ASURE SOFTWARE INC 10-Q

ITEM 1. FINANCIAL STATEMENTS ASURE SOFTWARE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) September 30, 2021 December 31, 2020 ASSETS (unaudited) Current assets: Cash and cash equivalents $ 11,506 $ 28,577 Accounts receivable, net of allowance for doubtful accounts of $ 2,730 and $ 2,194 at September 30, 2021 and December 31, 2020, respectively 4,595 3,848 Inventory 303 449 Prepaid expenses and other current assets 13,356 2,866 Total current assets before funds held for clients 29,760 35,740 Funds held for clients 174,754 321,069 Total current assets 204,514 356,809 Property and equipment, net 8,764 8,281 Goodwill 86,114 73,958 Intangible assets, net 82,385 64,552 Operating lease assets, net 6,170 6,450 Other assets, net 4,129 3,952 Total assets $ 392,076 $ 514,002 LIABILITIES AND STOCKHOLDERS ’ EQUITY Current liabilities: Current portion of notes payable $ 1,914 $ 12,310 Accounts payable 1,299 1,288 Accrued compensation and benefits 2,675 2,916 Operating lease liabilities, current 1,717 1,833 Other accrued liabilities 1,775 1,380 Contingent purchase consideration 1,905 3,880 Deferred revenue 1,501 4,416 Total current liabilities before client fund obligations 12,786 28,023 Client fund obligations 174,372 320,578 Total current liabilities 187,158 348,601 Long-term liabilities: Deferred revenue 51 111 Deferred tax liability 1,446 888 Notes payable, net of current portion 32,800 12,225 Operating lease liabilities, noncurrent 5,044 5,366 Contingent purchase consideration 3,038 — Other liabilities 600 1,157 Total long-term liabilities 42,979 19,747 Total liabilities 230,137 368,348 Stockholders’ equity: Preferred stock, $ 0.01 par value; 1,500 shares authorized; none issued or outstanding — — Common stock, $ 0.01 par value; 44,000 shares authorized; 20,352 and 19,354 shares issued, 19,968 and 18,970 shares outstanding at September 30, 2021 and December 31, 2020, respectively 204 193 Treasury stock at cost, 384 shares at September 30, 2021 and December 31, 2020 ( 5,017 ) ( 5,017 ) Additional paid-in capital 428,894 419,827 Accumulated deficit ( 262,459 ) ( 269,953 ) Accumulated other comprehensive income 317 604 Total stockholders’ equity 161,939 145,654 Total liabilities and stockholders’ equity $ 392,076 $ 514,002 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 1 Table of Contents ASURE SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands, except per share amounts) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 (unaudited) (unaudited) Revenue: Recurring $ 16,374 $ 15,273 $ 51,688 $ 47,442 Professional services, hardware and other 1,607 742 3,263 1,635 Total revenue 17,981 16,015 54,951 49,077 Cost of Sales 7,113 6,942 21,646 20,790 Gross profit 10,868 9,073 33,305 28,287 Operating expenses: Sales and marketing 3,897 3,573 11,130 9,917 General and administrative 7,005 5,947 20,324 16,484 Research and development 1,505 1,805 3,972 4,356 Amortization of intangible assets 2,534 2,424 7,590 7,122 Total operating expenses 14,941 13,749 43,016 37,879 Loss from operations ( 4,073 ) ( 4,676 ) ( 9,711 ) ( 9,592 ) Interest income (expense) and other, net ( 530 ) ( 397 ) ( 977 ) ( 930 ) (Loss) gain on extinguishment of debt ( 342 ) ( 11 ) 8,312 123 Employee retention tax credit 10,533 — 10,533 — Income (loss) from operations before income taxes 5,588 ( 5,084 ) 8,157 ( 10,399 ) Income tax expense (benefit) 260 ( 325 ) 663 71 Net income (loss) 5,328 ( 4,759 ) 7,494 ( 10,470 ) Other comprehensive (loss) income: Unrealized (loss) gain on marketable securities ( 79 ) 11 ( 287 ) 638 Comprehensive income (loss) $ 5,249 $ ( 4,748 ) $ 7,207 $ ( 9,832 ) Basic and diluted earnings (loss) per share Basic $ 0.28 $ ( 0.30 ) $ 0.39 $ ( 0.66 ) Diluted $ 0.28 $ ( 0.30 ) $ 0.39 $ ( 0.66 ) Weighted average basic and diluted shares Basic 19,182 15,873 19,083 15,793 Diluted 19,330 15,873 19,243 15,793 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 2 Table of Contents ASURE SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (in thousands) (unaudited) Common Stock Outstanding Common Stock Amount Treasury Stock Additional Paid-in Capital Accumulated Deficit Other