ASURE SOFTWARE, INC. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; comparisons are with fiscal 2017. Unless otherwise noted, financial figures are in millions of dollars. The filing was signed March 19, 2019.
Business context
Asure provides cloud-based human capital management (HCM), payroll, workforce time-and-labor, and workspace-management software and services. It reported one operating segment and approximately 10,000 direct clients in 80 countries. Growth strategy includes expanding cloud offerings, sales capacity, and acquisitions.
Financial performance and liquidity
| Metric | 2018 | 2017 | Change or context |
|---|---|---|---|
| Total revenue | $88.952 | $54.442 | Up 63.4%; growth reflects acquisitions as well as new sales and recurring cloud revenue. |
| Cloud revenue | $68.887 | $39.267 | Up 75.4%. |
| Gross profit / margin | $58.122 / 65.3% | $41.823 / 76.8% | Profit rose, but margin fell, which management attributed to product mix. |
| Operating loss | $(6.263) | $(1.000) | Loss widened with higher operating costs. |
| Net loss | $(7.548) | $(5.722) | Loss widened 31.9%; basic and diluted loss per share was $(0.54) versus $(0.53). |
| Interest expense and other | $(8.514) | $(4.626) | Increase primarily reflected higher debt balances. |
| Cash from operations | $(7.129) | $(0.036) | Use of cash increased. |
| Cash from investing | $(107.228) | $(58.492) | 2018 use primarily included acquisitions and changes in client funds. |
| Cash from financing | $101.788 | $73.541 | Included debt proceeds and public stock offerings. |
| Cash and cash equivalents | $15.444 | $27.792 | Year-end balance; separate from funds held for clients. |
| Working capital | $11.443 | $17.026 | Down $5.583, mainly due to acquisition spending and operating cash use. |
| Gross debt | $115.176 | $78.097 | Net carrying amount at year-end was $111.962 after debt issuance costs. |
Year-end balance sheet totals were $361.100 in assets, $258.582 in liabilities, and $102.518 in stockholders’ equity. The $122.206 of funds held for clients was matched by $123.170 of client fund obligations; these balances relate to payroll and tax payments and should be distinguished from unrestricted liquidity.
The company reported $5.000 available under its revolving line at year-end. It said it expected available liquidity and operating cash generation to support operations and debt payments for at least 12 months, while noting that additional capital or debt might be needed to support growth and acquisitions. The credit agreement matures May 25, 2022; the company reported covenant compliance at December 31, 2018.
Material changes and unusual items
- 2018 acquisitions included Pay Systems of America, the Evolution Payroll customer portfolio, USA Payroll, Occupeye, and other smaller transactions. Acquisition spending contributed materially to revenue growth and investing cash outflows.
- SG&A increased 39.7% to $47.333, including acquisition and integration costs, increased headcount and selling costs, and investment in a new ERP and financial reporting processes. R&D rose 87.5% to $8.360, including AWS migration and product and compliance investments. Intangible amortization increased 94.1% to $8.692.
- In June 2018, Asure raised approximately $39 million net through an offering of 2.375 million shares at $17.50 per share. Share issuance increased weighted-average shares to 14.010 million from 10.891 million.
- The 2018 income tax benefit of $7.229 mainly reflected a release of valuation allowance, including effects of acquisitions and tax attributes; it reduced the reported net loss despite a $14.777 pre-tax loss. The company continued to maintain a valuation allowance against domestic deferred tax assets.
- Adoption of Topic 606 had no reported revenue impact. It resulted in a $1.502 opening retained-earnings adjustment related to capitalized deferred commissions; commissions are amortized over estimated customer lives of five to ten years.
- Unaudited pro forma results assuming 2017 and 2018 acquisitions had occurred from January 1, 2017 showed revenue of $99.388 in 2018 versus $100.989 in 2017, and net losses of $6.112 and $16.797, respectively. These figures are not actual reported results and exclude certain potential synergies and non-recurring costs.
Outlook, risks, and contingencies
No specific revenue, earnings, or cash-flow guidance was provided. Management described ongoing product development, cloud migration, sales expansion, and acquisition activity, but stated there could be no assurance of revenue growth, profitability, or positive cash flows in 2019. In January 2019, Asure acquired Payroll Maxx, borrowed an additional $8.000 under a delayed-draw term loan, and amended leverage covenant thresholds.
- Key financial risks include continued losses, operating cash use, higher interest costs, substantial debt, restrictive leverage and fixed-charge covenants, and reliance on access to capital to fund growth and acquisitions.
- Business risks include acquisition integration and execution, intense competition, customer renewals and retention, and the ability to convert investment and revenue growth into improved margins and cash generation.
- As a processor of sensitive employee and payroll data, Asure faces cybersecurity, service interruption, privacy, and regulatory risks, including GDPR compliance. It also identified risk of client payment shortfalls and possible losses or liquidity needs related to client funds.
- Goodwill and intangible assets totaled approximately 52% of assets; impairment could materially affect earnings. The filing reported no goodwill or finite-lived intangible impairment for the periods presented.
- The company reported no pending material legal proceedings. Its auditor gave an unqualified opinion on the financial statements and an unqualified opinion on internal control effectiveness. The internal-control assessment excluded acquired subsidiaries representing 30.9% of assets and 19.5% of revenue.
Important facts for investors to verify
- How much of reported revenue growth reflects acquired businesses versus organic growth, and whether the pro forma revenue trend is indicative of underlying performance.
- Whether gross margin stabilizes and operating expenses, interest expense, and cash use improve as acquisitions are integrated.
- Debt balances, scheduled repayments, interest-rate exposure, covenant headroom, and availability of the remaining credit and equity financing capacity.
- Unrestricted liquidity and payroll/client-fund obligations, including the company’s ability to meet client payment obligations if customers lack sufficient funds.
- Acquisition integration progress, customer retention, and the realization of expected product, cost, and cross-selling benefits.
- Tax-asset realizability and potential ownership-change limits on the use of approximately $110 million of federal net operating losses and research credits.
- Completion and effectiveness of internal controls at the subsidiaries excluded from the 2018 assessment, along with progress on cybersecurity, privacy, and service-continuity safeguards.