Asure Software, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparative period is Q1 2016. Unaudited results. Asure provides SaaS workplace, time and labor management, HR, payroll and related services.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $10.727 million | $6.722 million | Up 59.6% |
| Gross profit / margin | $8.289 million / 77.3% | $4.992 million / 74.3% | Margin up 3.0 percentage points |
| Operating expenses | $8.659 million | $6.221 million | Up $2.438 million |
| Operating loss | $(0.370) million | $(1.229) million | Loss narrowed |
| Interest expense and other loss | $(0.547) million | $(0.281) million | Loss increased |
| Net loss / diluted loss per share | $(1.059) million / $(0.12) | $(1.554) million / $(0.25) | Loss narrowed |
| Cash used in operating activities | $(1.185) million | $(0.638) million | Use increased |
Cloud revenue rose 102.9% to $7.836 million and hardware revenue rose 57.0% to $1.088 million. Maintenance and support revenue declined 24.7% to $0.933 million; professional services revenue declined 11.0% to $0.701 million. Management attributed cloud growth to its focus on integrated cloud solutions. Acquired AsureForce-related businesses contributed $4.152 million of Q1 2017 revenue.
SG&A increased 39.9% to $7.043 million, with higher general and administrative costs reflecting increased headcount and acquisition-related professional fees; sales and marketing expense fell. R&D decreased 5.2% to $0.769 million. Intangible amortization increased to $0.847 million from $0.377 million, principally due to the January acquisitions.
Balance sheet, liquidity and debt
- Cash and cash equivalents were $2.288 million at March 31, 2017, down from $12.767 million at December 31, 2016.
- Working capital was a deficit of $3.685 million, versus positive working capital of $4.207 million at year-end. Client funds held of $30.544 million were matched by $30.544 million of client fund obligations; these balances are distinct from corporate cash.
- Gross notes payable totaled $31.915 million; net notes payable after $0.779 million of debt issuance costs and discount was $31.136 million. The Wells Fargo term loan had $29.715 million outstanding, at a stated 6.5% rate. The company also reported $3.0 million available on its revolver, with none drawn.
- Cash used in investing was $6.557 million, primarily reflecting the January acquisitions; cash used in financing was $2.700 million. The company reported $10.479 million of net cash decline for the quarter.
Material changes and notable items
In January 2017, Asure acquired Personnel Management Systems, Corporate Payroll’s payroll division, and Payroll Specialties NW. The transactions added HR consulting and payroll capabilities and were funded with cash, subordinated notes and, for CPI, common shares. Preliminary acquisition accounting recorded $5.016 million of goodwill and $6.088 million of acquired intangible assets. Purchase-price allocations remained subject to revision.
Asure obtained an additional $5.0 million Wells Fargo term loan in March and used proceeds to repay the Mangrove acquisition note, which was paid in full during Q1. The credit agreement was amended to revise financial covenants. Management said the company was compliant at March 31, 2017; the filing reports an $80,000 gain from debt extinguishment.
Outlook, risks and contingencies
No numerical revenue or earnings guidance was provided. Management said it expected sufficient liquidity for operational needs and debt payments for at least the next 12 months, and projected positive operating cash flow over that period. It also cautioned that growth, profitability and cash generation were uncertain, that cash consumption could exceed expectations, and that additional capital might be needed on terms that cannot be assured. Management intends to grow recurring revenue, invest in revenue-generating areas and explore further acquisitions.
Key disclosed risks include execution and integration of acquisitions, customer retention and market acceptance of cloud products, competition and pricing pressure, cybersecurity and service disruptions, privacy concerns, and the ability to manage growth. The company reported no pending legal proceedings and no goodwill or finite-lived intangible asset impairment for the periods presented. It stated that disclosure controls were effective as of March 31, 2017.
Important facts for investors to verify
- Whether the newly acquired businesses can be integrated and deliver expected growth and synergies, given their material contribution to Q1 revenue.
- Whether operating cash flow improves as management projects, particularly after Q1 cash use and the sharp decline in corporate cash.
- Ability to meet the amended fixed-charge coverage and leverage covenants and scheduled debt payments; the filing reports compliance at quarter-end.
- Final acquisition valuations, expected amortization and any changes to goodwill or intangible assets as measurement periods are completed.
- How cloud growth, declining maintenance and support revenue, and acquisition-related costs affect recurring revenue and the path to profitability.