ASURE Software, Inc. — Q1 2019 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2019, compared with Q1 2018; balance sheet compared with December 31, 2018. Asure provides cloud-based human capital management and workspace management software and related services. It acquired Payroll Maxx LLC effective January 1, 2019.
Key financial results
Amounts below are in thousands of dollars, except per-share data and percentages.
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $26,760 | $19,304 | +38.6% |
| Recurring revenue | $23,561 | $17,485 | +34.7% |
| Professional services, hardware and other revenue | $3,199 | $1,819 | +75.9% |
| Gross profit | $18,062 | $13,747 | +31.4% |
| Gross margin | 67.5% | 71.2% | -3.7 percentage points |
| Operating income | $164 | $18 | +$146 |
| Net loss | $(2,894) | $(1,925) | Loss increased |
| Basic and diluted loss per share | $(0.19) | $(0.15) | Loss per share increased |
| Cash provided by (used in) operations | $4,247 | $(896) | +$5,143 |
Revenue growth was attributed primarily to increased cloud revenue, acquisitions completed in 2017 and 2018, and continued emphasis on integrated cloud solutions. Management said lower gross margin reflected product mix, including a greater contribution from HCM products, which typically have lower margins. SG&A rose 19.2% to $12,766, while research and development rose 65.2% to $2,351 and intangible amortization rose 74.1% to $2,781. Interest expense and other expense increased to $2,754 from $1,760, primarily due to higher debt balances.
Financial position, debt and liquidity
- At March 31, cash and cash equivalents were $16,591, versus $15,444 at year-end. Working capital was $7,493, down from $11,443; it includes deferred revenue and substantial client-fund balances and obligations.
- Total assets were $380,101 and total liabilities were $279,044. Funds held for clients of $123,810 were largely offset by client-fund obligations of $124,672; these balances should be distinguished from unrestricted corporate liquidity.
- Gross notes payable were $124,134; carrying value net of debt issuance costs and discount was $120,045. Debt increased from $115,176 gross at year-end. The Wells Fargo term loans mature May 25, 2022; acquisition-related subordinated notes mature from May 2019 through July 2021. The filing lists term-loan stated rates of 5.74% and 10.74%.
- At quarter-end, $283 was drawn on the $5,000 revolving line, leaving $4,717 available. The company also reported $17,000 available under its delayed-draw term-loan commitment. The credit agreement is secured by substantially all company and subsidiary assets.
- Operating cash flow was $4,247, including the effects of collections, higher accounts payable and noncash depreciation and amortization. Investing cash flow was $3,313, including $7,495 of acquisition spending and cash inflow from changes in client funds. Financing cash flow was negative $6,402, including the net change in client-fund obligations and debt financing fees. Cash increased by $1,147 during the quarter.
Material changes, outlook and risks
- Payroll Maxx was acquired in January. The acquisition contributed to goodwill and intangible asset growth; Asure recorded $4,826 of goodwill from the acquisition and issued 122,850 shares in connection with it.
- Management stated that the company was in compliance with financial covenants at March 31 and expected to remain compliant over the next 12 months. An amendment raised the maximum leverage ratio to 6.00:1 for the first three quarters of 2019, with subsequent step-downs.
- Management believed available liquidity and expected operating cash generation would meet operational needs, including required debt payments, for at least 12 months. It also noted that additional capital or debt may be needed to support growth and acquisitions, and that acceptable financing may not be available.
- No formal revenue or earnings guidance was provided. Management cautioned that there was no assurance it could grow revenue or achieve profitability during the remainder of fiscal 2019.
- Remaining performance obligations were approximately $52,622; about 58% was expected to be recognized over the next 12 months. No customer represented 10% or more of quarterly revenue.
- Risks cited include economic and credit-market conditions, IT spending, customer retention and market acceptance, competition and pricing, security and service disruptions, privacy and regulatory requirements, hiring and growth management, acquisition benefits, indebtedness, and access to capital. The filing reported no pending legal proceedings, no off-balance-sheet arrangements, and no material changes to previously disclosed risk factors.
- Operating lease liabilities were $8,864 at quarter-end following adoption of the lease accounting standard in January; management said adoption did not materially affect operating results or liquidity.
Important facts for investors to verify
- How much of the 38.6% revenue growth reflects acquired businesses versus organic and cloud growth, and whether recurring revenue growth is sustained.
- Whether gross-margin pressure persists as product mix changes, alongside rising research, selling and integration costs.
- Debt balances, interest burden, scheduled maturities, covenant headroom, and actual availability of the revolver and delayed-draw facility.
- Cash generation excluding changes in client funds and working-capital movements, and the distinction between client funds and corporate cash.
- Progress toward profitability and the assumptions underlying management’s 12-month liquidity assessment and acquisition strategy.