ASURE Software, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Financial figures below are in USD millions unless noted. Asure provides cloud-based human capital management (HCM) and workspace-management software and services. It reported approximately 10,000 direct clients in 80 countries. On October 7, 2019, after quarter-end, it agreed to sell substantially all of its workspace-solutions business.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $24.6 | $23.5 | $76.2 | $64.5 |
| Recurring revenue | $21.2 | $19.6 | $65.2 | $54.8 |
| Gross profit / margin | $15.5 / 63.1% | $15.0 / 63.9% | $48.6 / 63.8% | $43.3 / 67.1% |
| Operating loss | $(0.8) | $(2.0) | $(2.1) | $(2.6) |
| Net loss | $(3.4) | $(3.6) | $(11.2) | $(9.3) |
| Loss per share, basic and diluted | $(0.22) | $(0.24) | $(0.73) | $(0.68) |
| Interest and other expense | $2.9 | $1.9 | $8.7 | $6.3 |
- Revenue rose 4.7% in Q3 and 18.0% year to date. Recurring revenue increased 8.5% and 19.0%, respectively; management attributed growth mainly to cloud revenue, acquisitions, and continued sales of integrated cloud solutions.
- Gross margin declined year over year in both periods. Management cited revenue mix, including a larger share of lower-margin HCM revenue and hardware/professional-services mix.
- Q3 net loss narrowed, while the nine-month net loss widened. Higher interest expense, reflecting increased debt from the credit agreement and acquisitions, weighed on results.
Cash flow, liquidity, and debt
- Nine-month operating cash flow was $3.9 million, compared with cash used of $6.1 million in 2018. Investing cash flow was $36.6 million provided, versus $53.8 million used; financing cash flow was $43.3 million used, versus $51.4 million provided.
- Cash and cash equivalents were $12.6 million at September 30, down from $15.4 million at December 31, 2018. Working capital was $3.6 million, down from $11.4 million.
- Funds held for clients of $88.2 million were substantially offset by client-fund obligations of $88.5 million; these client-related balances should be distinguished from cash available for general corporate use.
- Notes payable totaled $120.0 million gross, or $116.7 million net of issuance costs and discounts; the company also had $4.0 million outstanding on its revolver. The credit facility was secured by substantially all company and subsidiary assets. Principal payments of $103.7 million were scheduled for 2022.
- Only $1.0 million remained available on the revolver at quarter-end. Management said it expected sufficient liquidity for at least 12 months, taking account of the planned workspace-business sale, and expected covenant compliance; it also noted possible future needs for additional capital or debt.
Material developments, outlook, and risks
- Proposed sale: Asure agreed to sell the UK subsidiaries and certain workspace-business assets to FM:Systems-related buyers for $120 million cash, subject to a working-capital adjustment and customary closing conditions. The agreement had no financing condition, and an equity-financing commitment was in place. Completion was not assured.
- Credit agreement: Lenders waived the September 30 leverage-covenant requirement and consented to certain UK subsidiary advances, subject to conditions tied to the sale. The waiver could expire if the sale did not close by December 15, 2019, or other waiver conditions were not met. If an amendment was not negotiated by the sale closing, lenders could move the facility maturity to March 13, 2020. Management said it was negotiating an amendment.
- Outlook: Management planned modest investment in revenue- and cash-flow-generating areas, but stated there was no assurance it could grow revenue or achieve profitability for the remainder of 2019. It said completing the sale was included in its liquidity expectations.
- Execution and operating risks: The filing highlights risks to completing the sale, including potential costs, management distraction, business-partner or employee uncertainty, and possible acceleration of amounts owed to lenders if the transaction failed. Other cited risks include competition, customer retention, security and service disruptions, regulation, acquisition integration, and substantial indebtedness.
- Management reported no pending legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls as of September 30, 2019. Adoption of the new lease standard resulted in approximately $8.9 million of lease liabilities at January 1, 2019 and did not materially affect results or liquidity.
Important facts for investors to verify
- Whether the $120 million workspace-business sale closed on schedule, its final working-capital adjustment, proceeds received, and resulting business mix.
- Whether the sale-related lender waiver conditions were satisfied and a credit-facility amendment was completed; confirm covenant headroom, maturity, interest terms, and debt repayment plans.
- Whether recurring/cloud revenue growth continues after the sale, and how the remaining HCM business affects gross margin and profitability.
- Whether operating cash flow improves sustainably, given the quarterly and year-to-date losses, limited revolver availability, and client funds that are not general-purpose liquidity.
- How the sale proceeds are applied, including debt reduction, operating needs, or acquisitions, and whether additional financing is required.