Asure Software, Inc. — Q1 2021 Form 10-Q
Business and period: Asure provides cloud-based human capital management software and services to small and midsize businesses, primarily in the United States. This unaudited report covers the three months ended March 31, 2021; comparisons are with Q1 2020 unless noted. Financial amounts below are in thousands of dollars, except per-share data.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $19,802 | $18,947 | +4.5% |
| Recurring revenue | $19,242 | $18,436 | +4.4% |
| Gross profit | $12,492 | $11,107 | +12.5% |
| Gross margin | 63.1% | 58.6% | +4.5 percentage points |
| Operating loss | $(1,269) | $(1,513) | Loss narrowed |
| Net loss | $(1,598) | $(1,767) | Loss narrowed |
| Basic and diluted loss per share | $(0.08) | $(0.11) | |
| Net cash used in operating activities | $(1,235) | $(3,403) |
Recurring revenue was more than 95% of total revenue. Management attributed revenue growth primarily to 2020 acquisitions and higher client-fund balances, partly offset by COVID-19 impacts. Gross-margin improvement was attributed to revenue growth and operating efficiencies.
Sales and marketing expense was $3,611, slightly above the prior-year period; general and administrative expense increased to $6,498 from $5,522, partly because prior-year results included income under a transition-services agreement and because of higher personnel costs. Research and development expense was $1,124, down from $1,174. Interest expense and other, net was $224, versus $235; income tax expense was $105, versus $19.
Liquidity, cash flow, and debt
- Cash and cash equivalents were $24,290 at March 31, 2021, down from $28,577 at December 31, 2020. Working capital was $7,340, down from $8,206.
- Operating activities used $1,235 of cash. Investing activities provided $65,158, while financing activities used $68,210. These large investing and financing flows were principally driven by movements in funds held for clients and corresponding client-fund obligations; they should not be read as ordinary operating cash generation or use.
- Notes payable were $22,932 gross, or $22,583 net of debt issuance costs and discount. The balance included an $8,856 PPP loan. The Wells Fargo term loan was $9,813; no revolver borrowing was outstanding, and $4,500 was available.
- Funds held for clients were $254,492, with client-fund obligations of $254,241. These client-related balances are distinct from operating cash and ordinary corporate liquidity.
Material changes, outlook, and risks
- Revenue increased 4.5% year over year, while gross margin expanded. Net loss narrowed, though the company remained loss-making.
- Management expects revenue to increase as it adds applications, expands its client base, and renews or expands customer relationships. No specific financial guidance was provided. Management said it could not assure revenue growth or profitability for the remainder of 2021.
- COVID-19 remains a material uncertainty. Asure said customer headcount reductions had pressured per-employee revenue and could continue to do so; customer purchasing, implementation timing, payment terms, attrition, and prospective sales may also be affected. More than 70% of employees were working remotely at quarter-end.
- Asure reported that it expected the PPP loan to be forgiven, but forgiveness was not certain; its application was completed in early February 2021. If more than $3,250 is unforgiven, or required monthly payments exceed $185, the company said it could likely default under its credit agreement absent a waiver or acceptable revised terms. The filing states that payments, if owed, were expected to begin in Q2 or Q3 2021.
- The company expected to comply with amended Wells Fargo financial covenants over the next 12 months. It reported no material pending legal proceedings, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements.
- Revenue is seasonal: first-quarter payroll tax and ACA form processing generally boosts revenue and margins; year-end unscheduled payroll runs can also increase revenue.
Investor verification points
- Check the status and amount of PPP loan forgiveness, any repayment obligation, and any resulting credit-agreement waiver or covenant implications.
- Assess whether recurring-revenue growth and gross-margin gains persist, particularly as customer employment levels and COVID-related effects evolve.
- Reconcile cash and liquidity measures with client funds held and related obligations; the quarter’s investing and financing cash flows were heavily affected by those balances.
- Monitor operating expenses, continued losses, debt repayment needs, and the company’s progress toward profitability.
- Review the timing and conversion of the $24,563 in remaining performance obligations; the company expected about 65% to be recognized over the next 12 months.