Business context and reporting period
Asure Software, Inc. provides cloud-based human capital management software and services, principally to small and midsize businesses. This unaudited Form 10-Q covers the three months ended March 31, 2022; comparisons are with the three months ended March 31, 2021 unless otherwise stated. Amounts below are in millions of dollars unless noted.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Revenue | $24.33 | $19.80; up 23% |
| Recurring revenue | $23.00 | $19.24; up 20% |
| Gross profit / margin | $15.46 / 64% | $12.49 / 63% |
| Operating loss | $(2.17) | $(1.27) |
| Net loss / diluted loss per share | $(3.02) / $(0.15) | $(1.60) / $(0.08) |
| Operating cash flow | $2.53 provided | $1.36 used |
| Cash, cash equivalents and restricted cash on balance sheet | $12.05 | $13.43 at Dec. 31, 2021 |
| Working capital | $15.83 | $17.01 at Dec. 31, 2021 |
| Notes payable, gross | $38.99 | $38.40 at Dec. 31, 2021 |
Operating expenses rose to $17.64 from $13.76, including higher sales and marketing, research and development, and intangible amortization. Interest expense and other, net increased to $0.82 from $0.22. Comprehensive loss was $4.08, including a $1.06 unrealized loss on available-for-sale securities. Total assets were $449.86 and stockholders’ equity was $154.89 at March 31, 2022.
Material changes and cash flows
Revenue growth reflected organic growth, year-end processing fees, acquisitions, and an increase in professional services, hardware and other revenue, which management attributed in part to implementation of its ERTC service during 2021. Management cited more efficient operations as contributing to the gross-margin improvement. Sales and marketing increased 36% and R&D increased 62%, reflecting investment in direct sales hiring and product development. The company acquired payroll-business customer relationships effective January 1, 2022, for stated consideration of $2.35, including a $0.41 promissory note.
Investing activities used $6.72, including $1.97 for the acquisition and $4.50 of purchases of available-for-sale securities. Financing activities provided $21.30, entirely from a net increase in client fund obligations; this is not equivalent to unrestricted operating liquidity. Cash, cash equivalents and restricted cash across the company and client funds totaled $215.85 at quarter-end, of which $203.80 was restricted cash held for clients. Funds held for clients of $238.68 were largely matched by client fund obligations of $238.44.
Gross debt included $30.17 under the senior credit facility and $8.82 of subordinated acquisition notes; the balance-sheet carrying value, net of issuance costs and discount, was $35.75. The facility bears interest at the greater of 9% or prime plus 5.75%, with additional paid-in-kind interest. It is secured by company and subsidiary assets. Management disclosed the facility commitment was extended to June 30, 2022.
Outlook, risks and notable items
The filing provides no specific numerical revenue or earnings guidance. Management said it expects revenue to increase as it expands its applications and client base, and noted that first-quarter revenue and margins are typically higher because of annual payroll tax-form processing. It expects to continue investing in sales, marketing and R&D; management said the pandemic’s effects on client headcounts, together with increased investment, adversely affected Q1 operating results and may continue to weigh on net income. The filing states that the full future impact of COVID-19 is uncertain.
Management cautioned that the company may be unable to maintain sufficient cash for operations or acquisitions and may need additional capital, which may not be available on acceptable terms. Other stated risks include client attrition or reduced hiring, converting deferred revenue into revenue and cash flow, service interruptions and cybersecurity, regulation, competition, acquisitions, interest rates, and economic and market conditions. No material pending legal proceedings or material changes to previously disclosed risk factors were reported. Management reported disclosure controls and procedures were effective as of March 31, 2022.
Available-for-sale securities held for clients had $1.17 of aggregate unrealized losses at quarter-end, versus $0.11 at year-end; management said it did not intend or expect to sell them before recovery of amortized cost. The company reported no impairment of goodwill or intangibles during the quarter, while noting future impairment could occur if market conditions or its stock price deteriorate. An acquisition-related note with a July 2021 maturity remained unpaid pending resolution of an indemnification claim; the company stated it was not in default and retained offset rights.
Important facts for investors to verify
- Whether recurring revenue growth is sustained and increasingly reflects organic client and employee growth rather than acquisitions or seasonal processing fees.
- How increased sales and R&D spending affects operating losses, margins, and cash generation.
- Unrestricted liquidity, facility availability and terms, covenant exposure, and the ability to fund operations and acquisitions.
- The composition and recoverability of client-held investments, including the unrealized losses, and the distinction between client funds and company cash.
- Acquisition performance, purchase-price adjustments and contingent obligations, as well as potential impairment of goodwill and intangible assets.