Comprehensive Income (Loss) Total Stockholders’ Equity Balance at December 31, 2020 18,970 $ 193 $ ( 5,017 ) $ 419,827 $ ( 269,953 ) $ 604 $ 145,654 Stock issued upon option exercise and vesting of restricted stock units 51 1 — 131 — — 132 Share based compensation — — — 626 — — 626 Share issuance costs — — — ( 23 ) — — ( 23 ) Net loss — — — — ( 1,598 ) — ( 1,598 ) Other comprehensive loss — — — — — ( 139 ) ( 139 ) Balance at March 31, 2021 19,021 $ 194 $ ( 5,017 ) $ 420,561 $ ( 271,551 ) $ 465 $ 144,652 Stock issued upon option exercise and vesting of restricted stock units 49 1 — 188 — — 189 Stock issued, ESPP 29 — — 170 — — 170 Share based compensation — — — 714 — — 714 Net income — — — — 3,764 — 3,764 Other comprehensive loss — — — — — ( 69 ) ( 69 ) Balance at June 30, 2021 19,099 $ 195 $ ( 5,017 ) $ 421,633 $ ( 267,787 ) $ 396 $ 149,420 Stock issued upon option exercise and vesting of restricted stock units 102 1 — 57 — — 58 Shares issued — acquisitions 767 8 — 6,420 — — 6,428 Share based compensation — — — 784 — — 784 Net income — — — — 5,328 — 5,328 Other comprehensive loss — — — — — ( 79 ) ( 79 ) Balance at September 30, 2021 19,968 $ 204 $ ( 5,017 ) $ 428,894 $ ( 262,459 ) $ 317 $ 161,939 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 3 Table of Contents ASURE SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (in thousands) (unaudited) Common Stock Outstanding Common Stock Amount Treasury Stock Additional Paid-in Capital Accumulated Deficit Other Comprehensive Income (Loss) Total Stockholders’ Equity Balance at December 31, 2019 15,714 $ 161 $ ( 5,017 ) $ 396,102 $ ( 253,642 ) $ ( 25 ) $ 137,579 Stock issued upon option exercise and vesting of restricted stock units 29 — — 106 — — 106 Share based compensation — — — 438 — — 438 Net loss — — — — ( 1,767 ) — ( 1,767 ) Other comprehensive income — — — — — 65 65 Balance at March 31, 2020 15,743 $ 161 $ ( 5,017 ) $ 396,646 $ ( 255,409 ) $ 40 $ 136,421 Stock issued, ESPP 32 — — 157 — — 157 Stock issued upon option exercise and vesting of restricted stock units 66 1 — 301 — — 302 Share based compensation — — — 588 — — 588 Net loss — — — — ( 3,944 ) — ( 3,944 ) Other comprehensive income — — — — — 562 562 Balance at June 30, 2020 15,841 $ 162 $ ( 5,017 ) $ 397,692 $ ( 259,353 ) $ 602 $ 134,086 Stock issued upon option exercise and vesting of restricted stock units 59 1 — 50 — — 51 Share based compensation — — — 707 — — 707 Net loss — — — — ( 4,759 ) — ( 4,759 ) Other comprehensive income — — — — — 11 11 Balance at September 30, 2020 15,900 $ 163 $ ( 5,017 ) $ 398,449 $ ( 264,112 ) $ 613 $ 130,096 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 4 Table of Contents ASURE SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Nine Months Ended September 30, 2021 2020 (unaudited) Cash flows from operating activities: Net income (loss) $ 7,494 $ ( 10,470 ) Adjustments to reconcile income (loss) to net cash (used in) provided by operations: Depreciation and amortization 11,690 10,919 Amortization of operating lease assets 1,146 1,127 Amortization of debt financing costs and discount 117 348 Net amortization of premiums and accretion of discounts on available-for-sale securities 123 114 Provision for doubtful accounts 1 317 Provision for deferred income taxes 559 26 Gain on extinguishment of debt ( 8,312 ) ( 123 ) Net realized gains on sales of available-for-sale securities ( 390 ) ( 499 ) Share-based compensation 2,124 1,733 (Gain) loss on disposals of long-term assets ( 32 ) 55 Change in fair value of contingent purchase consideration ( 191 ) — Changes in operating assets and liabilities: Accounts receivable ( 536 ) 465 Inventory 85 190 Prepaid expenses and other assets ( 10,916 ) 6,244 Operating lease right-of-use assets ( 1,368 ) ( 1,052 ) Accounts payable 11 ( 887 ) Accrued expenses and other long-term obligations 111 ( 2,881 ) Operating lease liabilities 116 370 Deferred revenue ( 2,976 ) ( 3,700 ) Net cash provided by operating activities ( 1,144 ) 2,296 Cash flows from investing activities: Acquisition of intangible asset ( 25,526 ) ( 8,817 ) Purchases of property and equipment ( 100 ) ( 859 ) Software capitalization costs ( 3,152 ) ( 1,904 ) Purchases of available-for-sale securities ( 695 ) ( 12,188 ) Proceeds from sales and maturities of available-for-sale securities 8,431 8,456 Net cash used in investing activities ( 21,042 ) ( 15,312 ) Cash flows from financing activities: Proceeds from notes payable 29,425 8,856 Payments of notes payable ( 15,073 ) ( 12,174 ) Payments of contingent purchase consideration ( 1,784 ) — Debt financing fees ( 878 ) ( 245 ) Net proceeds from issuance of common stock 526 616 Net change in client fund obligations ( 146,206 ) 68,441 Net cash (used in) provided by financing activities ( 133,990 ) 65,494 Net (decrease) increase in cash, cash equivalents, restricted cash, and restricted cash equivalents ( 156,176 ) 52,478 Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of period 324,985 134,060 Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period $ 168,809 $ 186,538 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 5 Table of Contents ASURE SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (in thousands) Nine Months Ended September 30, 2021 2020 (unaudited) Reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents to the Condensed Consolidated Balance Sheets Cash and cash equivalents $ 11,506 $ 12,939 Restricted cash and restricted cash equivalents included in funds held for clients 157,303 173,599 Total cash, cash equivalents, restricted cash, and restricted cash equivalents $ 168,809 $ 186,538 Supplemental information: Cash paid for interest $ 722 $ 967 Cash paid for income taxes $ 332 $ 3,469 Net assets added from acquisitions $ 763 $ — Non-cash investing and financing activities: Contingent purchase consideration issued for acquisitions $ 3,038 $ 2,745 Notes payable issued for acquisitions $ 4,386 $ 330 Stock issuance for acquisitions $ 6,428 $ — The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 6 Table of Contents ASURE SOFTWARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (in thousands, except per share amounts) NOTE 1 – THE COMPANY AND BASIS OF PRESENTATION Asure Software, Inc., (“Asure”, the “Company”, “we” and “our”), a Delaware Corporation, is a leading provider of Human Capital Management (“HCM”) software solutions. We help small and medium-sized companies grow by helping them build more productive teams, providing the tools and resources that help them stay compliant with ever-changing federal, state, and local tax jurisdictions and labor laws, and better allocate cash so they can spend their financial capital on growing their business rather than back-office overhead expenses. Asure’s Human Capital Management suite, named Asure HCM, includes cloud-based Payroll, Tax Services, and Time & Attendance software as well as human resources (“HR”) services ranging from HR projects to completely outsourcing payroll and HR staff. We also offer these products and services through our network of reseller partners. Our platform vision is to help clients grow their business and become the most trusted HCM resource to entrepreneurs everywhere. Our product strategy is driven by three primary challenges that prevent businesses from growing: HR complexity, allocation of both human and financial capital, and the ability to build great teams. The Asure HCM suite includes four product lines: Asure Payroll & Tax, Asure HR, Asure Time & Attendance, and Asure HRServices. We develop, market, sell and support our offerings nationwide through our principal office in Austin, Texas and from our processing hubs in California, Florida, Nebraska, New Jersey, New York, Tennessee, and Vermont. In May 2021, we closed our Washington office where we provided our HR consulting services as employees from that office now work remotely. We have prepared the accompanying unaudited Condensed Consolidated Financial Statements in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) and accordingly, they do not include all information and footnotes required under U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. In the opinion of management, these interim financial statements contain all adjustments, consisting of normal, recurring adjustments, necessary for a fair presentation of our financial position as of September 30, 2021 and the results of operations, statements of changes in stockholders’ equity for the three and nine months ended September 30, 2021 and September 30, 2020, and our statements of cash flows for the nine months ended September 30, 2021 and September 30, 2020. