Asure Software, Inc. — FY2016 Form 10-K
Reporting period: Year ended December 31, 2016; comparisons are with FY2015. The filing is an annual report, not a standalone fourth-quarter report. Unless noted, amounts below are in millions of dollars.
Business context
Asure provides cloud-based workforce and workplace management software, including time and labor management, workspace utilization, HR, payroll and benefits administration. It reported approximately 7,000 clients in 80 countries. Its 2016 Mangrove acquisition expanded the business into HR, payroll and benefits services.
Financial performance and liquidity
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Revenue | $35.542 | $26.906 | Up 32.1% |
| Gross profit / margin | $27.425 / 77.2% | $19.566 / 72.7% | Margin up 4.5 percentage points |
| Operating income (loss) | $1.227 | $(0.317) | Improved |
| Net loss | $(0.972) | $(1.757) | Loss narrowed 44.7% |
| Basic and diluted loss per share | $(0.15) | $(0.28) | Improved |
| Cash from operating activities | $(2.012) | $3.355 | Turned negative |
| Cash used in investing activities | $(18.775) | $(1.388) | Higher, mainly acquisition and client funds |
| Cash from financing activities | $32.299 | $(1.143) | Primarily borrowing and equity issuance |
- Cloud revenue grew 51.2% to $20.606 million and was the largest revenue category. Mangrove contributed $5.806 million of 2016 cloud revenue.
- Maintenance and support revenue declined 24.6% to $4.566 million, which management linked mainly to customers moving from on-premise to cloud services and contract timing.
- SG&A rose 40.0% to $21.048 million, largely due to Mangrove integration costs; R&D declined 5.1% to $2.897 million. Interest expense and other totaled $2.012 million.
- Year-end cash and cash equivalents were $12.767 million, versus $1.158 million a year earlier. Working capital was $4.207 million, compared with a deficit of $8.067 million. The balance sheet also included $22.981 million of funds held for clients, matched by client fund obligations; these are restricted to payroll and tax-related client payments.
- Gross notes payable were $30.715 million ($30.036 million net of debt issuance costs), versus $13.687 million gross at year-end 2015. The $3.0 million revolving facility was undrawn at year-end. The company reported compliance with debt covenants at December 31, 2016.
Material changes and significant events
- In March 2016, Asure acquired Mangrove and COBRAsource for stated consideration including $11.3 million cash, a $6.0 million secured subordinated note and $1.0 million for COBRAsource assets. The acquisition added HR, payroll and benefits operations.
- In December 2016, Asure sold 1,949,250 common shares at $8.00 per share, receiving approximately $14.4 million net. The offering increased cash and stockholders’ equity; some proceeds were later used for debt reduction and January 2017 acquisitions.
- In January 2017, the company completed three acquisitions: Personnel Management Systems, Corporate Payroll’s payroll division, and Payroll Specialties NW. Consideration included cash, subordinated notes and, for Corporate Payroll, 112,166 shares valued at $1.0 million.
- In March 2017, the Wells Fargo credit agreement was amended to add a $5.0 million term loan, intended to repay part of the Mangrove note, and to revise leverage and fixed-charge coverage requirements. These are subsequent events, not FY2016 results.
Outlook, risks and controls
- Management provided no specific revenue or earnings guidance. It stated that it expects sufficient liquidity for at least the next 12 months and currently projects positive operating cash flow over that period, while cautioning that integration, growth, cash consumption and future acquisitions create uncertainty.
- Management cited risks from acquisition integration, competition, rapid technology and customer changes, ability to achieve profitability and positive cash flow, and possible need for additional capital on acceptable terms. Debt covenants and scheduled principal payments remain important constraints.
- As an HR and payroll services provider, Asure processes sensitive personal data. The filing highlights privacy and security compliance risks, including costs and obligations under the EU GDPR, effective May 2018.
- The company reported no pending legal proceedings at December 31, 2016 and no customer representing 10% or more of revenue. No goodwill or long-lived-asset impairment was recorded for the periods presented.
- Management concluded disclosure controls and internal control over financial reporting were effective as of year-end. However, Mangrove—representing 49.2% of consolidated assets and 19.5% of revenue—was excluded from management’s internal-control assessment because it had been acquired during 2016. The auditor did not attest to internal control effectiveness.
Most important facts for investors to verify
- Whether cloud growth and the Mangrove and 2017 acquisition businesses translate into recurring organic growth, and how much reported growth is acquisition-driven.
- Whether operating cash flow recovers: FY2016 operating cash flow was negative despite improved operating income and a year-end cash increase funded substantially by financing.
- Current debt balances, covenant headroom, scheduled repayments and the effect of the March 2017 loan amendment and subsequent acquisitions.
- Integration costs, acquired-business performance and the risks associated with goodwill of $26.259 million and intangible assets of $12.048 million at year-end.
- Progress in assessing and integrating Mangrove’s internal controls, and the company’s readiness and costs for changing privacy and revenue-recognition requirements.