CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Report represent forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results of operations, levels of activity, economic performance, financial condition or achievements to be materially different from future results of operations, levels of activity, economic performance, financial condition or achievements as expressed or implied by such forward-looking statements. Asure has attempted to identify these forward-looking statements with the words "believe," "estimate," "continue," "seek," plan," "expect," "intend," "anticipate," "may," "will," "could" and other similar expressions. Although these forward-looking statements reflect management's current plans and expectations, which we believe are reasonable as of the filing date of this report, they inherently are subject to certain risks and uncertainties. These risks and uncertainties include - but are not limited to - our ability to achieve or sustain profitability; the impact of COVID-19 on the US and global economy, including business disruptions, reductions in employment and an increase in business failures, specifically among our clients; adverse changes in the economy, financial markets, and credit markets, including a continuing high unemployment rate and the impact of low interest rates on the interest we receive on our cash, cash equivalents and investments; delays or reductions in information technology spending; the development of the market for cloud-based workplace applications; product development; market acceptance of new products and product improvements; changes in the forgiveness provisions for loans under the Paycheck Protection Program; our ability to retain or increase our customer base; security breaches; errors, disruptions or delays in our services; privacy concerns and laws; changes in our sales cycle; competition, including pricing pressures, entry of new competitors, and new technologies; intellectual property enforcement and litigation; our ability to obtain additional capital; our ability to hire, retain and motivate employees; our ability to manage our growth; our ability to realize benefits from acquisitions; limited or single sources of supply of key components; the level of our indebtedness; changes in sales may not be immediately reflected in our operating results due to our subscription model; changes inU.S and foreign laws and regulations; changes in the Internet infrastructure; disruptions in computing and communication infrastructure; and changes in accounting standards. Please refer to Part II, Item IA, "Risk Factors" of this Form 10-Q and Part I, Item IA, "Risk Factors" of our most recently filed Annual Report on Form 10-K for a further description of these and other factors. Asure is under no obligation to update any of the forward-looking statements after the date of this Form 10-Q to conform such statements to actual results. OVERVIEW The following review of Asure's financial position as ofSeptember 30, 2020 andDecember 31, 2019 , and results of operations for the three and nine months endedSeptember 30, 2020 and 2019 should be read in conjunction with our 2019 Annual Report on Form 10-K filed with theSecurities and Exchange Commission . Asure's internet website address is http://www.asuresoftware.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available through the investor relations page of our internet website free of charge as soon as reasonably practicable after they are electronically filed, or furnished to, theSecurities and Exchange Commission . Asure's internet website and the information contained in our website or connected to our website is not incorporated into this Quarterly Report on Form 10-Q. Asure is a leading provider of cloud-basedHuman Capital Management ("HCM") software and services and, until its divestiture inDecember 2019 , Workspace Management software solutions. Asure helps small and mid-sized companies grow by helping them build better teams with skills that get them to the next level, stay compliant with ever changing federal, state, and local tax jurisdictions and labor laws, and better allocation of cash so they can spend their financial capital on growing their business rather than back-office overhead that suffocates growth. Asure'sHuman Capital Management suite, named AsureHCM, includes cloud-based Payroll & Tax, HR, and Time & Attendance software as well as HR Services ranging from HR projects to completely outsourcing payroll and HR staff. We also offer these products and services through our network of reseller partners. Asure's platform vision is to help clients grow their business and become the most trusted HCM resource to entrepreneurs everywhere. The Asure product strategy is driven by three primary challenges that prevent businesses from growing: HR complexity, allocation of both human and financial capital, and the ability to build great teams. The AsureHCM suite includes four product lines: AsurePayroll&Tax, AsureHR, AsureTime&Attendance, and AsureHRServices. 21
--------------------------------------------------------------------------------
Table of Contents
