. 

Under the term loan, the Company borrowed $350,000 in July 2013 from a bank. The term loan expires on July 31, 2015. Monthly payments are at $15,776 including interest at 8%. The term loan is collateralized by substantially all of the assets of the Company and is guaranteed by the Company’s Chief Executive Officer, Mr. Meller.  At March 31, 2015 the outstanding balance was $61,076.

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 note matures on April 1, 2019. Monthly payments are $6,135 including interest at 2% per year. At March 31, 2015 the outstanding balance was $294,068. 

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 in the aggregate amount of $175,000 (the “ATR Note”) and matures on February 1, 2018.  Monthly payments are $5,012 including interest at 2% per year. At March 31, 2015 the outstanding balance was $175,000.

In March 2015, 363,490 shares of common stock were sold at a price of $4.24 per share and 181,745 warrants were sold at a price of $.01. The gross proceeds raised was $1,543,015 and underwriting expenses of $730,992, resulting in net proceeds to the Company of $812,023.
 
 
22

 
During the three months ended March 31, 2015, the Company had a net increase in cash of $1,076,044.  The Company’s principal sources and uses of funds were as follows:
 
Cash provided by operating activities

The Company generated $450,758 in cash from operating activities for the three months ended March 31, 2015 as compared to generating $400,627 of cash for operating activities for the same period in 2014. This increase in cash provided by operating activities is primarily attributed to an increase in deferred revenues and an increase in accounts receivable offset partially by an increase in accounts payable.

Cash used in investing activities

Investing activities for the three months ended March 31, 2015 used cash of $104,869. This use of cash is attributed to higher purchases of property and equipment and the acquisition of ATR.

Cash provided by financing activities
 
Financing activities for the three months ended March 31, 2015 provided cash of $730,155 as compared to a use of cash of $56,610 for the same period in 2014. The increase was due primarily to the sale of common stock.
 
The Company believes that as a result of the growth in business, and the availability of its credit line, it has adequate liquidity to fund its operating plans for at least the next twelve months.

There was no significant impact on the Company’s operations as a result of inflation for the three months ended March 31, 2015.  
 
Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate these estimates, including those related to bad debts, inventory obsolescence, intangible assets, and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of certain assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.

For the three months ended March 31, 2015, there have been no new significant accounting policies or accounting pronouncements from those disclosed in our annual 10-K for the year ended December 31, 2014.
 
We have identified below the accounting policies, revenue recognition and software costs, related to what we believe are most critical to our business operations and are discussed throughout Management’s Discussion and Analysis of Financial Condition or Plan of Operation where such policies affect our reported and expected financial results.

 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.

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.
 
 
23

 
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.

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, the customer’s current ability to pay its obligations.  
 
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.
 
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 calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations. The Company recognizes liabilities for uncertain tax positions if the weight of available evidence indicates that it is more likely than not that the position will not be sustained upon a tax examination with a tax examination being presumed to occur. The Company recognizes interest and penalties as incurred in finance income (expense), net in the Consolidated Statements of Income.

There were no liabilities for uncertain tax positions at March 31, 2015 and 2014.
 
 
24


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 in the years ended December 31, 2014 and 2013.
 
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, expected term, and forfeiture rate. Any changes in these highly subjective assumptions significantly impact stock-based compensation expense.

Recent Accounting Pronouncements

In May 2014, the FASB issued Accounting Standard Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” (“ASU 2014-09”). ASU 2014-09 outlines a new, single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. This new revenue recognition model provides a five-step analysis in determining when and how revenue is recognized. The new model will require revenue recognition to depict the transfer of promised goods or services to customers in an amount that reflects the consideration a company expects to receive in exchange for those goods or services. This ASU is effective for annual reporting periods beginning after December 15, 2016 and early adoption is not permitted. Accordingly, the Company will adopt this ASU on January 1, 2017. Companies may use either a full retrospective or modified retrospective approach to adopt this ASU and management is currently evaluating which transition approach to use. The Company is currently assessing the impact that adopting this new accounting guidance will have on its consolidated financial statements and footnote disclosures.  In April 2015 the FASB proposed delaying the effective date by one year for public companies

No other recently issued accounting pronouncements had or are expected to have a material impact on the Company’s consolidated financial statements.
 
Off Balance Sheet Arrangements
 
During the three months ended March 31, 2015 or for fiscal 2014, 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.
 
 
25

 
Item 3.  Quantitative and Qualitative Disclosures About Market Risk

We do not hold any derivative instruments and do not engage in any hedging activities.
 
Item 4.  Controls and Procedures
 
(a) Evaluation of Disclosure Controls and Procedures
 
Pursuant to Rule 13a-15(b) under the Exchange Act, the Company carried out an evaluation, with the participation of the Company’s management, including the Company’s Principal Executive Officer (“PEO”) and Principal Financial Officer (“PFO”), of the effectiveness of the Company’s disclosure controls and procedures (as defined under Rule 13a-15(e) and 15d-15 under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Company’s PEO and PFO concluded that the Company’s disclosure controls and procedures were not effective due to our limited finance staff, and the ineffective management review of complex transactions to ensure that information required to be disclosed by the Company in the reports that the Company files or submits under the Exchange Act, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s PEO and PFO, as appropriate, to allow timely decisions regarding required disclosure.

Notwithstanding the material weakness, management believes that the condensed consolidated financial statements which are included in this Quarterly Report on Form 10-Q fairly present, in all material respects, the financial position of the Company at March 31, 2015 in conformity with U.S. generally accepted accounting principles.

Remediation

We are currently in the process of executing a plan of action to remediate the material weaknesses identified above.   However, we cannot be assured that these weaknesses will be remediated or that other material weaknesses will not be discovered.

(b) Changes in Internal Control over Financial Reporting

There have been no changes in our internal controls over financial reporting (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act) during the quarter ended March 31, 2015, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
26

 
PART II – OTHER INFORMATION

Item 1.     Legal Proceedings

We are not currently involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our companies or our subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect on our financial condition.
 
Item 1A.  Risk Factors
 
We believe there are no changes that constitute material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC on March 31, 2015.
 
Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds
 
Other than disclosed above, there were no unregistered sales of equity securities that were not otherwise disclosed in a current report on Form 8-K.
 
Item 3.     Defaults upon Senior Securities
 
There has been no default in the payment of principal, interest, sinking or purchase fund installment, or any other material default, with respect to any indebtedness of the Company.
 
Item 4.     Mine Safety Disclosures

Not Applicable.
 
Item 5.     Other Information
 
There is no other information required to be disclosed under this item which has not been previously reported.

Item 6.     Exhibits
 
31.1
 
31.2
 
32.1
 
32.2
 
101.INS
 
XBRL Instance Document
101.SCH
 
XBRL Taxonomy Extension Schema
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase
101.LAB
 
XBRL Taxonomy Extension Label Linkbase
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase
 
* Filed herewith
 
 
27

 
SIGNATURES
 
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.
 
   
SILVERSUN TECHNOLOGIES, INC.
           
           
Dated: May 5, 2015
 
By:
/s/ Mark Meller
   
     
Mark Meller
   
     
Principal Executive Officer
       
       
    By: /s/ Crandall Melvin III  
      Crandall Melvin III
      Principal Accounting Officer
       
 
 
 
28