Asure Software, Inc. — Q3 2023 Form 10-Q
Business and period. Asure provides cloud-based human capital management software and services to small and medium-sized businesses. This unaudited report covers the quarter and nine months ended September 30, 2023; amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $29.334 | $21.903 | $92.818 | $66.536 |
| Recurring revenue | $23.833 | $19.959 | $74.749 | $61.977 |
| Professional services, hardware and other revenue | $5.501 | $1.944 | $18.069 | $4.559 |
| Gross profit / margin | $21.280 / 73% | $13.647 / 62% | $67.698 / 73% | $41.372 / 62% |
| Operating income (loss) | $0.253 | $(3.708) | $0.764 | $(11.727) |
| Net loss | $(2.206) | $(4.533) | $(5.632) | $(13.410) |
| Loss per share, diluted | $(0.10) | $(0.22) | $(0.27) | $(0.67) |
Revenue grew 34% in Q3 and 40% year to date. Recurring revenue rose 19% and 21%, respectively; growth in non-recurring ERTC-related revenue drove much of the increase in professional services, hardware and other revenue. Gross margin improved by 11 percentage points in both comparisons, which management attributed to revenue growth and more efficient operations. Q3 operating income was positive, but the company remained loss-making after interest and other items. Q3 included a $1.517 million loss on extinguishment of debt.
Cash flow, balance sheet and capital
- Cash flow: Nine-month operating cash flow was $11.835 million, versus $6.957 million a year earlier. Investing activities used $18.176 million and financing activities used $21.400 million. The reported $27.741 million decline in cash, cash equivalents and restricted cash includes movements in client funds. Cash and cash equivalents excluding client funds were $32.787 million at September 30, compared with $17.010 million at year-end 2022.
- Liquidity: Reported working capital was $31.634 million, up from $8.093 million at December 31, 2022. Funds held for clients ($172.503 million) and related client fund obligations ($175.056 million) are associated with payroll and tax services and should not be treated as ordinary corporate liquidity.
- Debt: Asure repaid and terminated its senior credit facility in September, paying $30.927 million, including principal, interest and fees. At quarter-end it had $4.200 million gross debt outstanding under an acquisition-related subordinated note, due September 2026; its balance-sheet carrying value, net of debt costs and discount, was $2.828 million. The company reported no credit facility or line of credit.
- Equity: An August public offering of 3.833 million shares generated approximately $42.982 million net proceeds, based on the two disclosed offering tranches. The cash flow statement reports $45.986 million of net proceeds from issuance of common stock for the nine-month period. Shares outstanding increased to 24.851 million at September 30 from 20.244 million at year-end.
- Client-fund investments: Available-for-sale securities held for clients had fair value of $68.989 million and aggregate unrealized losses of $2.712 million at September 30. Management said it did not intend to sell the securities and did not expect to sell them before recovery or maturity.
Outlook, risks and other notable items
- Management said it believes liquidity is sufficient to support operations for at least the next 12 months, while cautioning that cash needs could exceed expectations and future capital may be needed. The filing provides no specific revenue or earnings guidance.
- The IRS announced a moratorium on processing new ERTC claims through at least December 31, 2023. Asure warned that this could delay services and revenue; ERTC-related revenue is expected to wind down as the program expires, currently expected in 2025. Some customer and partner collections depend on customers first receiving their credits, creating collection risk. The company said its current outlook envisions continued ERTC revenue.
- Management cited risks including ERTC program changes, collection of receivables, customer employment and business conditions, security and regulatory issues, competition, acquisition impacts, and the ability to access additional capital.
- On October 1, 2023, after quarter-end, Asure acquired reseller-partner payroll assets for $8.391 million, comprising $6.891 million cash and a $1.500 million promissory note.
- No material legal proceedings or material changes to internal controls were reported. Management concluded disclosure controls and procedures were effective as of September 30, 2023.
Key facts for investors to verify
- How much revenue, receivables and future cash collection depend on ERTC services, and how the IRS moratorium affects timing and demand.
- Whether operating cash generation can be sustained as receivables rise and deferred revenue declines; nine-month accounts receivable increased $5.014 million in operating cash-flow terms, while deferred revenue used $5.190 million.
- How much of reported cash and working capital is available for corporate needs versus restricted or client-related funds, and how client-fund investment values perform.
- The effects of the share offering and subsequent acquisition on dilution, leverage, integration costs and future liquidity, particularly without a credit facility.