For all of Asure's product lines, support and professional services are key elements of our value proposition and overall solution. In addition to state-of-the-art hosting platforms and regular software upgrades and releases, Asure gives clients easy access to our skilled support team. Our services and support representatives are knowledgeable about Asure's solutions and HR best practices as many staff have professional certifications in payroll (CPP) and human resources (PHR and SPHR). Our sales and marketing strategy includes both direct and indirect channels to target small and mid-sized businesses (SMBs) throughoutthe United States . Our direct sales and marketing efforts include marketing directly to SMBs and their trusted advisors which include CPAs, banks, and benefits brokers who frequently refer their clients to HCM vendors. Our indirect model licenses our HCM software to resellers that provide value-add HCM services to their clients. These resellers include pure-play payroll providers focused on a geographic or industry niche as well as CPAs, banks, and benefits brokers that want to expand relationships with their clients directly without referring those clients outside their business. Recent Developments The COVID-19 outbreak has disrupted businesses on a global scale. The rapid spread has resulted in authorities around the world implementing numerous measures to contain the virus, such as business shutdowns, quarantines, shelter-in-place orders and travel bans and restrictions. The pandemic and these containment measures have had, and are expected to continue to have, a substantial negative impact on businesses, especially SMBs. We expect a COVID-19 related decrease in customer demand across all our markets to negatively and materially impact our revenues for the remainder of 2020, with the most significant impact currently expected in the second and third quarters. We implemented cost-saving initiatives in the first quarter of 2020. InApril 2020 , we entered into a loan under the Paycheck Protection Program ("PPP") offered by theU.S. Small Business Administration in a principal amount of$8,856 . InJuly 2020 , we acquired certain assets of a payroll tax business. We did not record any asset impairments or bad debt reserves related to COVID-19 during the first three quarters of 2020, but future events may require such charges. We will continue to evaluate the nature and extent of the COVID-19 outbreak's impact on our financial condition, results of operations and cash flows. RESULTS OF OPERATIONS ($ in thousands)
Three and Nine Months Ended
The following table sets forth, for the fiscal periods indicated, the percentage of total revenues represented by certain items in Asure's Condensed Consolidated Statements of Comprehensive Loss: Three Months Ended September 30, Nine Months Ended September 30, 2020 2019 2020 2019 Revenues 100.0 % 100.0 % 100.0 % 100.0 % Gross margin 56.7 60.3 57.6 63.3 Sales and marketing 22.3 18.2 20.2 16.2 General and administrative 37.1 39.1 35.8 39.2 Research and development 11.3 7.1 8.9 6.4 Amortization of intangible assets 15.1 13.0 14.5 12.9 Total operating expenses 85.9 77.3 79.4 74.7 Interest expense and other, net (2.5 ) (15.2 ) 0.6 (15.3 ) Loss from continuing operations before income taxes (31.7 ) (32.2 ) (21.2 ) (26.7 ) Net loss from continuing operations (29.7 ) (31.5 ) (21.3 ) (27.7 ) 22
--------------------------------------------------------------------------------
Table of Contents Revenue
Our revenue was derived from the following sources:
Three Months Ended September 30, Increase 2020 2019 (Decrease) % Recurring$ 15,273 $ 17,014 $ (1,741 ) (10.2 ) Professional services, hardware and other 742 840 (98 ) (11.7 ) Total$ 16,015 $ 17,854 $ (1,839 ) (10.3 ) Nine Months Ended September 30, Increase 2020 2019 (Decrease) % Recurring$ 47,442 $ 53,429 $ (5,987 ) (11.2 ) Professional services, hardware and other 1,634 2,109 (475 ) (22.5 ) Total$ 49,076 $ 55,538 $ (6,462 ) (11.6 ) Total revenue represents our consolidated revenues, including sales of our payroll and tax services, time and attendance and human resource software, as well as complementary hardware devices to enhance our software products. Recurring revenue consists of cloud revenue, recurring HR consulting revenue, hardware as a service, maintenance and support revenue and interest earned on client funds. Professional services, hardware and other revenue consists of hardware revenue, on-premise software license revenue as well as installation services and other professional services revenue. While revenue mix varies by product, recurring represents over 95% of total revenue. Revenue for the three months endedSeptember 30, 2020 was$16,015 , a decrease of$1,839 , or 10.3%, from$17,854 for the three months endedSeptember 30, 2019 , which excludes revenue from discontinued operations. Recurring revenue decreased primarily due to the impact of COVID and lower interest rates. Revenue for the nine months endedSeptember 30, 2020 was$49,076 , a decrease of$6,462 , or 11.6%, from$55,538 for the nine months endedSeptember 30, 2019 , which excludes revenue from discontinued operations. Recurring revenue decreased primarily due to the impact of COVID and lower interest rates. Although our total customer base is widely spread across industries, our HCM sales are concentrated in small to mid-size businesses. We continue to target small and mid-sized businesses across industries as prospective customers. Geographically, we sell our HCM products primarily inthe United States . In addition to continuing to develop our workforce solutions and release of new software updates and enhancements, we continue to actively explore other opportunities to acquire additional products or technologies to complement our current software and services.
