Asure Software, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited results; amounts below are in millions unless stated otherwise. Asure provides cloud-based human capital management software and services to small and medium-sized businesses.
Financial performance
- Q2 revenue: $30.4, up 50% year over year. Recurring revenue was $23.0, up 21%; professional services, hardware and other revenue was $7.5, up 480%, primarily due to non-recurring Employee Retention Tax Credit (ERTC) work.
- Q2 profitability: Gross profit was $22.0 and gross margin was 72%, versus $12.3 and 60% a year earlier. Operating loss narrowed to $1.5 from $5.8; net loss narrowed to $3.8 from $5.9, or $0.18 per share versus $0.29.
- Six-month results: Revenue was $63.5, up 42%; gross margin rose to 73% from 62%. Operating income was $0.5 versus an operating loss of $8.0 in 2022, while net loss narrowed to $3.4 from $8.9. Recurring revenue grew 21% to $50.9.
- Cash flow: Operating cash flow was $6.1 for the first half, compared with $7.5 in 2022. Software capitalization and property purchases totaled $4.3. The cash-flow statement reports a $26.8 decrease in cash, cash equivalents and restricted cash, including client funds; this measure is not the same as corporate cash.
- Liquidity: Cash and cash equivalents were $21.6 at June 30, excluding client funds, versus $17.0 at year-end. Working capital was $13.6, up from $8.1. Funds held for clients were $186.5 and are restricted for client obligations. Management said liquidity should support operations for at least 12 months, while noting future capital may be needed.
- Debt: Gross notes payable were $39.1 ($36.8 net of unamortized costs and discount), including a senior facility bearing 14% cash interest as of June 30. Interest expense for the first half rose to $3.5 from $1.9. Principal payments on the facility were scheduled to begin in October 2023, with a balloon payment due in October 2025.
Material changes and notable items
- Recurring revenue growth reflected higher HR compliance, AsureMarketplace and interest earned on client funds; management attributed approximately $3.8 of first-half recurring-revenue growth to client-fund interest.
- ERTC-related revenue drove much of the sharp increase in non-recurring revenue. The company said this revenue is expected to wind down as the related tax-credit programs expire in 2025. ERTC receivables contributed to higher accounts receivable, which rose to $16.6 from $12.1; the allowance for doubtful accounts increased to $4.9 from $3.2.
- Management attributed improved gross margin partly to higher revenue and consolidation and standardization efforts. Sales and marketing costs increased substantially as the company expanded direct sales staffing and commissions and increased receivable reserves.
- After quarter-end, Asure settled a $1.7 senior-facility final payment fee and paid an additional $0.25 lender fee. It also settled $2.3 of contingent acquisition consideration by issuing 214,000 shares in July.
Outlook, risks and contingencies
The filing provides no specific numerical revenue or earnings guidance. Management expects revenue to grow through new applications, customer expansion and renewals, and expects continued investment in sales, product development, AI and automation. It also cautioned that cash use could exceed expectations and additional capital may be needed.
Risks highlighted include customer and receivable collection, the runoff and regulatory interpretation of ERTC programs, competition, data privacy and security, debt and interest costs, and the possibility that AI-generated information is inaccurate or biased, potentially causing liability or reputational harm. Management reported no material legal proceedings and said disclosure controls were effective as of June 30, 2023.
Key facts for investors to verify
- How much of revenue growth and receivables depends on ERTC services, and how quickly those activities and related collections are expected to decline.
- Whether gross-margin improvement can continue as sales and marketing spending rises and recurring revenue remains the larger, but declining-share, component of total revenue.
- Cash generation and corporate liquidity, distinguishing unrestricted cash from funds held for clients and considering scheduled debt principal payments and the post-quarter lender payments.
- Receivable quality, including the effect of deferred ERTC payment terms and the increased allowance for doubtful accounts.
- The impact of the July share issuance and the August debt amendment on share count, financing costs and future obligations.