ASURE Software, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; comparative periods ended June 30, 2018. Unaudited. Unless otherwise stated, dollar amounts are in thousands.
Business context and financial results
Asure provides cloud-based human capital management (HCM) and workspace management software and related services. It reported approximately 10,000 direct clients in 80 countries.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $24,841 | $21,767 | $51,601 | $41,071 |
| Gross profit | $14,990 | $14,547 | $33,052 | $28,294 |
| Gross margin | 60.3% | 66.8% | 64.1% | 68.9% |
| Operating loss | $(1,508) | $(638) | $(1,344) | $(620) |
| Net loss | $(4,967) | $(3,768) | $(7,861) | $(5,693) |
| Net loss per share | $(0.32) | $(0.29) | $(0.51) | $(0.45) |
Recurring revenue rose 15.1% in Q2 and 24.9% for the six-month period. Professional services, hardware and other revenue increased 9.7% and 30.3%, respectively. Six-month cash from operations was $2,842, compared with cash used of $4,996 in 2018. Investing activities provided $21,396, largely reflecting the decrease in funds held for clients, while financing activities used $25,042, including the net change in client fund obligations. Cash and cash equivalents were $14,656 at June 30, 2019.
Financial position and changes versus prior periods
- Revenue grew 14.1% in Q2 and 25.6% for the first six months. Management attributed growth mainly to cloud revenue, acquisitions, and—in the six-month period—higher hardware revenue.
- Gross margin declined year over year, which management attributed to revenue mix, including hardware and professional services and a larger proportion of lower-margin HCM revenue.
- Net losses widened in both comparison periods. Operating expenses increased, including higher R&D and intangible amortization; interest expense also rose, primarily due to higher debt following acquisitions and the credit agreement.
- Working capital was $5,289, down from $11,443 at December 31, 2018. Funds held for clients were $104,628, with corresponding client fund obligations of $105,296; these client balances should be distinguished from resources available for general corporate use.
- Gross notes payable were $120,367, or $116,668 net of debt issuance costs and discount. The revolver had $4,000 outstanding and $1,000 available. The filing separately states $111,648 outstanding under the Second Restated Credit Agreement; investors should review the debt reconciliation and facility components.
- Stockholders’ equity declined to $96,917 from $102,518 at year-end. Goodwill was $116,031; the company reported no goodwill impairment.
Outlook, risks and notable items
- No specific revenue, earnings or margin guidance was provided. Management said it expected available liquidity and operating cash generation to cover operational needs and required debt payments for at least 12 months, and expected covenant compliance over that period. It cautioned that there is no assurance Asure will grow revenue or achieve profitability during the rest of 2019; additional capital or debt may be needed to support growth and acquisitions.
- Management described continued investment in sales, product development, AWS platform migration, new hardware, integrations, and compliance certifications. New hardware releases in Q2 increased inventory needs and affected cash flow.
- The company borrowed an $8,000 delayed-draw term loan in connection with its January 2019 Payroll Maxx acquisition. Its credit agreement was amended to raise the maximum leverage ratio to 6.00:1 for specified 2019 quarter-ends, with reductions thereafter. Asure reported compliance with financial covenants at June 30.
- Asure adopted lease accounting Topic 842 on January 1, 2019, recognizing approximately $8,900 of lease liabilities and $8,200 of right-of-use assets; management said adoption did not materially affect results or liquidity. At June 30, lease liabilities were $7,881.
- Management cited risks including the ability to achieve profitability, customer retention and market acceptance, competition, security and service disruptions, privacy and regulatory changes, acquisition integration, indebtedness, and access to additional capital. It reported no pending legal proceedings, no material change in previously disclosed risk factors, and no off-balance-sheet arrangements.
Important facts for investors to verify
- Reconcile the reported debt balances, credit-facility borrowings, availability, interest costs, and covenant requirements.
- Assess whether recurring/cloud growth can offset lower gross margins, operating losses, and continued interest and amortization costs.
- Review cash conversion and the effects of client funds and obligations, inventory growth, and acquisition spending on liquidity.
- Track management’s stated 12-month liquidity and covenant expectations, as well as progress toward profitability and any need for new financing.