Asure Software, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; financial statements are unaudited. Dollar amounts below are in millions unless otherwise noted. Asure provides cloud-based human capital management and workplace management solutions.
Financial results and liquidity
- Revenue: $19.30, up 80.0% from $10.73 in Q1 2017. Cloud revenue rose 109.8% to $16.44 and accounted for most of the increase; management attributed nearly all of the cloud-revenue increase to acquisitions.
- Profitability: Gross profit was $13.75, up 65.8%; gross margin fell to 71.2% from 77.3%, which management attributed to a higher share of lower-margin HCM revenue. Operating income was $0.02 versus an operating loss of $0.37. Net loss increased to $1.93 from $1.06; loss per diluted share was $0.15 versus $0.12.
- Expenses and interest: SG&A rose 52.1% to $10.71, primarily due to acquisitions and integration costs. Intangible amortization increased to $1.60 from $0.85. Interest expense and other loss rose to $1.76 from $0.55, reflecting additional borrowing and higher rates.
- Cash flow: Operating activities used $0.90, compared with $1.19 used a year earlier. Investing activities used $38.07, primarily for acquisitions and capitalized costs. Financing activities provided $36.98. Cash declined to $25.81 from $27.79.
- Liquidity: The balance sheet reports $25.81 cash and $2.62 available on the revolver. Funds held for clients of $66.77 are matched by client-fund obligations and should not be treated as unrestricted liquidity. Working capital is reported as $13.67 in the liquidity table, but the MD&A text gives $13.69; the filing does not provide a clear single value.
- Debt: Notes payable totaled $118.76 gross, or $114.59 net of issuance costs and discounts; a further $2.38 was drawn on the revolver. The credit agreement’s $105.00 term-loan balance was outstanding at quarter-end. Management said the company was in covenant compliance. Principal payments are heavily weighted to 2022, when $96.63 is scheduled.
- Other metrics: Deferred revenue was $12.15 current and $1.07 long-term. Approximately $27.3 of remaining performance obligations were expected to be recognized as revenue, with about 70% expected over the next 12 months.
Material changes and notable items
- Three January acquisitions—TelePayroll, Pay Systems and Savers Admin—had total consideration of $30.57. Their acquired goodwill and intangible assets contributed to balance-sheet growth and higher amortization. Goodwill increased to $91.00 from $77.35.
- Revenue growth was primarily acquisition-driven: the January 2018 acquisitions and selected 2017 acquisitions contributed $4.13 and $4.26, respectively, of Q1 2018 cloud revenue, together representing 98% of the cloud-revenue increase.
- On March 29, Asure amended its credit agreement, increasing aggregate available financing to $175 million, including $105 million in term loans, a $5 million revolver, a $25 million delayed-draw acquisition facility and a $40 million accordion. The agreement also revised covenant thresholds and removed the trailing-twelve-month recurring-revenue covenant.
- Adoption of revenue standard Topic 606 produced a $1.50 cumulative adjustment to opening retained earnings for deferred commissions. The filing says there was no Q1 revenue impact; capitalized deferred commissions were $2.33 at March 31.
- Subsequent to quarter-end, Asure disclosed acquisitions or purchases of payroll customer accounts, Austin HR and Occupeye, with stated consideration of approximately $10.45 million, an unspecified amount for Austin HR, and $7.1 million, respectively. The company also made a $175 million shelf registration statement effective in April.
Outlook, risks and contingencies
- Management expects existing cash, operating cash generation and available borrowing capacity to fund operational needs, including debt payments, for at least 12 months. It also said additional capital or debt may be needed to expand operations and pursue acquisitions, and cautioned that financing may not be available on acceptable terms.
- Management said it could not assure revenue growth or profitability for the remainder of 2018. It plans to pursue recurring-revenue growth and further acquisitions; no numerical revenue or earnings guidance was provided.
- Key disclosed risks include acquisition integration and realizing expected synergies, substantial indebtedness and interest costs, access to additional capital, customer retention and market acceptance, competition, cybersecurity and service disruptions, and the ability to manage growth. Management stated that substantial doubt about continuing as a going concern was not probable, subject to the disclosed risks and assumptions.
- The company reported no pending legal proceedings, no off-balance-sheet arrangements and no material changes to previously disclosed risk factors. Disclosure controls were deemed effective as of March 31, 2018.
Important facts for investors to verify
- How much of reported growth is organic versus acquired, and whether acquisitions deliver expected customer retention, revenue contribution and cost synergies.
- Debt balances, interest rates, covenant compliance and the ability to meet scheduled principal payments, particularly the large 2022 maturity.
- Cash conversion and operating cash flow, including working-capital movements and the distinction between corporate cash and client funds.
- The conflicting working-capital figures of $13.67 million and $13.69 million in the filing.
- Final purchase-price allocations for the 2018 acquisitions and the financial effects of post-quarter acquisitions and use of the credit facility.