Business context and reporting period
Asure Software, Inc. provides cloud-based human capital management software and services to small and midsize businesses, including payroll and tax, HR, and time and attendance. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2022; amounts below are in millions unless stated otherwise.
Financial results and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $21.9 | $18.0 | $66.5 | $55.0 |
| Gross profit / margin | $13.6 / 62% | $10.9 / 60% | $41.4 / 62% | $33.3 / 61% |
| Operating loss | $(3.7) | $(4.1) | $(11.7) | $(9.7) |
| Net income (loss) | $(4.5) | $5.3 | $(13.4) | $7.5 |
| Basic and diluted EPS | $(0.22) | $0.28 | $(0.67) | $0.39 |
- Recurring revenue rose 22% in Q3 and 20% for the nine months; it represented more than 93% of nine-month revenue. Management attributed growth to the 2021 acquisitions and organic growth. Professional services, hardware and other revenue grew 21% in Q3 and 40% year to date.
- Gross margin improved year over year. Operating expenses rose 16% in Q3 and 23% for the nine months, including higher selling and marketing costs and increased acquired-intangible amortization.
- Interest expense was $1.1 in Q3 and $3.0 year to date, versus $0.5 and $1.0 in the comparable periods, primarily reflecting the Structural Capital credit facility.
- Operating cash flow was $7.0 for the nine months, compared with cash used of $1.1 a year earlier. Investing used $34.0, including purchases of available-for-sale securities; financing used $34.0, largely reflecting a $32.5 decrease in client fund obligations. Cash, cash equivalents and restricted cash ended at $137.6, including $126.7 of restricted client funds; unrestricted cash and cash equivalents were $10.9.
- At September 30, 2022, working capital was $5.2. Net carrying value of notes payable was $34.4 ($37.3 gross); the senior facility carried a 12% cash interest rate. Total assets were $391.1 and stockholders’ equity was $144.6.
Material changes versus the prior comparable period
- Revenue and gross margin increased, but the company shifted from net income to net loss in both comparison periods. Prior-year results included a $10.5 employee retention tax credit in Q3 and a $10.5 credit for the nine-month period, as well as debt-extinguishment gains of $8.3 year to date. These items materially affect the year-over-year earnings comparison.
- Available-for-sale securities held for clients had $2.6 of gross unrealized losses at September 30, 2022, compared with $0.1 at year-end 2021. The company reported $2.8 of nine-month unrealized losses in other comprehensive loss.
- Working capital declined from $17.0 at December 31, 2021 to $5.2. Total funds held for clients declined to $182.0 from $217.3, alongside corresponding client fund obligations.
Outlook, risks and unusual items
- No quantified revenue, earnings or cash-flow guidance is provided. Management expects revenue to increase with new applications, client growth and expanded relationships, and expects the recurring/nonrecurring revenue mix to remain relatively constant.
- Management said lower client headcount and pandemic-related effects, together with deliberate investment in sales, marketing and R&D, pressured operating results. It expects net income to remain negatively affected by these factors. Management believes liquidity is sufficient for at least the next 12 months, but says future growth or acquisitions may require additional capital and that acceptable financing is not assured.
- Remaining performance obligations were approximately $26.5; about 82% was expected to be recognized over the next 12 months. Payroll-related revenue is seasonal, typically stronger in the first quarter and sometimes in the fourth quarter.
- Management cited risks including client attrition and employment levels, competition, service or security interruptions, regulation, acquisitions, interest rates, receivable collections and economic conditions. It reported no material pending legal proceedings and no material changes to the risk factors in its 2021 Form 10-K.
- The filing disclosed an inconsistency in previously reported 2022 comprehensive-loss figures: Q2 other comprehensive loss had been reported as $7.614 rather than $6.356, and the six-month figure as $9.940 rather than $10.436. Management concluded the effects were not material and elected prospective correction. The filing also states disclosure controls were effective and there were no material changes in internal control over financial reporting.
Important facts for investors to verify
- How much of revenue growth is organic versus acquisition-related, and whether the company can convert growth into operating profitability.
- Unrestricted liquidity and covenant status under the high-interest senior facility, including the debt payment schedule and any potential need for additional capital.
- Credit quality, maturity and market-value risks of client-fund securities, and the relationship between funds held for clients and client fund obligations.
- Progress toward converting remaining performance obligations into recognized revenue and cash, given seasonality and client retention risks.
- The accounting and investor impact of the prior-period comprehensive-loss inconsistency and the significant year-over-year effects of prior-year tax-credit and debt-extinguishment items.