Asure Software, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Dollar amounts are in thousands unless otherwise stated. Asure provides cloud-based human capital management (HCM) software and services to small and mid-sized businesses. Its Workspace Management business was sold in December 2019; 2019 results include that business as discontinued operations, so revenue comparisons below are for continuing operations.
Financial performance
- Revenue: $18,947, down 7.2% from $20,410. Recurring revenue declined 6.8% to $18,436; professional services, hardware and other revenue fell 17.4% to $511. Management cited higher client losses and lower year-end processing fees.
- Profitability: Gross profit was $11,107, down 21.5%; gross margin fell to 58.6% from 69.4%. The filing attributes lower margin to investment in HCM service personnel and migration to secure cloud hosting. Operating loss was $2,444 versus $477.
- Net loss: $1,767, or $0.11 per share, compared with a reported net loss of $2,894, or $0.19 per share, in Q1 2019. Continuing-operations loss improved to $1,767 from $3,437. The 2019 reported net loss included $543 of after-tax discontinued-operations gain.
- Operating expenses: Sales and marketing increased to $3,575 from $2,705; general and administrative fell to $6,453 from $8,189; R&D declined to $1,174 from $1,321. Amortization was $2,349 versus $2,418.
- Cash flow: Operating activities used $3,403, versus $4,247 provided in Q1 2019. Investing activities provided $24,806, principally reflecting a decrease in funds held for clients; financing activities used $29,449, largely from a corresponding decrease in client fund obligations and $1,784 of debt payments. Cash and cash equivalents ended at $20,780, down from $28,826 at year-end.
- Liquidity and debt: Working capital was $14,483, down from $17,854 at December 31, 2019. Gross notes payable were $25,688; reported net carrying value was $25,277 after debt costs and discount. The company reported $9,500 available under its revolver, with a $500 letter of credit outstanding. It was in compliance with financial covenants at quarter-end.
Material changes and unusual items
- Revenue and gross margin declined year over year. Operating loss widened despite lower G&A and R&D spending; the improved reported net loss partly reflects a much less adverse “interest expense and other, net” line, which was a $696 gain in Q1 2020 versus a $2,714 loss in Q1 2019. Management says the 2020 amount included income from the FM:Systems transition services agreement, offset by interest expense.
- Cash flow movements were heavily affected by client funds and related obligations. Funds held for clients were $116,433 and client fund obligations were $117,476 at March 31, 2020; these balances are distinct from cash available for general corporate purposes.
- In April 2020, Asure received an $8,856 Paycheck Protection Program loan at 1% interest, due in two years. Some or all may be forgiven subject to program requirements, including eligible use and headcount; the filing does not state the amount expected to be forgiven.
- The board authorized a new stock repurchase program of up to $5,000; no repurchases had occurred in 2020 as of the filing.
- The company disclosed that its Q1 earnings press release misstated March 31 total liabilities and stockholders’ equity as $299,060; the 10-Q reports the correct amount as $300,138 and says the other press-release financial information was correct.
Outlook, risks, and controls
- Management expected COVID-19 to materially reduce demand and revenue for the remainder of 2020, with the largest impact then anticipated in Q2 and Q3. Risks include customer closures or headcount reductions, delayed purchasing, lower subscription values or duration, higher attrition, and difficulty providing on-site services. The duration and scale of the impact were uncertain.
- Asure had implemented cost-saving initiatives and stated that, based on internal projections and available liquidity including the PPP loan, it expected sufficient cash for operating needs and required debt payments for at least 12 months. Management cautioned that it could not assure revenue growth or profitability for the remainder of 2020.
- The credit agreement includes minimum EBITDA, leverage, and fixed-charge coverage covenants. The company reported compliance at March 31 and expected to remain compliant or obtain compliance through debt repayment. The filing does not provide a detailed covenant headroom calculation.
- Disclosure controls and procedures were deemed ineffective as of March 31, 2020, following a material weakness reported in Q4 2019. Management described remediation efforts but did not state that the weakness had been fully remediated.
- No material pending legal proceedings or off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Subsequent quarterly results, customer retention, employment trends among clients, and the actual COVID-19 impact versus management’s Q2–Q3 expectations.
- PPP loan use, eligibility, forgiveness outcome, and any resulting repayment obligations.
- Cash available for corporate use versus client funds, ongoing operating cash burn, and the basis for the 12-month liquidity assessment.
- Debt covenant performance and headroom, revolver availability, and the terms and effects of the credit agreement amendment filed for April 2020.
- Progress in remediating the material weakness and the accuracy of financial reporting after the press-release correction.