QXO, Inc. (QXO) FY 2023 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This annual report on Form 10-K and other reports filed by SilverSun Technologies, Inc. and its wholly owned subsidiaries, SWK Technologies, Inc., Secure Cloud Services, Inc., Critical Cyber Defense Corp., and SilverSun Technologies Holdings, Inc. (together 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 Annual Report on Form 10-K, 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 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

SilverSun Technologies, Inc. is engaged in providing transformational business management applications and technologies and professional consulting services to small and medium size companies, primarily in the manufacturing, distribution and service industries.

We are executing a multi-pronged business strategy centered on recurring revenue, customer retention and on rapidly increasing the size of our installed customer base. The growth of our customer base is accomplished via our traditional marketing programs and acquisitions. After a customer is secured, our strategy is to up-sell and cross-sell, providing the customer with advanced technologies and third-party add-ons that help them digitally transform their business. These add-on products could include application hosting, cybersecurity, warehouse management, human capital management, payment automation, sales tax compliance or any number of other products or services that we represent. Many of these incremental products and services are billed on a subscription basis, often paying monthly for the service, which increases our monthly recurring revenue (“MRR”). This strategy increases the average revenue per customer, which facilitates our continued growth, and reduces our cost of customer acquisition, which enhances our profitability profile.

Our core strength is rooted in our ability to discover and identify the driving forces of change that are affecting – or will affect – businesses in a wide range of industries. We invest valuable time and resources to fully understand how technology is transforming the business management landscape and what current or emerging innovations are deserving of a clients’ attention. By leveraging this knowledge and foresight, our growing list of clients are empowered with the means to more effectively manage their businesses; to capitalize on real-time insight drawn from their data resources; and to materially profit from enhanced operational functionality, process flexibility and expedited process execution.

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”).

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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, Infrastructure-as-a-Service, 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, Connecticut, Southern California, North Carolina, Washington, Oregon and Illinois.

As Microsoft Certified Systems Engineers and Microsoft Certified Professionals, our staff offers a host of mission critical services, including cybersecurity, business continuity, disaster recovery, application hosting, remote network monitoring, server implementation, support and assistance, and technical design of network infrastructure, among other services. We compete with numerous large and small companies in this market sector, both nationally and locally.

Distinguished as one of the largest Acumatica and Sage Software practices in North America, we resell enterprise resource planning software published by both Acumatica and Sage, which addresses the financial accounting requirements of small- and medium-size businesses focused on manufacturing and distribution. We also offer services related to these sales, including design, installation, implementation, support and training. These product sales are primarily packaged software programs installed on a user workstation, on a local area network server, or in a hosted environment. The programs perform and support a wide variety of functions related to accounting, including financial reporting, accounts payable, accounts receivable and inventory management.

We employ consultants and host formal, topic-specific, training classes, both remotely and on-site at our clients’ facilities. Our consultants must pass annual subject matter examinations required by the software publisher to retain their product-based teaching certifications. We also provide end-user technical support services through our support/help desk, which is available during normal business hours, Monday through Friday. Our team of qualified product and technology consultants assist customers that contact us with questions about product features, functions, usability issues and configurations. The support/help desk offers services in a variety of ways, including prepaid services, time and materials billed as utilized and annual support contracts. Our customers can communicate with our support/help desk through email, chat, telephone and fax channels.

Led by specialized project managers, we provide professional services ranging from software customization to data migration to small- and medium-size business consulting.

We also are resellers of the WMS software, which develops warehouse management software for middle market distributors. The primary purpose of a WMS is to control the movement and storage of materials within an operation and process the associated transactions. Directed picking, directed replenishment, and directed put-away are the key to WMS. The detailed setup and processing within a WMS can vary significantly from one software vendor to another. However, the basic WMS will use a combination of item, location, quantity, unit of measure and order information to determine where to stock, where to pick, and in what sequence to perform these operations. The WMS software improves accuracy and efficiency, streamlines materials handling, meets retail compliance requirements, and refines inventory control. WMS also works as part of a complete operational solution by integrating seamlessly with RF hardware, accounting software, shipping systems and warehouse automation equipment. We market the WMS solution to our new and existing medium-sized business clients.