Gross Profit and Gross Margin
Consolidated gross profit for the three months endedSeptember 30, 2020 was$9,073 , a decrease of$1,695 or 15.7%, from$10,768 for the three months endedSeptember 30, 2019 . Gross margin as a percentage of revenue was 56.7% for the three months endedSeptember 30, 2020 as compared to 60.3% for the three months endedSeptember 30, 2019 . Our decline in gross margin is primarily attributable to lower sales volumes, a growing investment in HCM service resources and personnel, maintaining COVID related tax codes, employment levels are also down due to COVID, a migration to secure cloud hosting services and an increase in the amortization of capitalized software costs. 23
--------------------------------------------------------------------------------
Table of Contents
Consolidated gross profit for the nine months endedSeptember 30, 2020 was$28,269 , a decrease of$6,870 or 19.6%, from$35,139 for the nine months endedSeptember 30, 2019 . Gross margin as a percentage of revenue was 57.6% for the nine months endedSeptember 30, 2020 as compared to 63.3% for the nine months endedSeptember 30, 2019 . Our decline in gross margin is attributable to lower sales volumes, a growing investment in HCM service resources and personnel, maintaining COVID related tax codes, employment levels are also down due to COVID, increased amortization of capitalized software costs as well as migration to secure cloud hosting services. Sales and Marketing Expenses Sales and marketing expenses primarily consist of salaries and related expenses for sales and marketing staff, including stock-based expenses, commissions, as well as marketing programs, which include events, corporate communications and product marketing activities. Selling and marketing expenses for the three months endedSeptember 30, 2020 were$3,573 , an increase of$328 from$3,245 for the three months endedSeptember 30, 2019 . The increase in sales and marketing is primarily due to increased personnel costs as we focus on hiring direct sales personnel. Sales and marketing expenses as a percentage of revenue increased to 22.3% for the three months endedSeptember 30, 2020 from 18.2% for the same period in 2019. Selling and marketing expenses for the nine months endedSeptember 30, 2020 were$9,916 , an increase of$908 from$9,008 for the nine months endedSeptember 30, 2019 , primarily due to increased personnel costs as we focus on hiring direct sales personnel. Selling and marketing expenses as a percentage of revenue increased to 20.2% for the nine months endedSeptember 30, 2020 from 16.2% for the same period in 2019.
We continue to expand and increase selling costs as we focus on hiring direct sales personnel, expanding recognition of our brand, and lead generation.
General and Administrative Expenses
General and administrative expenses primarily consist of salaries and related expenses, including stock-based expenses for finance and accounting, legal, internal audit, human resources and management information systems personnel, legal costs, professional fees, and other corporate expenses such as transaction costs for acquisitions. General and administrative expenses for the three months endedSeptember 30, 2020 were$5,947 , a decrease of$1,025 from$6,972 for the three months endedSeptember 30, 2019 , primarily attributable to reduced personnel costs and reduced rent expenses associated with closures of certain facilities we had acquired due to acquisition. General and administrative expenses as a percentage of revenue decreased to 37.1% for the three months endedSeptember 30, 2020 from 39.1% for the same period in 2019. General and administrative expenses for the nine months endedSeptember 30, 2020 were$17,580 , a decrease of$4,199 from$21,779 for the nine months endedSeptember 30, 2019 primarily attributable to a reduction in professional fees that were incurred in the nine months endedSeptember 30, 2019 , as well as reduced rent expenses associated with closures of certain facilities we had acquired due to acquisition. General and administrative expenses as a percentage of revenue decreased to 35.8% for the nine months endedSeptember 30, 2020 from 39.2% for the same period in 2019.