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with our audited Consolidated Financial Statements and notes thereto filed with the SEC in our annual report on Form 10-K for the fiscal year ended December 31, 2020 (our “2020 Annual Report on Form 10-K”). The results for the interim periods are not necessarily indicative of results for a full fiscal year. NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES Preparation of the Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. These estimates are subjective in nature and involve judgments. The more significant estimates made by management include the valuation allowance for the gross deferred tax assets, useful lives of long-lived assets, the determination of the fair value of its long-lived assets, and the fair value of assets acquired and liabilities assumed during acquisitions. We base our estimates on historical experience and on various other assumptions management believes reasonable under the given circumstances. These estimates could be materially different under different conditions and assumptions. Additionally, the actual amounts could differ from the estimates made. Management periodically evaluates estimates used in the preparation of the Condensed Consolidated Financial Statements for continued reasonableness. We make appropriate adjustments, if any, to the estimates used prospectively based upon such periodic evaluation. 7 Table of Contents ASURE SOFTWARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (in thousands, except per share amounts) CASH EQUIVALENTS The Company considers all highly liquid investments with an original maturity of 90 days or less at the time of purchase to be cash equivalents. Cash equivalents include investments in an institutional money market fund, which invests in U.S. Treasury bills, notes and bonds, and/or repurchase agreements, backed by such obligations. Carrying value approximates fair value. Cash and cash equivalents are deposited at various area banks, which at times may exceed federally insured limits. The Company monitors the viability of the banking institutions carrying its assets on a regular basis, and has the ability to transfer cash to various institutions during times of risk. The Company has not experienced any losses related to these cash balances, and believes its credit risk to be minimal. SIGNIFICANT RISKS AND UNCERTAINTIES The coronavirus (“COVID-19”) pandemic has resulted in a global economic slowdown and disruptions that have and could continue to negatively impact our business. The pandemic and numerous measures implemented to contain the virus such as business shutdowns, shelter-in-place orders and travel bans and restrictions have caused businesses, especially small and medium-sized businesses, some of whom are our customers, to reduce headcount or cease operations as customer demand decreased. Given the economic slowdown and other risks and uncertainties associated with the pandemic, we expect our business, financial condition, results of operations and growth prospects to be adversely affected in the future. Our business is impacted by employment levels as we have contracts that charge clients on a per-employee basis. In addition, the conditions caused by the COVID-19 pandemic could adversely affect our customers’ ability or willingness to purchase our offerings, delay prospective customers’ purchasing decisions, delay the provisioning of our offerings, lengthen payment terms, reduce the value or duration of customer subscription contracts, or affect attrition rates, all of which could adversely affect our future sales, operating results and overall financial performance. The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus and potential variants, the extent and effectiveness of containment actions, including the administration of vaccinations and