Asure Software, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Amounts are in U.S. dollars; financial statement amounts are in thousands unless stated otherwise. Asure provides cloud-based human capital management and workplace management software and services.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $21.767 million | $12.880 million | $41.071 million | $23.607 million |
| Gross margin | $14.547 million; 66.8% | $10.054 million; 78.1% | $28.294 million; 68.9% | $18.343 million; 77.7% |
| Operating loss | $(0.638) million | $(0.608) million | $(0.620) million | $(0.978) million |
| Net loss | $(3.768) million; $(0.29) per share | $(1.837) million; $(0.18) per share | $(5.693) million; $(0.45) per share | $(2.896) million; $(0.31) per share |
- Q2 revenue rose 69.0%; six-month revenue rose 74.0%. Cloud revenue increased 84.9% in Q2 and 96.6% for the half-year, primarily from acquisitions and continued emphasis on integrated cloud solutions. Professional services also grew; hardware revenue declined.
- Gross margin percentage fell, which management attributed to a larger share of lower-margin HCM revenue. SG&A and R&D increased in dollars, while SG&A as a share of revenue declined. Amortization rose with acquired intangible assets.
- Interest expense and other loss was $2.722 million in Q2 and $4.482 million for six months, up from $1.088 million and $1.635 million, respectively, mainly due to higher debt and interest rates.
- At June 30, cash was $46.845 million; working capital was $42.868 million. Six-month operating cash use was $4.996 million, versus $3.609 million a year earlier. Investing cash use was $27.971 million, and financing provided $52.517 million.
- Gross notes payable totaled $115.245 million, including $10.507 million of acquisition-related subordinated notes; the balance-sheet carrying amount after discounts and issuance costs was $111.616 million. An additional $2.161 million was drawn on the revolving line, with $2.839 million available. The main term loan maturity is May 25, 2022.
Material changes and unusual items
- 2018 acquisitions included Pay Systems, reseller businesses, HR and workplace-related providers, and the Evolution Payroll customer portfolio. Acquisitions contributed to higher revenue, debt, goodwill and intangible assets; preliminary purchase accounting remained subject to change.
- In June, Asure sold 2.375 million shares at $17.50 per share, receiving approximately $38.910 million net. Shares outstanding were 15,222,717 as of August 7, 2018.
- Goodwill increased from $77.348 million to $96.660 million; net intangible assets increased from $33.554 million to $63.172 million.
- Adoption of revenue standard Topic 606 had no revenue impact. It capitalized qualifying sales commissions; the company recorded a $1.502 million opening retained-earnings adjustment. Management reported a $0.385 million reduction in six-month net loss relative to the former standard.
- In July 2018, Asure acquired USA Payroll and issued 225,089 shares valued at $3.6 million as partial consideration.
Outlook, risks and contingencies
- Management expects available cash and projected operating cash generation to cover operational needs and debt payments for at least 12 months from issuance, and reported compliance with debt covenants at June 30. It also said additional capital or borrowing will be needed to support growth and future acquisitions; access to financing on acceptable terms is not assured.
- No quantified revenue or earnings guidance was provided. Management stated there is no assurance of revenue growth or profitability during the remainder of 2018.
- Risks highlighted include acquisition integration and realizing expected benefits, substantial indebtedness and interest costs, obtaining capital, customer retention, cloud-market acceptance, competition, cybersecurity and service disruptions, privacy and regulatory changes, and execution of growth plans.
- No pending legal proceedings or off-balance-sheet arrangements were reported. No material changes to previously disclosed risk factors or market-risk exposure were reported. Management stated disclosure controls were effective.
Important facts for investors to verify
- How much reported growth reflects acquired businesses versus organic growth, and whether acquisitions deliver the expected revenue and cost synergies.
- Whether gross margins stabilize as the revenue mix shifts toward HCM, and whether operating cash use and losses improve.
- Debt balances, interest costs, covenant headroom, scheduled repayments, and the limited remaining revolver availability.
- Cash availability after accounting for client funds and obligations, and the company’s need and ability to raise capital for operations or acquisitions.
- Final acquisition purchase-price allocations, integration costs, and the impact of the July USA Payroll acquisition and share issuance.