We continue to drive efficiencies within our payroll operations and execute vendor rationalization with the sale of the Workspace Management business in the fourth quarter of 2019.
Research and Development Expenses
Research and development ("R&D") expenses consist primarily of salaries and related expenses, including stock-based expenses for employees supporting our R&D activities.
R&D expenses for the three months endedSeptember 30, 2020 were$1,805 , an increase of$534 , or 42.0%, from$1,271 for the three months endedSeptember 30, 2019 . The increase in R&D expense is primarily attributable to increased personnel costs as well as COVID-19 related initiatives in order to comply with the CARES Act legislation. R&D expenses as a percentage of revenues increased to 11.3% for the three months endedSeptember 30, 2020 from 7.1% for the same period in 2019. 24
--------------------------------------------------------------------------------
Table of Contents
R&D expenses for the nine months endedSeptember 30, 2020 were$4,356 , an increase of$795 , or 22.3%, from$3,561 for the nine months endedSeptember 30, 2019 . The increase in R&D expense is primarily attributable to increased personnel costs as well as COVID-19 related initiatives in order to comply with the CARES Act. R&D expenses as a percentage of revenues increased to 8.9% for the nine months endedSeptember 30, 2020 from 6.4% for the same period in 2019. We will continue to enhance our products and technologies through expansion of our technological resources by increasing headcount and development partnership, as well as through organic improvements and acquired intellectual property. We will continue to expand the breadth of integration between our solutions, allowing direct clients and resellers the ability to easily add and implement components across our entire solution set. We believe that our expanded investment in product, engineering, SaaS hosting, mobile and hardware technologies lays the groundwork for broader market opportunities and represents a key aspect of our competitive differentiation. Native mobile applications, common user interface, expanded web service integration and other technologies are all part of our initiatives. Our development efforts for future releases and enhancements are driven by feedback received from our existing and potential customers and by gauging market trends. We believe we have the appropriate development team to design and enhance our solution suite and integrated platform. We have also made significant investments outside of core R&D into compliance and certifications, including SOC I Type 2 and SOC II Type 2 certifications, GDPR, CCPA, and other initiatives. In the second quarter of 2020, we launched the new Simple Payroll Entry cloud solution for providing clients self-service payroll entry capabilities, with a modern user experience appropriate for small companies. For Asure HR, we developed a new product tier for Advanced HR called Essential HR.Asure Time & Attendance launched our next major release 12.4. Mid-Market HCM released the Asure Mobile app in the Google and Apple stores. The app provides employees quick access to key payroll and benefit information.
Amortization of Intangible Assets
Amortization expense for the three months ended
Amortization expense for the nine months endedSeptember 30, 2020 of$7,123 was consistent with amortization expense of$7,143 for the nine months endedSeptember 30, 2019 . Amortization expense as a percentage of revenue was 14.5% and 12.9% for the nine months endedSeptember 30, 2020 and 2019, respectively.