the impact of these and other factors on our employees, customers, partners and vendors. If we are not able to respond to and manage the impact of such events effectively, our business will be harmed. RECENT ACCOUNTING PRONOUNCEMENTS In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The standard became effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. We adopted ASU 2019-12 during the quarter beginning January 1, 2021, using the prospective approach except for hybrid tax regimes, which we adopted using the modified retrospective approach. The adoption of ASU 2019-12 resulted in no material impact to the Company’s financial statements. RECLASSIFICATION The Company reclassified its presentation of restricted cash and restricted cash equivalents included in funds held for clients as of September 30, 2020 in the Condensed Consolidated Statements of Cash Flows to conform to the current period presentation. Such reclassification had no effect on the consolidated financial position or consolidated results of operations of the Company. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) As of September 30, 2021 and December 31, 2020, accumulated other comprehensive income (loss) consisted of net unrealized gains and losses on available-for-sale securities. 8 Table of Contents ASURE SOFTWARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (in thousands, except per share amounts) NOTE 3 – INVESTMENTS AND FAIR VALUE MEASUREMENTS Accounting Standards Codification (ASC) 820 “Fair Value Measurement” (ASC 820) defines fair value, establishes a framework for measuring fair value under U.S. GAAP and enhances disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820 describes a fair value hierarchy based on the following three levels of inputs that may be used to measure fair value, of which the first two are considered observable and the last unobservable: Level 1: Quoted prices in active markets for identical assets or liabilities; Level 2: Quoted prices in active markets for similar assets or liabilities; quoted prices in markets that are not active for identical or similar assets or liabilities; and model-driven valuations whose significant inputs are observable; and Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The following table presents the fair value hierarchy for our financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020, respectively (in thousands): Total Carrying Value Level 1 Level 2 Level 3 September 30, 2021 Assets: Funds held for clients Money market funds $ 2,409 $ 2,409 $ — $ — Available-for-sale securities 17,451 — 17,451 — Total $ 19,860 $ 2,409 $ 17,451 $ — Liabilities: Contingent purchase consideration (1) $ 4,943 $ — $ — $ 4,943 Total $ 4,943 $ — $ — $ 4,943 December 31, 2020 Assets: Cash equivalents Money market funds $ 5,204 $ 5,204 $ — $ — Funds held for clients Money market funds 63,999 63,999 — — Available-for-sale securities 25,919 — 25,919 — Total $ 95,122 $ 69,203 $ 25,919 $ — Liabilities: Contingent purchase consideration (1) $ 3,880 $ — $ — $ 3,880 Total $ 3,880 $ — $ — $ 3,880 (1) See Note 4 — Goodwill and Intangible Assets for further discussion regarding the contingent purchase consideration. 9 Table of Contents ASURE SOFTWARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (in thousands, except per share amounts) The contractual obligations and earn out provision are accounted for as a contingent liability and fair value is determined using Level 3 inputs, as estimating the fair value of these contingent liabilities require the use of significant and subjective inputs that may and are likely to change over the duration of the liabilities. The following table discloses the change in the gross contingent purchase consideration on the Company’s Condensed Consolidated Balance Sheets as of September 30, 2021 (in thousands): December 31, 2020 $ 3,880 Contingent purchase consideration ( 1,975 ) Issued for acquisitions 3,038 September 30, 2021 $ 4,943 Restricted cash equivalents and investments classified as available-for-sale within funds held for clients consisted of the following (in thousands): Amortized Cost Gross Unrealized Gains (1) Gross