Asure Software, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Asure provides cloud-based human capital management software and services, primarily to small and mid-sized businesses. The company sold its Workspace Management business in December 2019; 2020 results reflect continuing operations.
Financial results
Amounts below are in millions, except per-share figures and percentages.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $16.0 | $17.9 | $49.1 | $55.5 |
| Gross profit / margin | $9.1 / 56.7% | $10.8 / 60.3% | $28.3 / 57.6% | $35.1 / 63.3% |
| Operating loss | $(4.7) | $(3.0) | $(10.7) | $(6.4) |
| Loss from continuing operations | $(4.8) | $(5.6) | $(10.5) | $(15.4) |
| Net loss | $(4.8) | $(3.4) | $(10.5) | $(11.2) |
| Loss per share, continuing operations | $(0.30) | $(0.36) | $(0.66) | $(0.99) |
Recurring revenue, over 95% of total revenue, fell 10.2% in Q3 and 11.2% year to date. Management attributed the declines mainly to COVID-19 and lower interest rates. Q3 operating loss widened despite lower general and administrative costs; sales, R&D and amortization costs increased or remained relatively high against lower revenue. The 2019 net-loss comparisons include income from discontinued operations of $2.3 million for Q3 and $4.1 million year to date, so continuing-operations losses provide a more comparable view.
Cash flow, liquidity and debt
- Cash and cash equivalents were $12.9 million at September 30, 2020, down from $28.8 million at year-end 2019. Working capital was $0.5 million, versus $17.9 million. Client funds and matching obligations are substantial and should be distinguished from operating liquidity.
- Nine-month operating cash flow was $(1.7) million, versus $3.9 million provided in 2019. Investing cash flow was $(64.7) million, largely reflecting a $53.1 million net increase in funds held for clients and the payroll-tax business acquisition. Financing cash flow was $50.5 million, largely reflecting a $53.5 million increase in client-fund obligations.
- Notes payable totaled $24.1 million gross, or $23.7 million net of issuance costs and discount; $10.8 million net was classified current and $12.9 million long-term. Debt included an $8.9 million PPP loan. The Wells Fargo facility was amended in August: it now comprises $10 million of term loans and a $5 million revolver, of which $4.5 million was available at quarter-end.
- In July, the senior lender had reserved rights after covenant and technical defaults, including failure to meet minimum EBITDA for Q1. The August amendment waived the default in exchange for a $9.75 million principal payment and a $0.225 million fee, reset covenants, and reduced the credit facility. Management expected covenant compliance over the next 12 months.
Outlook, risks and notable items
- Management expected COVID-19-related demand weakness to continue to materially affect revenue for the remainder of 2020, and said it could not assure revenue growth or profitability for the year. No numerical revenue or earnings guidance was provided.
- Management cited customer employment reductions, business closures, delayed purchases, lower subscription value or duration, and lower interest income as potential pressures. The company had implemented cost-saving initiatives and continued investing in direct sales, product development and service resources.
- The $8.9 million PPP loan was outstanding pending a forgiveness application expected in Q4 2020. Management expected full forgiveness but cautioned that it was not assured; repayment, if required, was expected to begin after an SBA decision.
- In July, Asure acquired payroll-tax business assets for $4.25 million cash, with possible additional revenue-based consideration. It recorded $2.7 million of contingent consideration at quarter-end.
- Disclosure controls and procedures were reported ineffective as of September 30, 2020, with remediation underway for a previously reported material weakness. No material legal proceedings or off-balance-sheet arrangements were reported.
- After quarter-end, CFO James Powers resigned and John Pence was appointed CFO effective November 9, 2020. A director also announced an intended resignation effective December 31, 2020.
Key facts for investors to verify
- Whether recurring revenue, customer retention and employment-linked fees stabilize as COVID-19 effects evolve.
- Actual operating cash generation, excluding movements in client funds and obligations, and the adequacy of available operating liquidity.
- Compliance with amended lender covenants, revolver availability and repayment terms for debt, including the PPP loan’s forgiveness outcome.
- Progress in remediating the material weakness and improving disclosure controls.
- Whether the payroll-tax acquisition delivers expected revenue and whether contingent consideration becomes payable.