Investing in the acquisition of other companies and proprietary business management solutions has been an important growth strategy for our Company, allowing us to rapidly expand into new geographic markets and create new and exciting profit centers. To date, we have completed a series of strategic ventures that have served to fundamentally strengthen our Company’s operating platform and materially expand our footprint to nearly every U.S. state. More specifically, over the past fifteen years, we have outright acquired select assets of or entered into revenue sharing agreements with Business Tech Solutions Group, Inc.; Wolen Katz Associates; AMP-BEST Consulting, Inc.; IncorTech; Micro-Point, Inc.; HighTower, Inc.; Point Solutions, LLC; SGEN, LLC., ESC, Inc., 2000 SOFT, Inc., Productive Tech Inc., The Macabe Associates, Oates & Co; Pinsight Technology, Inc.; Info Sys Management, Inc., Nellnube, Inc., Partners in Technology Inc., Prairie Technology Solutions Group, Inc., Computer Management Services, LLC, Business Software Solutions, PeopleSense, Inc., Dynamic Tech Services, Inc. and NEO3, LLC. On November 13, 2023, SWK entered into an Asset Purchase Agreement with JCS Computer Resource Corporation (“JCS”), an Illinois corporation pursuant to which SWK acquired from JCS certain assets (the “Acquired Assets”) related to the component of JCS’ business devoted to being a value-added reseller of Sage 100, Sage 50, and QuickBooks software, together with ancillary consulting services related thereto.

Additionally, it is our intention to continue to increase our business by seeking additional opportunities through potential acquisitions, revenue sharing arrangements, partnerships or investments. Such acquisitions, revenue sharing arrangements, partnerships 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.

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As discussed above (see Recent Events – Merger), on September 29, 2022, SilverSun entered into a definitive agreement and plan of merger (the “Rhodium Merger Agreement”) by and among SilverSun, Rhodium Enterprises Acquisition Corp, Rhodium Enterprises Acquisition LLC and Rhodium Enterprises, Inc., an industrial-scale digital asset technology company utilizing proprietary technologies to mine bitcoin. On October 13, 2023, SilverSun terminated the Rhodium Merger Agreement

On December 3, 2023, SilverSun entered into an Investment Agreement (as it may be amended or supplemented, the “Investment Agreement”), with Jacobs Private Equity II, LLC, a Delaware limited liability company (“JPE”), and the other investors party thereto (the “Other Investors,” and together with JPE, the “Investors”), providing for an aggregate investment by the Investors of $1,000,000,000 in cash in SilverSun, including $900,000,000 from JPE (the “Equity Investment”). The Investment Agreement has been unanimously approved by the SilverSun board of directors. Following the closing (the “Closing”) of the Equity Investment (together with all of the other transactions contemplated by the Investment Agreement), JPE will become the controlling stockholder of SilverSun, and Brad Jacobs, the Managing Member of JPE, will become Chairman of the SilverSun board of directors and Chief Executive Officer of SilverSun (see “Recent Events” above for more detail).

Results of Operations

Revenues

Revenues for the year ended December 31, 2023 increased $9,531,665 (21.2%) to $54,516,941 as compared to $44,985,276 for the year ended December 31, 2022. This increase is mostly attributed to increases in professional consulting services and software.

Software sales increased by $2,329,411 (19.8%) to $14,110,773 in 2023 from $11,781,362 in 2022. The increase is primarily attributable to an increase in our ERP software sales, especially for Acumatica and Sage Intacct.

