Asure Software, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Unless noted otherwise, financial amounts are in thousands of dollars. The company provides SaaS time-and-labor and workplace-management software, and expanded into payroll, HR management, and benefits administration through its March 2016 Mangrove acquisitions.
Financial results and key metrics
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $9,664 | $7,159 | $16,386 | $13,491 |
| Gross margin | $7,488 (77.5%) | $5,280 (73.8%) | $12,480 (76.2%) | $9,960 (73.8%) |
| Operating income | $737 | $421 | $214 | $409 |
| Net income (loss) | $136 | $95 | $(1,418) | $(388) |
| Basic and diluted EPS | $0.02 | $0.02 | $(0.23) | $(0.06) |
| Operating cash flow | Not presented by quarter | $(1,084) | $862 |
Cloud revenue rose 57.7% in Q2 and 36.3% for the first half; total revenue increased 35.0% and 21.5%, respectively. Mangrove contributed $1,984 of Q2 revenue. Maintenance and support revenue declined 22.6% in Q2 and 21.8% in the first half, with management citing customers shifting from on-premise to cloud services. Q2 operating expenses were $6,751, including $5,480 of SG&A; first-half SG&A increased 38.9%, primarily reflecting Mangrove integration costs and higher selling costs.
Six-month investing cash outflow was $20,066, including $12,000 for acquisitions net of cash acquired and an $8,106 increase in funds held for clients. Financing provided $20,151, including $15,335 of debt proceeds. Cash declined $875 to $283. Cash paid for interest was $456 in the first half.
Balance sheet, debt and liquidity
- At June 30, 2016, total assets were $74,804 and stockholders’ equity was $3,049. Cash was $283, compared with $1,158 at year-end 2015.
- Gross debt was $31,756 ($30,975 net of $781 debt issuance costs), versus $13,687 gross at December 31, 2015. Debt included a $25,696 Wells Fargo term loan and a $6,060 Mangrove subordinated note. The Wells Fargo revolver had $3,000 available and no amount outstanding.
- Working capital deficit was $10,847, compared with $8,593 at year-end. Client funds of $24,525 were matched by client fund obligations of $24,525; these funds are restricted for client payroll and tax payments and should not be treated as available operating liquidity.
- Management said it expects sufficient liquidity for at least 12 months and projects positive operating cash flow over that period. The company reported compliance with debt covenants at June 30 and current debt payments.
Material changes, outlook and risks
- The Mangrove payroll-business stock acquisition and COBRAsource benefits-administration asset acquisition expanded AsureForce into payroll, HR and benefits services. Consideration included $11,348 cash and a $6,000 subordinated note for Mangrove, plus $1,036 for the COBRAsource assets. Purchase-price allocations were preliminary; goodwill increased by $8,837 and acquired amortizable intangible assets totaled $8,700.
- First-half other loss included $706 of one-time Mangrove transaction costs; interest expense also increased with higher debt. Despite Q2 profitability, the first-half net loss widened to $1,418 from $388. Management cautioned that there was no assurance of revenue growth or profitability for the remainder of 2016.
- Management is focused on recurring revenue growth and expense discipline, and is exploring further acquisitions, but reported no acquisition agreement in place. Future acquisitions could be funded with equity, cash, operating cash flow or external debt.
- Liquidity risks include low unrestricted cash, negative operating cash flow in the first half, debt and covenant requirements, and the possibility that cash needs exceed projections. The company said it may need additional capital and cannot assure that financing will be available on acceptable terms. Other cited business risks include customer retention, cloud-market adoption, competition, security or service disruptions, and realizing acquisition benefits.
- No pending legal proceedings were reported. Management concluded disclosure controls were effective as of June 30, 2016; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether Mangrove integration delivers the expected revenue, cost synergies and cash generation, given its material contribution to Q2 growth.
- Whether Asure can convert its first-half operating cash use and $283 cash balance into the positive operating cash flow management projected, while meeting debt obligations and covenants.
- How much of the $24,525 client-fund balance is restricted and how it affects reported working capital and cash-flow interpretation.
- The final Mangrove purchase-price allocation, including acquired intangible values and goodwill, because estimates remained preliminary.
- Whether cloud growth can continue to offset declining maintenance and support revenue and rising SG&A and interest costs.