Business context and reporting period
Asure Software, Inc. provides cloud-based SaaS time-and-labor, workplace management, HR, and payroll solutions. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2017; financial amounts below are in thousands of dollars unless stated otherwise. The 2017 results include five acquisitions: PMSI, Corporate Payroll, Payroll Specialties NW, iSystems, and Compass HRM.
Financial performance and liquidity
| Metric | Three months ended Sept. 30, 2017 | Three months ended Sept. 30, 2016 | Nine months ended Sept. 30, 2017 | Nine months ended Sept. 30, 2016 |
|---|---|---|---|---|
| Revenue | $15,527 | $9,440 | $39,134 | $25,826 |
| Gross margin | $12,131; 78.1% | $7,414; 78.5% | $30,474; 77.9% | $19,894; 77.0% |
| Operating income (loss) | $448 | $982 | $(530) | $490 |
| Net income (loss) | $(1,281) | $315 | $(4,177) | $(1,103) |
| Diluted EPS | $(0.10) | $0.05 | $(0.40) | $(0.17) |
- Cloud revenue rose 96.5% in the quarter to $11,062 and 86.3% for the nine months to $27,724. Management attributed much of the increase to cloud sales and acquisitions; iSystems and PMSI contributed $4,139 of quarterly cloud revenue.
- Quarterly revenue increased 64.5% and nine-month revenue 51.5% year over year. Hardware revenue also grew; on-premise software licenses declined 20.6% for the quarter and 22.4% for the nine months.
- Gross margin dollars increased, while quarterly gross margin percentage eased 0.4 percentage points; nine-month gross margin percentage improved 0.9 points. SG&A rose 87.5% for the quarter and 62.5% for the nine months, reflecting acquisition and integration costs. Higher amortization and interest expense also weighed on earnings.
- Operating cash flow was negative $2,083 for the nine months, versus negative $730 in 2016. Investing cash flow was negative $38,351, primarily reflecting acquisitions. Financing cash flow was positive $55,123, including $27,820 net proceeds from a June stock offering and acquisition-related borrowing.
- Cash and cash equivalents were $27,464 at September 30, up from $12,767 at year-end; working capital was $18,734, compared with $4,207. The company also reported $5,000 available under its revolving credit facility. Funds held for clients of $23,217 were matched by client-fund obligations of the same amount.
- Gross notes payable were $77,850; net of issuance costs and discounts, debt was $75,704. The balance sheet reported $8,724 current and $66,980 long-term net notes payable. Debt increased substantially from year-end, principally to fund acquisitions. Interest expense was $3,279 for the nine-month period, versus $1,460.
Material changes, outlook, and risks
- Acquisition activity materially expanded the business and balance sheet. The five 2017 deals had an aggregate stated purchase price of $72,610; preliminary allocations included $49,318 of goodwill and $24,628 of acquired amortizable intangible assets. Purchase accounting estimates remained subject to change.
- The May 2017 amended credit agreement raised total commitments to $75,000 and added a $35,000 first-out term loan and $35,000 last-out term loan. The loans have quarterly principal payments and mature in May 2022. As of September 30, the company said it was current and in compliance with its covenants.
- Management expected sufficient liquidity for at least 12 months and projected positive operating cash flow over that period, while acknowledging cash use could exceed expectations and additional capital might be needed. Management cautioned there was no assurance it would achieve profitability in the remainder of 2017.
- Key stated risks include acquisition integration and realizing expected benefits, indebtedness and covenant compliance, customer retention and growth, competition and pricing, cybersecurity and service disruptions, privacy regulation, product development, and market acceptance of cloud solutions. The filing reported no pending legal proceedings.
- Subsequent events: Asure closed the acquisition of Associated Data Services on October 1, 2017. On October 9, it moved headquarters and entered a 60-month lease with approximately $2,073 of future minimum payments.
- Asure planned to adopt the new revenue recognition standard on January 1, 2018, likely using the modified retrospective method. It had not completed its impact assessment but did not expect a material effect on revenue timing or amount. The company also identified potential effects on sales-commission accounting.
Important facts for investors to verify
- How much of reported growth and future recurring revenue is organic versus contributed by acquired businesses, including the post-quarter Associated Data Services acquisition.
- Whether operating cash flow turns positive as projected, especially given the $4,450 nine-month increase in accounts receivable and continued acquisition/integration spending.
- Debt service capacity, interest costs, and compliance with leverage, fixed-charge-coverage, and recurring-revenue covenants.
- Whether preliminary acquisition valuations, goodwill, and amortization assumptions change during the measurement period, and whether integration produces expected synergies.
- The effects of the 2017 equity issuance and acquisition shares on dilution; weighted-average shares increased materially year over year.