Asure Software, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Amounts below are in thousands of dollars, except per-share data. Asure provides cloud-based human capital management software and services to small and mid-sized businesses. The 2019 comparisons reflect continuing operations; Asure sold its Workspace Management business in December 2019.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $14,115 | $17,274 | $33,061 | $37,684 |
| Gross profit | $8,107 | $10,215 | $19,213 | $24,371 |
| Gross margin | 57.4% | 59.1% | 58.1% | 64.7% |
| Operating loss | $(3,581) | $(2,833) | $(6,026) | $(3,310) |
| Loss from continuing operations | $(3,944) | $(6,298) | $(5,711) | $(9,735) |
| Continuing-operations loss per share | $(0.25) | $(0.41) | $(0.36) | $(0.63) |
Q2 revenue declined 18.3%, and six-month revenue declined 12.3%. Recurring revenue fell 17.4% in Q2 and 11.7% for the first half; management attributed the declines primarily to COVID-19, the loss of a major customer, and lower interest rates on client funds. Gross margin also contracted, which management linked to lower volumes, increased HCM service staffing, cloud-hosting migration, and higher amortization of capitalized software costs.
Q2 operating expenses were $11,688, down from $13,048, but the operating loss widened as gross profit fell. Lower general and administrative expenses helped reduce the continuing-operations loss; the prior-year comparison also included substantially higher interest expense. Q2 2020 interest and other, net was income of $14, versus expense of $3,069 in Q2 2019. The six-month figures were income of $710 versus expense of $5,783, including transition-services income related to the Workspace sale.
Cash flow, liquidity and debt
- Cash and cash equivalents were $29,259 at June 30, 2020, compared with $28,826 at year-end 2019. Working capital was $10,513, down from $17,854; the company attributed much of the decline to debt reclassification.
- For the first six months, operating activities used $4,131 of cash, compared with $2,842 provided in 2019. Investing activities provided $29,891 and financing activities used $25,327. These totals were materially affected by movements in client funds and corresponding client-fund obligations, rather than solely by operating liquidity.
- Gross notes payable totaled $33,882 at June 30; net of debt issuance costs and discount, reported notes payable were $33,555. Of gross debt, $15,894 was classified as current. The revolving facility had no borrowing outstanding and $9,500 available at June 30.
- Client funds held were $112,581, against client-fund obligations of $112,857; these balances should not be viewed as unrestricted company cash.
Material developments, outlook and risks
- COVID-19: Management expected pandemic-related demand weakness to materially reduce revenue for the remainder of 2020, with the largest impact then expected in Q2 and Q3. Risks include customer headcount reductions or closures, delayed purchases, shorter or lower-value subscriptions, payment delays, and higher attrition. Management reported no COVID-related impairment or bad-debt reserve in the first half, but said future events could require charges.
- Credit covenant default and amendment: Asure failed to meet its minimum EBITDA covenant for the quarter ended March 31, 2020 and reported it was also out of compliance as of June 30. In July, the lender reserved rights and began accruing default interest. On August 10, after quarter-end, the lender waived the default and accrued default interest under an amendment. The amendment reduced the facility to $10,000 of term loans and a $5,000 revolver, required a $9,750 principal payment and a $225 fee, reset covenants, and added a minimum recurring-revenue covenant. The amendment waived a prepayment penalty on the required payment. Management said it had sufficient cash for the payment and expected to meet future needs and amended covenants; those expectations are forward-looking.
- PPP loan: Asure received an $8,856 Paycheck Protection Program loan at 1% interest. The company intended to use a significant majority for qualifying expenses, but gave no assurance that any portion would be forgiven.
- Strategy and outlook: The company said it would continue measured investment in revenue- and cash-generating areas and product development, while cautioning that it could not assure revenue growth or profitability for the remainder of 2020. Q2 launches included payroll self-service, an HR product tier, a time-and-attendance release, and a mobile app.
- Controls and leadership: Management concluded disclosure controls were not effective at June 30, 2020, citing a previously reported material weakness and ongoing remediation. CFO Kelyn Brannon resigned effective August 10; Jay Powers was appointed CFO effective August 11.
- Other: No material pending legal proceedings were reported. The company had no off-balance-sheet arrangements and reported no material change in market-risk exposure.
Important facts for investors to verify
- Whether Asure meets the amended minimum EBITDA and recurring-revenue covenants, and what borrowing capacity remains after the lender amendment and $9,750 payment.
- How COVID-19, customer losses, employment levels, and lower client-fund interest rates affect recurring revenue, collections, and attrition.
- The amount, if any, of PPP loan forgiveness ultimately obtained and the repayment obligations for any unforgiven balance.
- Whether operating cash flow improves, separating business cash generation from client-fund flows.
- Progress in remediating the material weakness and restoring effective disclosure controls.