Unrealized Losses (1) Aggregate Estimated Fair Value September 30, 2021 Restricted cash equivalents $ 1,000 $ — $ — $ 1,000 Available-for-sale securities: Certificates of deposit 5,153 93 ( 4 ) 5,242 Corporate debt securities 8,085 160 ( 5 ) 8,240 Municipal bonds 3,427 52 ( 5 ) 3,474 U.S. Government agency securities 500 — ( 5 ) 495 Total available-for-sale securities 17,165 305 ( 19 ) 17,451 Total (2) $ 18,165 $ 305 $ ( 19 ) $ 18,451 December 31, 2020 Restricted cash equivalents $ 1,258 $ — $ — $ 1,258 Available-for-sale securities: Certificates of deposit 7,370 204 — 7,574 Corporate debt securities 8,914 295 ( 1 ) 9,208 Municipal bonds 7,276 103 ( 1 ) 7,378 U.S. Government agency securities 500 1 — 501 Total available-for-sale securities 24,060 603 ( 2 ) 24,661 Total (2) $ 25,318 $ 603 $ ( 2 ) $ 25,919 (1) Unrealized gains and losses on available-for-sale securities are included as a component of comprehensive income (loss). As of September 30, 2021 and December 31, 2020, there were 42 and 69 securities, respectively, in an unrealized gain position and there were 9 and 2 securities in an unrealized loss position, respectively. As of September 30, 2021, these unrealized losses were less than $ 6 individually and $ 19 in the aggregate. As of December 31, 2020, these unrealized losses were less than $ 2 individually and $ 2 in the aggregate. These securities have not been in a continuous unrealized gain or loss position for more than 12 months. We do not intend to sell these investments and we do not expect to sell these investments before recovery of their amortized cost basis, which may be at maturity. We review our investments to identify and evaluate investments that indicate possible other-than-temporary impairment. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the investee, and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. 10 Table of Contents ASURE SOFTWARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (in thousands, except per share amounts) (2) At September 30, 2021 and December 31, 2020, none of these securities were classified as cash and cash equivalents on the accompanying Condensed Consolidated Balance Sheets. Funds held for clients represent assets that the Company has classified as restricted for use solely for the purposes of satisfying the obligations to remit funds relating to the Company’s payroll and payroll tax filing services, which are classified as client funds obligations on our Condensed Consolidated Balance Sheets. Funds held for clients have been invested in the following categories (in thousands): September 30, 2021 December 31, 2020 Restricted cash and cash equivalents held to satisfy client funds obligations $ 157,303 $ 296,408 Restricted short-term marketable securities held to satisfy client funds obligations 3,297 4,249 Restricted long-term marketable securities held to satisfy client funds obligations 14,154 20,412 Total funds held for clients $ 174,754 $ 321,069 Expected maturities of available-for-sale securities as of September 30, 2021 are as follows (in thousands): One year or less $ 3,297 After one year through five years 14,154 $ 17,451 NOTE 4 – GOODWILL AND OTHER INTANGIBLE ASSETS December 31, 2020 Acquisitions September 30, 2021 Goodwill $ 73,958 $ 12,156 $ 86,114 We believe significant synergies are expected to arise from these strategic acquisitions and their assembled workforces. This factor contributed to a purchase price that was in excess of the fair value of the net assets acquired and, as a result, we recorded goodwill for each acquisition. A portion of acquired goodwill will be amortizable for tax purposes. As of September 30, 2021, there has been no impairment of goodwill based on the qualitative assessments performed by the Company. Gross Intangible Assets December 31, 2020 Acquisitions September 30, 2021 Customer relationships $ 88,310 $ 26,401 $ 114,711 Developed technology 12,001 — 12,001 Reseller relationships 853 159 1,012 Trade names 880 — 880 Non-compete agreements 1,032 — 1,032 $ 103,076 $ 26,560 $ 129,636 In July 2020, we acquired certain assets of a payroll tax business (the “Asset Purchase Agreement”). The