Asure Software, Inc. — Q2 2017 Form 10-Q
Business and period: The filing reports the quarter and six months ended June 30, 2017. Asure provides cloud-based workplace, time-and-labor management, HR, and payroll software and services. Results include several 2017 acquisitions, notably iSystems and Compass HRM, acquired in May.
Financial performance
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $12.880 million | $9.664 million | $23.607 million | $16.386 million |
| Gross margin | $10.054 million; 78.1% | $7.488 million; 77.5% | $18.343 million; 77.7% | $12.480 million; 76.2% |
| Operating income (loss) | $(0.608) million | $0.737 million | $(0.978) million | $(0.492) million |
| Net income (loss) | $(1.837) million | $0.136 million | $(2.896) million | $(1.418) million |
| Net loss per share | $(0.18) | $0.02 income | $(0.31) | $(0.23) |
| Operating cash flow | Not separately stated for the quarter | $(3.609) million | $(1.084) million |
All dollar amounts are in U.S. dollars; financial statement amounts are in thousands unless otherwise indicated.
- Revenue mix and growth: Q2 cloud revenue grew 63.8% to $8.826 million; total revenue increased 33.3%. For the first half, cloud revenue rose 80.1% to $16.662 million and total revenue increased 44.1%. Management attributed much of the growth, particularly in AsureForce, to the 2017 acquisitions and cloud sales.
- Costs and margins: Gross margin percentage improved year over year in both periods. Q2 SG&A increased 60.3% to $8.784 million, outpacing revenue growth; first-half SG&A rose 50.5% to $15.827 million. The company cited acquisition and integration expenses. Amortization also increased with acquired intangible assets.
- Cash and liquidity: Cash and cash equivalents were $30.419 million at June 30, 2017, versus $12.767 million at year-end 2016; working capital was $21.238 million versus $4.207 million. Cash used in investing was $40.823 million, principally for acquisitions. Financing provided $62.176 million, including $27.872 million net proceeds from a June public offering and debt proceeds.
- Debt: Gross notes payable totaled $78.725 million, or $76.333 million net of issuance costs and discounts, compared with $30.715 million gross at year-end. The balance sheet reports $8.094 million net current debt and $68.239 million net long-term debt. The amended credit facility included $70 million in term loans and an expanded revolver; $4.521 million was available under the revolver. Management reported covenant compliance at quarter-end.
Material changes and unusual items
- Asure completed five acquisitions in 2017: PMSI, Corporate Payroll, and Payroll Specialties NW in January, followed by iSystems and Compass HRM in May. The acquisitions increased goodwill by $49.041 million and added $24.628 million of amortizable intangible assets, based on preliminary purchase-price allocations.
- The iSystems acquisition consideration included $32 million cash, a $5 million subordinated note, and 1,526,332 shares valued at $18 million. The June public offering issued 2,185,000 shares at $13.50 per share. These transactions increased the share count and funded growth, while acquisition financing substantially increased debt.
- Transaction costs for the 2017 acquisitions were $1.234 million and expensed in SG&A. The company recorded no goodwill or finite-lived intangible-asset impairment for the periods presented.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance was provided. Management said it expects sufficient liquidity for at least the next 12 months and projects positive operating cash flow over that period, while acknowledging there is no assurance it will achieve profitability during the remainder of 2017.
- Management plans to grow recurring revenue and continue exploring acquisitions. It cautioned that cash use may exceed recent levels and that future capital may be needed, with no assurance it can be raised on acceptable terms.
- Debt covenants include leverage, fixed-charge coverage, and minimum recurring-revenue requirements; thresholds tighten over time. Management expected to maintain or obtain compliance, including through debt repayment if needed.
- Disclosed risks include integration and realization of acquisition benefits, indebtedness, customer retention and market acceptance, competition and pricing, cybersecurity and service disruption, privacy and regulatory matters, and changes in technology spending. No pending legal proceedings were reported. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Investor facts to verify
- How much of reported revenue growth is organic versus acquired, and how acquisitions affect recurring revenue, margins, and cash generation.
- Integration progress and whether expected synergies from iSystems and other acquisitions are being realized.
- Operating cash flow and working-capital trends, particularly receivables and the conversion of deferred revenue into services.
- Debt terms, interest expense, covenant headroom, required amortization, and the company’s ability to meet upcoming principal payments.
- Final purchase-price allocations and any subsequent adjustments, as the 2017 acquisition valuations were preliminary.