Asure Software, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Unless otherwise stated, financial amounts are in thousands of dollars. Asure provides cloud-based time-and-labor and workspace-management software, alongside hardware, maintenance, and professional services.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $6,654 | $7,030 | $20,145 | $20,105 |
| Gross margin | $4,904 (73.7%) | $5,435 (77.3%) | $14,864 (73.8%) | $15,579 (77.5%) |
| Operating income (loss) | $(253) | $520 | $157 | $1,237 |
| Net income (loss) | $(574) | $161 | $(962) | $(354) |
| Basic and diluted EPS | $(0.09) | $0.03 | $(0.16) | $(0.06) |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $1,993 | $1,671 |
| Cash at period end | September 30, 2015: $122 | September 30, 2014: $1,637 |
- Q3 revenue declined 5.3%; nine-month revenue was nearly flat, up 0.2%. Nine-month cloud revenue was essentially unchanged at $10,201, while hardware revenue increased 41.7% to $2,467. Maintenance and support declined 6.4%, and professional services declined 14.6%.
- Gross margin contraction reflected an unfavorable shift in revenue mix. Q3 SG&A rose 8.8% to $3,866; management attributed higher selling costs partly to reorganizing and expanding the sales team for larger enterprise and global opportunities. Nine-month SG&A increased 5.0%.
- Nine-month net loss widened to $962 from $354. Comparability was affected by 2014’s $1,034 gain on settlement of PeopleCube litigation and $1,402 debt-refinancing loss; 2015 included a $110 lease-termination loss.
- Nine-month investing cash outflow was $1,272, primarily for property and equipment. Financing cash outflow was $914; the cash flow statement reports debt proceeds of $4,250 and debt payments of $5,527. Cash fell by $198 during the period.
Financial position, debt, and liquidity
- At September 30, 2015, total assets were $33,641 and stockholders’ equity was $4,422. Working capital deficit was $8,307, compared with $7,314 at December 31, 2014; current liabilities included $10,125 of deferred revenue.
- Notes payable totaled $13,876, including $938 current and $12,938 long-term. The Wells Fargo term loan carried a stated 5.00% rate and matured in March 2019. No revolving loan was outstanding, and the filing says none was available to borrow at quarter end.
- Asure was not compliant with its leverage-ratio and fixed-charge-coverage covenants at September 30. A November 11, 2015 amendment waived that noncompliance and increased the applicable LIBOR margin; Asure agreed to pay at a 4.50-percentage-point margin through the leverage-testing period ending September 30, 2016. Management expected covenant and payment compliance over the next 12 months.
- Management said it expected operating cash generation to support operations and debt payments for at least 12 months, but cautioned that cash use could exceed expectations and that additional capital might be needed; there was no assurance it could be raised on acceptable terms or at all.
Outlook, risks, and other notable items
- Management planned to focus on growing existing products and recurring revenue, investing selectively in revenue-generating areas, and exploring acquisitions; no acquisition agreement was in place. It stated there could be no assurance of revenue growth or profitability for the remainder of 2015.
- Disclosed risks include competition and pricing pressure, customer retention and market acceptance of cloud products, security or service disruptions, sales-cycle changes, hiring and growth management, acquisition integration, and the possibility that subscription sales changes may not immediately affect reported results.
- The FotoPunch acquisition earnout liability was $262 at quarter end, measured using Level 3 assumptions; no earnout consideration was payable as of June 30, 2015. The Roomtag acquisition note was repaid in August 2015 for $722.
- Management reported disclosure controls were effective as of September 30, 2015 and no material change in internal control over financial reporting during the quarter. The filing reported no pending legal proceedings.
Most important facts for investors to verify
- Whether the November 2015 covenant waiver and amended pricing terms remain in effect, and whether subsequent covenant tests were met.
- Whether operating cash generation can sustain debt service given only $122 of quarter-end cash and the working capital deficit.
- Whether revenue mix, gross-margin pressure, and declines in maintenance and professional-services revenue improve or persist.
- Whether sales-force investment produces growth sufficient to offset increased SG&A and restore profitability.
- Whether the filing’s financing-cash-flow discussion contains a wording error: the cash flow statement shows net cash used in financing of $914, while the MD&A paragraph inconsistently calls it cash provided.