Business context and reporting period
Asure Software, Inc. filed this Form 10-K for the fiscal year ended December 31, 2017. The company provides cloud-based human capital management (HCM), payroll, time and labor, benefits, and workplace-management solutions. It reports one operating segment. This is an annual report; it does not provide standalone fourth-quarter results.
Financial performance and liquidity
Amounts below are in U.S. dollars; financial statement amounts are presented in millions unless otherwise noted.
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $54.4 | $35.5 |
| Gross profit / margin | $41.8 / 76.8% | $27.4 / 77.2% |
| Operating income (loss) | ($1.0) | $1.2 |
| Net income (loss) | ($5.7) | ($1.0) |
| Net loss per share, basic and diluted | ($0.53) | ($0.15) |
| Cash used in operating activities | $0.04 | $2.0 |
| Cash used in investing activities | $58.5 | $18.8 |
| Cash provided by financing activities | $73.5 | $32.3 |
- Cloud revenue grew 90.6% to $39.3 million and accounted for most of the $18.9 million increase in total revenue. Acquisitions contributed $17.1 million of cloud revenue; management also cited growth in Mangrove and organic Asure cloud revenue.
- Operating expenses rose to $42.8 million from $26.2 million. SG&A increased 61.0% to $33.9 million, reflecting acquisition and integration costs, a full year of Mangrove expenses, higher headcount, and increased selling costs. Intangible amortization rose to $4.5 million.
- Interest expense and other loss increased to $4.6 million from $2.0 million, primarily due to higher acquisition-related debt. Income tax expense was $96,000; the filing reports a 1.7% effective tax rate for 2017.
- At year-end, cash and cash equivalents were $27.8 million and working capital was $17.0 million. Cash used in operations was close to break-even, while investing outflows included $45.4 million for acquisitions and $10.2 million of net changes in client funds.
- Gross notes payable were $78.1 million, versus $30.7 million in 2016; the balance-sheet carrying amount after debt issuance costs was $75.9 million. The company had $5.0 million available on its revolver and reported compliance with debt covenants at December 31, 2017.
- Goodwill and net intangible assets totaled $110.9 million, about 56% of total assets. No goodwill or intangible-asset impairment was recorded for the periods presented.
Material changes versus the prior year
- Revenue increased 53.2%, substantially reflecting acquisitions and cloud growth. Gross margin edged down 0.4 percentage points to 76.8%.
- The company completed six acquisitions during 2017: PMSI, Corporate Payroll’s payroll division, Payroll Specialties NW, iSystems, Compass HRM, and Associated Data Services. The acquisitions expanded payroll, HCM, HR outsourcing, and service-bureau operations.
- To fund growth and acquisitions, Asure amended and expanded its credit agreement and issued 2.185 million common shares in a June 2017 public offering, receiving net proceeds of $27.8 million. Outstanding shares increased to 12.492 million at year-end from 8.517 million a year earlier.
- Net loss widened to $5.7 million from $1.0 million, and the company moved from operating income to an operating loss. Management attributed higher expenses to growth, acquisitions, integration, and increased financing costs.
Outlook, risks, and unusual items
- No numerical revenue or earnings guidance is provided. Management said it expected sufficient liquidity for operating needs and debt payments for at least 12 months from issuance of the financial statements, but also said further capital or borrowing may be needed to fund growth and additional acquisitions.
- In January 2018, Asure completed three additional acquisitions for total consideration of $30.6 million; $25.3 million was paid in cash, with the remainder funded through promissory notes and common stock. These transactions occurred after the reporting date.
- Management cited continuing integration, revenue-growth, profitability, and positive-cash-flow challenges. Key risks include substantial debt and covenant requirements, acquisition integration and financing, customer retention, competition, cybersecurity and service interruptions, and privacy regulation, including the GDPR taking effect in May 2018.
- The company reported no pending legal proceedings as of December 31, 2017. The independent auditor gave an unqualified opinion on the financial statements and on internal control over financial reporting. Newly acquired subsidiaries representing 39.5% of assets and 18.3% of revenue were excluded from the 2017 internal-control assessment and audit.
- The Tax Cuts and Jobs Act resulted in provisional tax accounting; the filing notes that estimates could change as the company completes its analysis. The company also reported $130.1 million in federal net operating loss carryforwards, subject to potential ownership-change limitations.
Important facts for investors to verify
- How much of the reported revenue growth and recurring cloud revenue is organic versus acquired, and whether acquired operations are meeting integration and synergy expectations.
- Whether operating performance and cash generation can support debt service, scheduled principal payments, covenant requirements, and the January 2018 acquisitions without additional financing.
- Customer retention, renewals, and subscription growth, including the effect of migrations from on-premise licenses to cloud offerings.
- The impact of the 2018 revenue-recognition standard, Tax Act estimates, and any ownership-change limits on tax attributes.
- Progress in integrating acquired entities into internal controls and managing data-security, privacy, and service-continuity risks.