Asure Software, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Unaudited financial statements; dollar amounts below are in thousands, except per-share data. Asure provides cloud-based workforce and workplace management software and services. In March 2016, it acquired Mangrove’s payroll business and COBRAsource benefits-administration assets.
Financial results and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $9,440 | $6,654 | $25,826 | $20,145 |
| Gross margin | $7,414 (78.5%) | $4,904 (73.7%) | $19,894 (77.0%) | $14,864 (73.8%) |
| Operating income (loss) | $982 | $(253) | $1,196 | $157 |
| Net income (loss) | $315 | $(574) | $(1,103) | $(962) |
| Basic and diluted EPS | $0.05 | $(0.09) | $(0.17) | $(0.16) |
- Revenue mix: Q3 cloud revenue was $5,630, up 65.0%; nine-month cloud revenue was $14,881, up 45.9%. Q3 total revenue increased 41.9%; nine-month revenue increased 28.2%. Mangrove contributed $2,120 of Q3 revenue. Maintenance and support revenue declined 24.8% in Q3 and 22.7% year to date.
- Expenses and margins: Q3 operating expenses were $6,432 versus $5,157 a year earlier; nine-month expenses were $18,698 versus $14,707. Nine-month SG&A rose 35.9%, primarily due to Mangrove integration costs. Nine-month other loss was $2,166, including $706 of acquisition-related professional expenses and higher interest expense.
- Cash flow: Operations used $730 in the first nine months of 2016, compared with $1,993 provided in 2015. Investing used $7,750, including $12,000 of acquisition cash outflow; financing provided $7,460. Cash declined from $1,158 at year-end 2015 to $289.
- Balance sheet and liquidity at September 30: Total assets were $62,057, total liabilities $58,573, and stockholders’ equity $3,484. Working capital deficit was $10,741, compared with $8,593 at December 31, 2015. The deficit includes deferred revenue ($8,905), an obligation to provide future services rather than future cash payments. Funds held for clients and corresponding client-fund obligations were each $12,264.
- Debt: Gross notes payable were $31,318, compared with $13,687 at December 31, 2015; net notes payable were $30,563 after issuance costs. Wells Fargo term-loan principal was $25,205, and $2,800 was available on the $3,000 revolver. The Mangrove subordinated note had a $6,000 original principal, 3.5% interest, and March 2018 maturity. The company reported compliance with debt covenants and current payments at September 30.
Changes, outlook, and risks
- Compared with Q3 2015, Asure moved from a net loss to net income, with higher revenue and gross margin. For the first nine months, revenue grew but the net loss widened to $1,103 from $962.
- Management attributed revenue growth chiefly to cloud sales and the Mangrove acquisition, and higher gross margin to revenue mix and Mangrove. The company is integrating Mangrove into AsureForce and continues to emphasize cloud products and direct sales investment.
- No formal numerical earnings or revenue guidance is provided. Management said it expects to generate positive operating cash flow and believes liquidity will cover operations and debt requirements for at least 12 months; it cautioned that cash use could exceed expectations and that future capital may be needed on terms that are not assured. It also said profitability for the remainder of 2016 was not assured.
- Key disclosed risks include customer retention and market acceptance of cloud products, competition and pricing, security or service disruptions, privacy and regulatory changes, sales-cycle variability, acquisition integration and benefits, and the ability to manage growth. No pending legal proceedings were reported as of September 30.
- Subsequent event: The board approved up to $120,000 reimbursement for the CEO’s relocation and executive salary increases effective October 1, 2016; target bonuses for the CEO, CFO, and COO were to take effect January 1, 2017.
Important facts for investors to verify
- Whether Mangrove integration delivers expected revenue, cost savings, and operating cash flow, and how much reported growth reflects the acquisition versus organic performance.
- Cash conversion and working-capital trends, particularly the impact of receivables growth and falling deferred revenue on operating cash flow.
- Debt maturities, interest costs, covenant headroom, and the availability of the $2,800 revolver as leverage requirements step down.
- The sustainability of Q3 profitability given the nine-month net loss, higher SG&A and interest expense, and management’s lack of assurance about full-year profitability.
- The effect of declining maintenance and support revenue as customers migrate to cloud services, and whether cloud growth and gross margins can continue.