Interest Expense and Other, net
Interest expense and other, net for the three months endedSeptember 30, 2020 was a loss of$408 compared to a loss of$2,712 for the three months endedSeptember 30, 2019 . Interest expense and other as a percentage of revenue was at (2.5%) and (15.2%) for the three months endedSeptember 30, 2020 andSeptember 30, 2019 , respectively. Interest expense and other for the three months endedSeptember 30, 2020 is composed of interest expense on notes payable. Interest expense and other for the three months endedSeptember 30, 2019 is composed primarily of interest expense on notes payable. Interest expense and other, net for the nine months endedSeptember 30, 2020 was a gain of$302 compared to a loss of$8,495 for the nine months endedSeptember 30, 2019 . Interest expense and other as a percentage of revenue was at 0.6% and (15.3%) for the nine months endedSeptember 30, 2020 andSeptember 30, 2019 , respectively. Interest expense and other for the nine months endedSeptember 30, 2020 is composed of income from the transition services agreement with FM:Systems in relation to the sale of the Workspace business in 2019, offset by interest expense on notes payable. Interest expense and other for the nine months endedSeptember 30, 2019 is composed primarily of interest expense on notes payable. Income Taxes For the three months endedSeptember 30, 2020 and 2019, we recorded an income tax benefit attributable to continuing operations of$(325) and$(130) , respectively, an increase of$195 , or 149.6%. For the nine months endedSeptember 30, 2020 and 2019, we recorded an income tax expense attributable to continuing operations of$71 and$512 , respectively, a decrease of$441 , or 86.2%. 25
--------------------------------------------------------------------------------
Table of Contents
Loss From Continuing Operations
We incurred a loss from continuing operations of$4,759 , or$0.30 per share, during the three months endedSeptember 30, 2020 , compared to a loss from continuing operations of$5,624 , or$0.36 per share, during the three months endedSeptember 30, 2019 . Loss from continuing operations as a percentage of total revenues was 29.7% and 31.5% for the three months endedSeptember 30, 2020 and 2019, respectively. We incurred a loss from continuing operations of$10,475 , or$0.66 per share, during the nine months endedSeptember 30, 2020 , compared to a loss from continuing operations of$15,359 , or$0.99 per share, during the nine months endedSeptember 30, 2019 . Loss from continuing operations as a percentage of total revenues was 21.3% and 27.7% for the nine months endedSeptember 30, 2020 and 2019, respectively. We intend to continue to implement our corporate strategy for growing our software and services business by investing in areas that directly generate revenue and positive cash flows for the Company. However, uncertainties and challenges remain, including the effects of COVID-19, and there can be no assurance that we can successfully grow our revenues or achieve profitability during the remainder of fiscal year 2020.
LIQUIDITY AND CAPITAL RESOURCES (Amounts in thousands)
September 30, 2020 December 31, 2019 Working capital $ 477 $ 17,854 Cash and cash equivalents 12,939 28,826 Nine Months Ended September 30, 2020 2019
Net cash (used in) provided by operating activities $ (1,717 )
$ 3,923 Net cash (used in) provided by investing activities (64,687 ) 36,552 Net cash provided by (used in) financing activities 50,517 (43,310 ) Working Capital. We had working capital of$477 atSeptember 30, 2020 , a decrease of$17,377 from working capital of$17,854 atDecember 31, 2019 . Working capital as ofSeptember 30, 2020 andDecember 31, 2019 includes$3,585 and$5,500 of short-term deferred revenue, respectively. Deferred revenue is an obligation to perform future services. We expect that deferred revenue will convert to future revenue as we perform our services, but this does not represent future payments. Deferred revenue can vary based on seasonality, expiration of initial multi-year contracts and deals that are billed after implementation rather than in advance of service delivery.
Operating Activities. Net cash used in operating activities of
Investing Activities. Net cash used in investing activities of$64,687 for the nine months endedSeptember 30, 2020 is primarily due to the net change in funds held for clients and our acquisition of a payroll tax business during the quarter. Net cash provided by investing activities of$36,552 for the nine months endedSeptember 30, 2019 is primarily due to the net change in funds held for clients offset by the acquisition from first quarter of 2019. Financing Activities. Net cash provided by financing activities was$50,517 for the nine months endedSeptember 30, 2020 , which primarily consisted of a net increase in client fund obligations of$53,465 and payments of notes payable of$12,171 offset by proceeds of notes payable of$8,856 . Net cash used in financing activities was$43,310 for the nine months endedSeptember 30, 2019 . We incurred$8,000 of indebtedness, resulting in a source of cash. This was offset by debt financing fees of$1,102 and the net change in client fund obligations of$49,964 . 26
--------------------------------------------------------------------------------
Table of Contents
Sources of Liquidity. As ofSeptember 30, 2020 , Asure's principal sources of liquidity consisted of approximately$12,939 of cash and cash equivalents, cash generated from operations of our business over the next twelve months, and$4,500 available for borrowing under our Wells Fargo revolver. Due to the effects of Covid-19 on our business, we were not in compliance with our minimum EBITDA financial covenant as ofMarch 31, 2020 . This covenant was set inDecember 31, 2019 , before the Covid-19 pandemic and its possible effects on our business were known to our senior lender or us. OnJuly 10, 2020 , our senior lender issued a reservation of rights letter related to our failure to comply with the minimum EBITDA financial covenant, along with other technical defaults. See Part II, Item 3 for more information about this default and our senior lender's reservation of rights letter. Following this default, we negotiated and entered a waiver and amendment to our Credit Agreement and our Amended and Restated Guaranty and Security Agreement (the "Amendment") onAugust 10, 2020 . The Amendment reduced our facility from$30,000 to$15,000 , consisting of$10,000 in term loans and a$5,000 revolver. As a result, we were required to make a principal payment of$9,750 on our outstanding term loans. The Amendment provides for an accordion feature to our term loan that would allow us to borrow up to an additional$15,000 in term loans subject to certain conditions following the Covenant Conversion Date, which is described below.
