Business context and reporting period
Asure Software, Inc. provides cloud-based human capital management software and services, primarily to small and midsize businesses. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2021. Amounts below are in millions of dollars, except per-share data.
Financial performance
| Metric | Three months ended September 30, 2021 | Three months ended September 30, 2020 | Nine months ended September 30, 2021 | Nine months ended September 30, 2020 |
|---|---|---|---|---|
| Revenue | $17.981 | $16.015 | $54.951 | $49.077 |
| Gross profit / margin | $10.868 / 60% | $9.073 / 57% | $33.305 / 61% | $28.287 / 58% |
| Operating income (loss) | $(4.073) | $(4.676) | $(9.711) | $(9.592) |
| Net income (loss) | $5.328 | $(4.759) | $7.494 | $(10.470) |
| Diluted earnings (loss) per share | $0.28 | $(0.30) | $0.39 | $(0.66) |
- Quarterly revenue grew 12%; recurring revenue rose 7%, while professional services, hardware and other revenue increased 117%. Nine-month revenue also grew 12%, with recurring revenue up 9%.
- Gross margin improved three percentage points in both comparisons. Management attributed the improvement to higher revenue and more efficient operations.
- Net income was materially affected by a $10.533 employee retention tax credit (ERTC) benefit recorded in the third quarter, covering the first three quarters of 2021. Nine-month results also included an $8.312 gain on extinguishment of debt, principally related to PPP loan forgiveness. The operating loss shows the business remained loss-making before these items.
- Operating expenses rose 9% for the quarter and 14% for the nine months. General and administrative expense increased 18% and 23%, respectively, mainly from personnel, contracting and placement costs.
Cash flow, debt and liquidity
- For the nine months, operating cash flow was negative $1.144, compared with positive $2.296 in 2020. Investing cash outflow was $21.042, including acquisition-related spending; financing cash outflow was $133.990, largely reflecting a $146.206 decrease in client fund obligations.
- Cash and cash equivalents, excluding client funds, were $11.506 at September 30, down from $28.577 at year-end 2020. Funds held for clients were $174.754, with corresponding client fund obligations of $174.372; these funds are restricted to payroll and related client obligations.
- Reported working capital was $17.356, versus $8.208 at December 31, 2020. The working-capital total includes client funds and obligations, so it should not be treated as wholly available liquidity.
- Gross notes payable were $38.321 and the balance-sheet carrying amount, net of financing costs and discount, was $34.714. The company entered a secured facility with Structural Capital for up to $50.000; $30.090 was outstanding and management reported $20.000 available to borrow. The facility bears a stated basic rate of at least 9% and includes payment, covenant and collateral provisions. The prior Wells Fargo credit agreement was terminated.
Changes, outlook and risks
- Two payroll-business asset acquisitions closed on September 30 for stated purchase prices of $24.150 and $14.750, funded through cash, seller notes and 767,000 shares in total. The acquisitions increased goodwill and intangible assets; purchase-price adjustments and earnout terms remain relevant.
- Management said ERTC services contributed to the sharp increase in professional-services revenue and expected that service to benefit results through 2021. The filing provides no formal revenue or earnings guidance and cautions that it cannot assure growth or profitability for the rest of fiscal 2021.
- Management identified COVID-19 effects on clients and employment levels, inflation, supply-chain disruptions, acquisitions and integration, customer attrition, cybersecurity and regulatory compliance, and the ability to generate cash and service or refinance debt as risks. The company noted that per-employee pricing can make recurring revenue sensitive to client headcount.
- No material pending legal proceedings were reported. Management concluded disclosure controls were effective as of September 30, 2021, with no material change in internal control over financial reporting reported for the quarter.
Important facts for investors to verify
- Whether the $10.533 ERTC receivable is eligible, collectible and recognized in the appropriate periods; the credit accounts for a substantial portion of reported profit.
- Underlying operating performance and cash conversion, given continuing operating losses and negative nine-month operating cash flow.
- Actual usable liquidity after excluding restricted client funds, and the facility’s borrowing availability, interest costs, repayment terms and covenant triggers.
- Integration, retention and financial performance of the September acquisitions, including working-capital adjustments, seller notes and contingent consideration.
- How much revenue growth is organic versus acquisition-driven and whether client employment levels and recurring revenue recover as expected.