ASURE Software, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Unaudited consolidated results; dollar amounts below are in millions unless stated otherwise.
Business context
Asure provides cloud-based human capital management and workplace-management software, services and related hardware. Reported growth was supported substantially by 2017 and 2018 acquisitions, alongside the company’s continued focus on integrated cloud offerings.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $23.458 | $15.527 | $64.529 | $39.134 |
| Gross profit | $14.987 | $12.131 | $43.281 | $30.474 |
| Gross margin | 63.9% | 78.1% | 67.1% | 77.9% |
| Operating income (loss) | $(2.026) | $0.448 | $(2.646) | $(0.530) |
| Net income (loss) | $(3.584) | $(1.281) | $(9.277) | $(4.177) |
| Diluted loss per share | $(0.24) | $(0.10) | $(0.68) | $(0.40) |
- Q3 cloud revenue rose 66.2% to $18.390; professional services increased 39.3% to $2.347. Maintenance and support declined 28.9% to $1.264. Nine-month cloud revenue rose 84.5% to $51.149.
- Gross margin fell year over year, which management attributed partly to product mix, inventory write-offs and capitalized-software amortization; a larger share of lower-margin HCM revenue also weighed on the nine-month margin.
- Q3 operating expenses were $17.013, including $11.052 SG&A, $3.514 R&D and $2.447 intangible amortization. Higher acquisition-related costs, integration expenses, R&D and amortization contributed to losses.
- Net interest expense was $2.350 in Q3 and $6.832 for the first nine months, higher than comparable 2017 periods following increased borrowing and a higher rate on part of the debt. Q3 included $0.489 of other income from release of contingent consideration.
Cash flow, liquidity and debt
- For the first nine months, operating cash flow was negative $6.062 (versus negative $2.083 in 2017); investing cash flow was negative $53.788, principally reflecting acquisitions; financing cash flow was positive $51.380.
- Cash and equivalents were $19.194 at September 30, down from $27.792 at year-end 2017. Reported working capital was $17.844. Funds held for clients of $71.176 are substantially matched by client-fund obligations of $71.699 and should not be viewed as ordinary operating liquidity.
- Gross notes payable were $116.640; the balance sheet reported $113.068 net of debt issuance costs and discounts. Debt included $104.476 under the Wells Fargo credit agreement and $12.164 in acquisition-related subordinated notes. The company reported $5.000 available on its revolver and a $25.000 delayed-draw term-loan commitment.
- In June, Asure issued 2.375 million shares at $17.50 per share and reported approximately $38.910 net proceeds. The filing’s cash-flow statement reports net stock-issuance proceeds of $39.156.
- Management said it expected sufficient liquidity for at least 12 months and was in compliance with debt covenants at quarter-end. However, the filing identifies the nine-month net loss and operating cash outflow as indicators of substantial doubt about going concern, which management said its liquidity outlook mitigated. Additional capital or debt may be needed for growth and acquisitions, and financing may not be available on acceptable terms.
Changes, outlook and notable items
- During 2018, Asure completed several acquisitions, including Pay Systems, USA Payroll and the Evolution Payroll customer portfolio. Acquisition accounting added $31.632 of goodwill and $36.960 of amortizable intangibles for the business acquisitions; preliminary valuations remained subject to change.
- Reported revenue growth does not show the comparison as if acquisitions had been owned throughout both periods. On that unaudited pro forma basis, revenue was $23.458 versus $27.163 for Q3 and $70.645 versus $76.590 for the nine months ended September 30, 2018 and 2017, respectively; pro forma losses also increased. The company cautions that these figures are not necessarily indicative of actual or future results.
- Management planned continued investment in products and revenue-generating areas and continued to explore acquisitions, but gave no quantified forward guidance and said it could not assure revenue growth or profitability for the remainder of 2018.
- Asure adopted the new revenue-recognition standard in 2018. It reported no revenue impact, but capitalized eligible customer-acquisition commissions; the filing reports a $1.502 cumulative adjustment to opening retained earnings. The company expected adoption of the new lease standard in 2019 to materially increase reported assets and liabilities.
- Forward-looking risks include customer retention and market acceptance, service interruptions and security or privacy issues, competition, acquisition integration and benefits, indebtedness, and access to capital. No pending legal proceedings or off-balance-sheet arrangements were reported; management said disclosure controls were effective.
Important facts for investors to verify
- Reconcile the nine-month revenue figure: the financial statements and revenue table report $64.529, while one MD&A sentence states $64.259.
- Review cash generation, working-capital movements, debt maturities and covenant headroom, including the distinction between unrestricted cash and client funds.
- Assess whether acquisition-driven growth can translate into sustainable organic growth, improved gross margins and positive operating cash flow; compare reported and pro forma trends.
- Monitor the company’s going-concern disclosures, liquidity assumptions and potential need for additional financing, as well as the impact of acquisition valuations and future amortization.