The Fourth Amendment also reset our financial covenants and added a new financial covenant for minimum recurring revenue.
The Amendment does not require that we meet our fixed charge ratio or leverage ratio covenant until the Covenant Conversion Date. The Coverage Conversion Date is the earlier ofAugust 10, 2022 or the date in which we have satisfied the fixed charge coverage ratio and leverage ratio for two consecutive reporting periods. Until such time, we are only obligated to comply with our minimum EBITDA and minimum recurring revenue covenants. In addition to the requirement that we pay$9,750 on our outstanding term loans, we were also required to pay our senior lender an amendment fee of$225 . Our senior lender waived any prepayment penalty that would have otherwise been due on the$9,750 payment toward our term loan and agreed that we would not owe a prepayment penalty if we were to refinance our facility beforeDecember 31, 2021 . Finally, as a condition to the amendment, our senior lender required that we agree to obtain lender consent for any acquisitions until the later ofAugust 10, 2021 or the Covenant Conversion Date. Previously certain types of acquisitions were deemed permitted acquisitions, which did not require our lender's consent. We do not anticipate an issue with obtaining consent from our lender for accretive acquisitions. We had sufficient cash on hand to make the required payment of$9,750 in connection with the Fourth Amendment and expect to have enough cash on hand to meet our future business needs. Further, we expect to comply with our financial covenants in future quarters under the Credit Agreement, as amended by the Fourth Amendment. Due to the effects of Covid-19 on our business and the related need to support our operations, we applied for and received a loan from Pinnacle Bank under the Paycheck Protection Program during the second quarter of 2020. Under the terms of our note with Pinnacle Bank, principal payments would have begun inNovember 2020 . However, theSmall Business Administration , who administers loans issued under the Paycheck Protection Program, has issued guidance, deferring all payments that would be owed on this loan until theSmall Business Administration makes a decision on our loan forgiveness application. While we expect that the entire loan will be forgiven, we cannot be certain that theSmall Business Administration will grant forgiveness of our entire loan. If we do not receive forgiveness of our entire loan, we will be obligated to begin repaying the portion of the principal and interest that is not forgiven such that it is fully paid no later thanApril 15, 2022 , unless we are able to negotiate new payment terms with Pinnacle Bank. We intend to apply for forgiveness of this loan in the fourth quarter of 2020. Given this, we expect that payments we may owe, if any, would not start until second quarter of 2021. Under GAAP, we are required to report this entire loan as outstanding debt in our financial statements and further identify the current portion of this debt (e.g. amounts which would be payable in the next 12 months) with reference to the actual terms of our note with Pinnacle Bank. Notwithstanding how this loan is reported in our financial statements, we do not expect to make any payments on this note until at least second quarter of 2021, and then only to the extent that any portion of this note is not forgiven in accordance with the terms of the Paycheck Protection Program. Thus, we do not anticipate our obligations to Pinnacle Bank to have a material effect on our liquidity needs in the next twelve months. 27
--------------------------------------------------------------------------------
Table of Contents
OFF-BALANCE SHEET ARRANGEMENTS
As of
COMMITMENTS AND CONTINGENCIES None. CRITICAL ACCOUNTING POLICIES
Information regarding recent accounting pronouncements is provided in Note 2, Significant Accounting Policies, to the Condensed Consolidated Financial Statements. Such information is incorporated by reference herein.
© Edgar Online, source