Asure Software, Inc. — FY2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019; filed March 16, 2020. This is an annual report, not a standalone fourth-quarter report. Unless noted, financial amounts below are in millions of dollars.
Business context and reporting period
Asure provides cloud-based human capital management (HCM) software and services, including payroll and tax, HR, time and attendance, and HR services, primarily to small and midsize businesses. It reported approximately 64,000 businesses served, including about 16,000 direct clients and 48,000 clients served through resellers. The company reports one operating segment.
On December 2, 2019, Asure completed the sale of its Workspace Management business and is now focused on HCM. Results from Workspace Management are reported as discontinued operations; continuing-operations comparisons below exclude that business.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Continuing-operations revenue | $73.150 | $63.626 |
| Recurring revenue | $70.066 | $58.890 |
| Gross profit / margin | $43.314 / 59.2% | $39.504 / 62.1% |
| Operating loss | $(50.955) | $(10.740) |
| Continuing-operations loss | $(42.291) | $(11.373) |
| Net income (loss), including discontinued operations | $30.001 | $(7.548) |
| Net cash used in operating activities | $(0.450) | $(7.129) |
| Cash and cash equivalents at year-end | $28.826 | $15.444 |
| Working capital | $17.854 | $11.443 |
| Net notes payable, after debt issuance costs | $26.713 | $111.367 |
Revenue rose 15.0%, led by 19.0% growth in recurring revenue. Gross margin declined 2.9 percentage points; management attributed the decline to increased HCM service resources and migration to secure cloud hosting. SG&A rose 14.5% to $42.093 million, while R&D fell 10.8% to $5.351 million. Intangible-asset amortization increased to $11.765 million, partly after useful-life reassessments tied to rebranding.
Operating expenses included a $35.060 million noncash goodwill impairment. Interest expense and other, net increased to $15.447 million, including a $2.808 million loss on debt extinguishment. Net income chiefly reflects the discontinued-operations sale: Asure recorded a $94.293 million pretax gain on sale and $72.292 million of total income from discontinued operations, net of tax. Therefore, consolidated net income does not represent profitability from continuing HCM operations.
Cash from investing activities was $96.942 million, primarily reflecting sale proceeds; financing activities used $82.995 million, primarily for debt repayment. The sale price was approximately $121.5 million, subject to a working-capital adjustment; the cash-flow statement reports $118.206 million of proceeds. The balance sheet separately reports $137.935 million of funds held for clients and $145.227 million of corresponding client-fund obligations; these funds are not ordinary available corporate cash. Management reported $10 million available under its revolver and stated it expected liquidity to cover operations and required debt payments for at least 12 months.
Material changes, outlook, and risks
- Divestiture and debt reduction: Sale of Workspace Management in December 2019 generated a large accounting gain and funded substantial debt repayment. Gross notes payable fell from $114.539 million to $27.185 million.
- Profitability outlook: Management provided no specific revenue or earnings guidance. It said it could not assure successful revenue growth, profitability, or positive cash flow in 2020, while stating that projected liquidity was sufficient for at least the next 12 months.
- Debt terms and covenants: The December 2019 credit agreement provides a $20 million term loan and $10 million revolver. It includes quarterly EBITDA requirements during 2020, leverage limits beginning at year-end 2020, and fixed-charge coverage requirements. Certain covenants were not yet required at December 31, 2019; management expected to comply or achieve compliance through cash generation or debt repayment.
- Internal controls: Management and the independent auditor concluded internal control over financial reporting was ineffective at year-end because of a material weakness involving system access and segregation of duties. Management described remediation measures and expected completion by June 30, 2020; remediation was not yet established as effective. The auditor issued an adverse opinion on internal controls but an unqualified opinion on the financial statements.
- Other risks and unusual items: The filing highlights ongoing losses, competition, customer retention, cybersecurity and privacy obligations, client-fund and payment-processing risks, acquisition integration, goodwill impairment, and debt-service and covenant risks. It also identified uncertainty from the then-emerging coronavirus outbreak. No material pending legal proceedings were reported.
- Subsequent event: On March 10, 2020, the board authorized a stock repurchase program of up to $5 million, to be funded from existing cash resources; repurchases are discretionary.
Most important facts for investors to verify
- Whether HCM recurring-revenue growth translates into improved gross margins, operating results, and operating cash flow after the Workspace Management divestiture.
- The final sale working-capital adjustment and escrow release; $1.685 million was reported as held in escrow at year-end.
- Actual covenant compliance, scheduled debt repayments, interest costs, and remaining revolver availability.
- Whether management’s internal-control remediation was completed and independently tested as effective after the stated June 30, 2020 target.
- How much reported cash is freely available for corporate use, distinct from funds held for clients and related obligations, and whether the planned repurchases affect liquidity.
- The continued effect of goodwill impairment, amortization, and tax-attribute limitations on reported results; the filing reports a $35.060 million impairment and potential Section 382 limits on tax benefits.