Service revenue increased by $7,202,254 (21.7%) to $40,406,168 in 2023 from $33,203,914 in 2022. This increase is mainly attributed to the increase in professional services, especially for our Acumatica, Sage 100, and Sage Intacct products, as well as an increase in revenue in our hosting services. Recruiting in 2022 was a difficult challenge, but our efforts to increase our consulting staff with additional resources, as well as system improvements, has yielded a positive result in our financial performance. We have also utilized some outside contractors to assist in projects because of our growth.

Gross Profit

Gross profit for the year ended December 31, 2023 increased $3,653,073 (20.3%) to $21,613,809, as compared to $17,960,736 for the year ended December 31, 2022. For the year ended December 31, 2023, the overall gross profit percentage was 39.6%, as compared to 39.9% for the year ended December 31, 2022.

The gross profit attributed to software sales increased $894,448 (19.0%) to $5,598,006 for 2023 from $4,703,558 in 2022, which is due mostly to the increased volume of software sold. For the year ended December 31, 2023, the gross profit percentage for software was 39.7%, as compared to 39.9 % for the year ended December 31, 2022. While revenues may decrease because of the shift to a subscription-based business model, our margins will, for the most part, not significantly change. The mix of products being sold by the Company changes from time to time, which can cause the overall gross margin percentage to vary.

The gross profit attributed to services increased $2,758,625 (20.8%) to $16,015,803 for 2023 from $13,257,178 in 2022. This increase is attributed to revenue increases in professional services and application hosting. For the year ended December 31, 2023 the gross profit percentage for services was 39.6% as compared to 39.9% for the year ended December 31, 2022. This change in gross profit percentage is mostly due to higher costs associated with increasing pay and benefits to employees to retain and recruit their services and to address inflationary pressures in the overall economy, plus the training of new employees, who were hired to accommodate our growth, and who are not as yet as billable as our more experienced team.

Operating Expenses

Selling and marketing expenses increased $1,107,474 (14.3%) to $8,852,739 for the year ended December 31, 2023, as compared to $7,745,265 for the year ended December 31, 2022. This increase is primarily due to increased salary increases, new personnel, higher commissions to employees as a result of the increased revenues, as well as increased travel expenses associated with attendance at trade shows and conferences.

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General and administrative expenses increased $745,532 (7.9%) to $10,217,157 for the year ended December 31, 2023, as compared to $9,471,625 for the year ended December 31, 2022. This increase is a result of salary increases and increased accrued compensation, travel and entertainment, professional and license fees, offset partially by a decrease in credit card fees, lower rent and recruitment expenses.

Share-based compensation decreased $138,763 (77.0%) to $41,497 for the year ended December 31, 2023, as compared to $180,260 for the year ended December 31, 2022. The decrease is primarily due to the issuance of certain stock options in 2021 that were all expensed as these stock options were immediately vested.

Depreciation and amortization expense for the year ended December 31, 2023 was $828,157 as compared to $948,965 for the year ended December 31, 2022. This $120,808 (12.7%) increase is primarily due to the additional amortization of intangible assets related to the new acquisitions.

Income (Loss) from Operations

As a result of the above, the Company had net income from operations of $1,674,259 for the year ended December 31, 2023, as compared to a loss from operations of $385,379 for the year ended December 31, 2022.

Other Expense

For the year ended December 31, 2023, the Company incurred other expense of $2,986,107 related to the termination of the Agreement and Plan of Merger dated as of September 29, 2022 (Notes 15 and Note 2). The Company charged to expense all previously deferred deal related expenses in the amount of $2,986,107. These expenses are recorded as Deal Costs in the accompanying statement of operations in Other Expense.

(Loss) Before Taxes

As a result of the above, the Company had a loss before taxes of $1,367,514 for the year ended December 31, 2023 as compared to a loss before taxes in the amount of $474,403 for the year ended December 31, 2022.

Income Taxes

For the year ended December 31, 2023, the Company recorded tax benefit of $297,419, primarily as a result of the loss for the year.

For the year ended December 31, 2022, the Company recorded a tax benefit of $192,184, primarily as a result of the loss for the year.

