Business context and reporting period
ASURE Software, Inc. provides cloud-based human capital management software and services, primarily to small and midsize businesses. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2021; comparisons are with the same 2020 periods. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 |
|---|---|---|---|---|
| Total revenue | $17.17 | $14.12 | $36.97 | $33.06 |
| Recurring revenue | $16.07 | $13.73 | $35.31 | $32.17 |
| Gross profit | $9.95 | $8.11 | $22.44 | $19.21 |
| Gross margin | 57.9% | 57.4% | 60.7% | 58.1% |
| Operating loss | $(4.37) | $(3.58) | $(5.64) | $(6.03) |
| Net income (loss) | $3.76 | $(3.94) | $2.17 | $(5.71) |
| Diluted EPS | $0.20 | $(0.25) | $0.11 | $(0.36) |
Q2 revenue increased 21.6%; H1 revenue increased 11.8%. Management attributed growth to both organic and acquisition-related contributions, higher client-fund balances and related interest revenue, and increased professional-services revenue from its Employee Retention Tax Credit service. Professional services, hardware and other revenue grew 186.9% in Q2 and 85.4% in H1 from relatively small prior-year bases.
Net income included an $8.654 million gain from forgiveness of the Paycheck Protection Program loan. Excluding that gain, the reported profit does not reflect positive operating performance: operating losses were $4.369 million in Q2 and $5.638 million for H1. Operating expenses rose 22.5% in Q2, led by higher general and administrative and sales and marketing costs. Gross margin improved, which management attributed to revenue growth and more efficient operations.
Cash flow, liquidity and debt
- H1 operating cash flow was negative $1.898 million, compared with negative $0.350 million in H1 2020. Investing activities provided $5.180 million, mainly from sales and maturities of securities. Financing activities used $117.657 million, primarily reflecting a $113.251 million decrease in client-fund obligations and $3.090 million of debt payments.
- Cash and cash equivalents, excluding client funds, were $20.292 million at June 30, 2021, down from $28.577 million at December 31, 2020. Funds held for clients of $207.432 million were restricted for client payroll and tax obligations and were substantially matched by client-fund obligations of $207.326 million.
- Working capital was $14.836 million, versus $8.206 million at year-end. The reported balances include client funds and obligations; unrestricted cash is the more relevant liquidity indicator.
- Notes payable totaled $13.683 million gross ($13.365 million net of issuance costs and discounts), including a $9.750 million Wells Fargo term loan and $3.933 million of acquisition-related subordinated notes. The company reported $4.5 million available on its Wells Fargo revolver and no revolver borrowings.
Material changes, outlook and risks
- Revenue and gross margin improved year over year, but operating expenses grew and the company remained loss-making at the operating level. Q2 revenue declined 13.3% sequentially from Q1, which management attributed mainly to seasonal first-quarter W-2 and ACA revenue.
- Management gave no specific numerical revenue or earnings guidance. It said it would continue investing in sales personnel and product development, while cautioning that there was no assurance it could grow revenue or achieve profitability during the rest of 2021. It expected the ERTC service to benefit operating results through 2021.
- COVID-19 remained a key uncertainty: customer employment levels affect per-employee revenue, while business disruption could delay purchases or implementations, increase attrition, or impair collections. The company said it could not estimate the pandemic’s full future effect.
- After quarter-end, on August 9, 2021, Asure signed a conditional commitment for up to $50 million of Structural Capital term financing, with up to $25 million expected to fund at closing, subject to conditions. The proposed facility carries a basic rate of the greater of 9% or Prime plus 5.75%, plus 1.00% or 1.25% payment-in-kind interest. Asure intended to use proceeds to refinance Wells Fargo debt and fund growth and acquisitions; closing was not assured.
- No material pending legal proceedings or material changes to previously disclosed risk factors were reported. Management stated disclosure controls were effective as of June 30, 2021.
Most important facts for investors to verify
- Whether recurring revenue growth continues as customer employment levels and COVID-related conditions evolve, and how much growth is organic versus acquisition-related.
- Operating profitability and cash generation excluding the one-time PPP forgiveness gain; H1 operating cash flow was negative despite reported net income.
- Liquidity after separating unrestricted cash from client funds, and the effect of changes in client-fund balances on reported cash flows.
- Whether the proposed Structural Capital facility closes, its final terms and fees, and the resulting interest burden and covenant exposure.
- Whether sales and administrative spending translates into growth while margins and operating losses improve.