ASURE Software, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. Unless noted otherwise, amounts are in thousands of dollars.
Business context
Asure provides cloud-based SaaS time-and-labor and workplace-management solutions. In March 2016, it acquired Mangrove Employer Services’ payroll division and substantially all assets of COBRAsource, entering payroll processing and benefits administration, which it plans to integrate into AsureForce.
Financial performance and position
- Revenue: $6,722, up 6.2% from $6,332. Cloud revenue rose 14.6% to $3,862; maintenance and support revenue fell 20.9% to $1,239.
- Gross profit and margin: Gross profit was $4,992 versus $4,680. Reported gross margin was 74.3%, compared with 73.9% a year earlier.
- Operating expenses: $5,515, up from $4,692. SG&A increased 25.5% to $4,327; R&D increased 10.0% to $811.
- Net loss: $1,554, or $0.25 per share, versus a loss of $483, or $0.08 per share. The 2016 loss included $706 of Mangrove acquisition costs.
- Cash flow: Operating cash use was $638, versus $546 provided in Q1 2015. Investing cash use was $24,205, including $12,000 for acquisitions and $12,189 of net change in client funds. Financing provided $24,201, including $12,500 of borrowing and $12,189 of client-fund obligations.
- Liquidity: Cash and cash equivalents were $553 at March 31, down from $1,158 at year-end. The reported working-capital deficit was $13,238. The company had $3,000 available on its revolver. Client funds of $28,608 are matched by client-fund obligations and are restricted to satisfying those obligations.
- Debt: Gross notes payable totaled $32,188, including a $26,188 Wells Fargo term loan and a $6,000 Mangrove acquisition note. The Wells Fargo loan carried a stated 5.00% rate; the Mangrove note bears 3.50% interest and matures in March 2018.
Changes versus Q1 2015 and year-end
- Revenue growth was led by cloud services and professional services; maintenance/support and on-premise license revenue declined.
- AsureForce revenue increased 17.2%, including $368 from Mangrove in Q1. AsureSpace revenue declined 1.3%.
- Net loss widened by $1,071. SG&A growth and acquisition-related costs contributed to the higher loss.
- Cash from operations shifted from a $546 inflow to a $638 outflow. Cash used in investing increased substantially, principally reflecting the acquisition and client funds.
- Compared with December 31, 2015, goodwill rose to $26,556 from $17,436 and net intangible assets to $14,242 from $6,026, primarily reflecting the Mangrove acquisition.
Outlook, risks, and unusual items
- Management projected positive operating cash flow and sufficient liquidity for at least the next 12 months, including debt payments, based on internal projections. It cautioned that cash use could exceed expectations and additional capital may be needed; access to capital on acceptable terms is not assured.
- Management said it intends to pursue growth in existing offerings and may explore further acquisitions, but reported no acquisition agreements at the time of filing. It gave no specific revenue or earnings guidance and cautioned that profitability for the remainder of 2016 was not assured.
- The March 2016 Wells Fargo amendment expanded the overall credit facility by $12,500 to $29,188 and revised leverage covenants; the maximum leverage ratio was 5.00:1 at March 31, 2016, stepping down to 2.25:1 by December 31, 2018. The company reported covenant compliance at quarter-end.
- The Mangrove purchase-price allocation was preliminary and subject to measurement-period adjustments. Acquisition costs of $706 were expensed. Management reported no pending legal proceedings and no goodwill or finite-lived intangible-asset impairment in the periods presented.
- Management reported effective disclosure controls as of March 31, 2016 and no material changes in internal control over financial reporting during the quarter.
- Filing-text inconsistency to note: MD&A describes gross margin as decreasing due to revenue mix, although the reported margin percentages increased from 73.9% to 74.3%.
Important facts for investors to verify
- Whether Mangrove integration delivers expected synergies and recurring revenue, and whether the preliminary acquisition valuation changes.
- Cash conversion and working-capital trends, separating restricted client funds from funds available for corporate use.
- Debt repayment capacity, covenant headroom, borrowing costs, and the availability of additional financing if needed.
- The drivers of rising SG&A and the path to reducing losses and achieving management’s projected positive operating cash flow.
- The reported gross-margin explanation, given the difference between the MD&A narrative and the stated percentages.