Asure Software, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise noted. Asure provides cloud-based human capital management software and services to small and medium-sized businesses. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / prior period |
|---|---|---|
| Total revenue | $33.064 | $24.333; up 36% |
| Recurring revenue | $27.956 | $23.004; up 22% |
| Professional services, hardware and other revenue | $5.108 | $1.329; up 284% |
| Gross profit / margin | $24.400 / 74% | $15.464 / 64% |
| Operating income (loss) | $1.963 | $(2.171) |
| Net income (loss) | $0.339; $0.02 per diluted share | $(3.017); $(0.15) per diluted share |
| Net cash provided by operating activities | $4.588 | $2.530 |
| Cash and cash equivalents, excluding client funds | $21.438 at March 31 | $17.010 at December 31, 2022 |
| Working capital | $14.191 at March 31 | $8.093 at December 31, 2022 |
| Debt | $38.379 gross; $35.896 net of unamortized issuance costs and discount | $37.554 gross; $34.901 net at December 31, 2022 |
Revenue growth included approximately $1.874 million more interest earned on client funds, $1.336 million more HR compliance revenue and $1.157 million more AsureMarketplace revenue. The increase in professional services, hardware and other revenue was primarily attributed to non-recurring Earned Retention Tax Credit (ERTC) revenue. Recurring revenue was over 84% of total revenue, versus 94% a year earlier.
Gross margin improved primarily due to higher revenue and more efficient operations, including lower salaries and benefits following consolidation and standardization. Operating expenses increased to $22.437 million from $17.635 million: sales and marketing rose 47% and general and administrative rose 33%, while research and development rose 9%. Net interest expense increased to $1.944 million from $0.820 million, primarily due to the credit facility.
Cash, debt and liquidity
Operating cash flow was $4.588 million. Investing activities used $6.647 million, including purchases of available-for-sale securities; financing activities provided $21.128 million, primarily reflecting a $19.372 million net increase in client fund obligations. The reported $183.111 million ending total of cash, cash equivalents and restricted cash includes $161.673 million held for clients; it should not be treated as freely available corporate cash. Client funds held were $223.465 million and client fund obligations were $225.462 million.
Gross debt included $31.664 million under the senior credit facility and $6.715 million in acquisition-related subordinated notes. The facility carried a 13.75% cash interest rate at quarter-end, plus payment-in-kind interest. Management said it believes liquidity is sufficient for at least the next 12 months, but cautioned that future demands could increase cash use and that additional capital may be needed for growth or acquisitions. The company reported working capital of $14.191 million; this figure includes client-fund balances and short-term deferred revenue.
Outlook, risks and notable items
- No specific numerical revenue or earnings guidance was provided. Management expects revenue growth from new applications, customer acquisition and expansion of existing relationships; it expects revenue mix to remain relatively constant.
- Management describes seasonal patterns: first-quarter revenue and margins are generally higher due to payroll tax forms and ACA filings, and fourth-quarter revenue can benefit from unscheduled payroll runs.
- ERTC revenue presents uncertainty: the filing identifies possible expiration of this revenue stream and changing regulatory interpretation or eligibility requirements. Deferred-payment terms on many ERTC commitments contributed to higher accounts receivable.
- Other disclosed risks include customer employment and business-failure trends, collection of receivables, cybersecurity and service interruptions, privacy and regulatory requirements, competition, access to capital, debt terms, and potential impairment of goodwill or intangible assets.
- Available-for-sale securities had $2.060 million of gross unrealized losses at March 31, 2023. Management said it did not intend to sell the securities and did not expect to sell them before recovery of amortized cost; no impairment of goodwill or intangible assets was recorded during the quarter.
- Subsequent to quarter-end, $587,000 of contingent consideration was added to an acquisition-related note, and in May the company paid $422,000, including interest, to settle a note related to a 2022 acquisition.
- Management reported effective disclosure controls as of March 31, 2023. The company reported no material legal proceedings and no material changes to previously disclosed risk factors.
Key facts for investors to verify
- How much of revenue growth and future cash collection depends on ERTC work, including the timing and collectability of related receivables.
- Whether recurring revenue growth and customer retention can offset any decline in ERTC-related revenue.
- Cash available for corporate use, excluding restricted client funds, and the effect of client-fund balances on reported working capital and cash flow.
- Debt repayment needs, the high credit-facility interest rate, and compliance with any applicable financial covenants.
- Whether higher sales, administration and development spending translates into durable margin improvement and growth.