initial purchase price for the assets was $ 4,250 , which we paid in cash at closing. The Asset Purchase Agreement set forth two subsequent purchase consideration payments, which are contingent on certain thresholds. The first contingent purchase consideration of $ 1,975 , was offset by certain net amounts owed to us by the seller related to transition services in the amount of $ 191 , was paid in June 2021 (a total payment of $ 1,784 ). The second and final contingent purchase consideration, will be based on the trailing twelve-month revenue at October 31, 2021, and will generally be made by April 30, 2022. We utilized a Monte Carlo simulation to determine the fair value of the contingent consideration. The adjustment to the fair value of the contingent consideration as of September 30, 2021 was the aforementioned $ 191 offset. 11 Table of Contents ASURE SOFTWARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (in thousands, except per share amounts) In September 2021, the Company acquired certain assets (the “Second Asset Purchase Agreement”) of a payroll business, which was used to provide payroll processing services. The aggregate purchase price that the Company paid for these assets was $ 14,750 , paid as follows: (i) $ 10,325 in cash at closing, (ii) the delivery of a promissory note in the amount of $ 2,213 , and (iii) the delivery of 244 shares of the Company’s common stock, which the parties agreed had an aggregate value of $ 2,213 as of September 30, 2021. The Second Asset Purchase Agreement is subject to working capital adjustments to the purchase price. Also in September 2021, we acquired certain assets of a payroll business (the “Third Asset Purchase Agreement”). The initial purchase price for the assets was $ 24,150 , of which $ 15,000 was paid in cash at closing. The Third Asset Purchase Agreement also included the delivery of 523 shares of the Company’s common stock, which both parties agreed had an aggregate value of $ 4,800 at closing. Finally, the Third Asset Purchase Agreement set forth a promissory note initially valued at $4,350 and includes a contingent consideration, which is contingent on certain thresholds and will be based on the trailing twelve-month revenue at September 30, 2022, which we expect will be paid in the fourth quarter of 2022. The promissory note has since been adjusted to $ 4,318 to account for a shortfall in working capital. We utilized a Monte Carlo simulation to determine the fair value of the contingent consideration. There was no adjustment to the fair value of the contingent consideration at September 30, 2021. The Second Asset Purchase Agreement and Third Asset Purchase Agreement mentioned above were of small, privately held companies, whose historic cash basis financial statements were unaudited and not prepared under generally accepted accounting principals in the United States, including, but not limited to, differences in revenue recognition. The disclosure of supplemental pro forma financial information suggested under ASC 805 for a public business entity has been deemed impracticable by management due to these reasons. The gross carrying amount and accumulated amortization of our intangible assets as of September 30, 2021 and December 31, 2020 are as follows (in thousands, except weighted average periods): Weighted Average Amortization Period (in Years) Gross Accumulated Amortization Net September 30, 2021 Customer relationships 8.7 $ 114,711 $ ( 36,257 ) $ 78,454 Developed technology 6.6 12,001 ( 8,744 ) 3,257 Reseller relationships 7.2 1,012 ( 859 ) 153 Trade names 3.0 880 ( 513 ) 367 Non-compete agreements 5.2 1,032 ( 878 ) 154 8.4 $ 129,636 $ ( 47,251 ) $ 82,385 December 31, 2020 Customer relationships 8.9 $ 88,310 $ ( 28,898 ) $ 59,412 Developed technology 6.6 12,001 ( 7,608 ) 4,393 Reseller relationships 7.0 853 ( 853 ) — Trade names 3.0 880 ( 312 ) 568 Non-compete agreements 5.2 1,032 ( 853 ) 179 8.5 $ 103,076 $ ( 38,524 ) $ 64,552 We record amortization expenses using the straight-line method over the estimated useful lives of the intangible assets, as noted above. Amortization expenses recorded in Operating Expenses were $ 2,534 and $ 2,424 for the three months ended September 30, 2021 and 2020, respectively. Amortization expenses recorded in Cost of Sales were $ 379 and $ 397 for the three months ended September 30, 2021 and 2020, respectively. 