State provision requirements were calculated based on the estimated tax rate. The Federal effective rate is higher than the statutory rate primarily due to the non-cash share-based compensation related to the issuance of stock options which are not tax deductible.

Net (Loss) Income

As a result of the above, the Company generated a net loss of $1,070,095 for the year ended December 31, 2023, as compared to a net loss of $282,219 for the year ended December 31, 2022.

Liquidity and Capital Resources

The uncertainty on the economy continues to create uncertainty for the Company in the coming months and quarters. While our Company has not been significantly impacted because of this uncertainty, the potential negative impact on our business, in the future, is impossible to determine at this point, although it is likely that we could suffer negative consequences as many companies go out of business or decrease their technology spending. As such, we need to rely on our own limited resources to weather any economic downturn. 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.

The Company currently has no line of credit or other credit facility with any lender.

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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 in 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 and other markets with solid revenue streams and established customer bases that generate positive cash flow. We continue to seek these opportunities.

At December 31, 2023, future payments of promissory notes are as follows over each of the next four fiscal years:

The Company’s working capital was $273,762 at December 31, 2023 as compared to $2,946,349 at December 31, 2022 mostly due to lower deferred charges, lower prepaid expenses and other current assets and cash offset partially by the decrease in deferred revenues.

During the year ended December 31, 2023, the Company had a net decrease in cash of $1,865,335. The Company’s principal sources and uses of funds were as follows:

Cash provided by operating activities:

The Company provided $583,805 in cash for operating activities for the year ended December 31, 2023, as compared to providing $2,038,392 of cash from operating activities for the year ended December 31, 2022. This decrease in cash provided by operations is primarily because of the increase in loss before taxes as a result of the deal costs and the decrease in deferred revenues offset partially by the increase in deferred charges.

Cash used in investing activities:

Investing activities for the year ended December 31, 2023 used cash of $399,416, as compared to using $188,742 of cash for the year ended December 31, 2022. This increase in cash used is due primarily to an increase in amounts required to acquire businesses or assets as well as higher purchases of property and equipment.

Cash used in financing activities:

For the year ended December 31, 2023 financing activities used cash of $2,049,724 as compared to using cash of $655,134 for the year ended December 31, 2022. The increase in cash used is a result of the cash dividend paid to shareholders in August 2023 as well as increase in payments of long-term debt.

The Company believes that as a result of the growth in business, and the funds on hand, 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 recent economic uncertainty and its effects on the business in the coming quarters. The Company does not anticipate any major capital expenditures in the near future.

For the year ended December 31, 2023, inflation has impacted the Company’s profitability, as it has resulted in increased costs necessary to recruit and retain personnel. As the Company returns back to its pre-Covid marketing and trade show schedules, the higher costs of travel and meals will also have a negative impact on the Company’s profitability.

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Critical Accounting Estimates

We prepare our consolidated financial statements in accordance with U.S. generally accepted accounting principles, which require our management to make estimates that affect the reported amounts of assets, liabilities and disclosures of contingent assets and liabilities at the balance sheet dates, as well as the reported amounts of revenues and expenses during the reporting periods. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations would be affected. We base our estimates on our own historical experience and other assumptions that we believe are reasonable after taking account of our circumstances and expectations for the future based on available information. We evaluate these estimates on an ongoing basis.

We consider an accounting estimate to be critical if: (i) the accounting estimate requires us to make assumptions about matters that were highly uncertain at the time the accounting estimate was made, and (ii) changes in the estimate that are reasonably likely to occur from period to period or use of different estimates that we reasonably could have used in the current period, would have a material impact on our financial condition or results of operations. There are items within our financial statements that require estimation but are not deemed critical, as defined above.

For a detailed discussion of our significant accounting policies and related judgments, see Note 2 of the Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” of this report.

Off Balance Sheet Arrangements

During fiscal 2023, 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.