12 Table of Contents ASURE SOFTWARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (in thousands, except per share amounts) Amortization expenses recorded in Operating Expenses were $ 7,590 and $ 7,122 for the nine months ended September 30, 2021 and 2020, respectively. Amortization expenses recorded in Cost of Sales were $ 1,135 and $ 1,225 for the nine months ended September 30, 2021 and 2020, respectively. There was no impairment of intangibles during the nine months ended September 30, 2021 based on the qualitative assessment performed by the Company. The following table summarizes the future estimated amortization expense relating to our intangible assets as of September 30, 2021 (in thousands): 2021 (three months) $ 3,712 2022 14,388 2023 13,262 2024 13,002 2025 12,216 2026 9,105 Thereafter 16,700 $ 82,385 NOTE 5 – NOTES PAYABLE The following table summarizes our outstanding debt as of the dates indicated (in thousands): Maturity Cash Interest Rate September 30, 2021 December 31, 2020 Subordinated Notes Payable – Acquisitions (1) 7/1/2021 – 9/30/2026 2.00 % - 3.00 % $ 8,231 $ 6,182 PPP Loan 6/30/2021 1.00 % — 8,856 Term Loan 12/31/2024 5.25 % — 9,875 Senior Credit Facility 10/1/2025 9.00 % 30,090 — Total Notes Payable $ 38,321 $ 24,913 (1) See Note 4 — Goodwill and Intangible Assets for further discussion regarding the notes payable related to acquisitions. The following table summarizes the debt issuance costs as of the dates indicated (in thousands): Gross Notes Payable Debt Issuance Costs and Debt Discount Net Notes Payable September 30, 2021 Current portion of notes payable $ 2,132 $ ( 218 ) $ 1,914 Notes payable, net of current portion 36,189 ( 3,389 ) 32,800 Total $ 38,321 $ ( 3,607 ) $ 34,714 December 31, 2020 Current portion of notes payable $ 12,388 $ ( 78 ) $ 12,310 Notes payable, net of current portion 12,525 ( 300 ) 12,225 Total $ 24,913 $ ( 378 ) $ 24,535 13 Table of Contents ASURE SOFTWARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (in thousands, except per share amounts) The following table summarizes the future principal payments related to our outstanding debt as of September 30, 2021 (in thousands): 2021 (three months) $ — 2022 2,132 2023 4,405 2024 6,623 2025 23,151 2026 2,010 Total $ 38,321 Subordinated Notes Payable - Acquisitions There remains an outstanding principal balance on the subordinated note payable issued in connection with the purchase of a business we acquired in 2018, which note matured on July 1, 2021. Payment on the principal balance was withheld as security for an outstanding claim for which we are entitled to indemnification under the purchase agreement. We will make the payment, subject to our right of offset under the purchase agreement, when these claims are resolved. Due to our rights under the purchase agreement and the terms of this note, we are not in default under the note. See Note 4 — Goodwill and Intangible Assets for further discussion regarding the issuance of subordinated notes payable related to acquisitions. PPP Loan with Pinnacle Bank Due to the effects of COVID-19 on our business and the related need to support our operations, we received an unsecured Paycheck Protection Program loan in the amount of $ 8,856 (the “PPP Loan”) in April 2020 from Pinnacle Bank (the “Lender”) under the Coronavirus Aid, Relief and Economic Security Act. In June 2021, we received notice from our Lender that the Small Business Administration (“SBA”) had approved our application for forgiveness of our PPP Loan. The amount forgiven of $ 8,560 was the amount we requested in our forgiveness application but was less than the original principal balance due, in part, to changes in SBA guidance following the date of our original loan application. Following the grant of forgiveness, we had an outstanding principal balance of $ 296 and an additional immaterial amount of accrued interest in our PPP Loan, both of which were paid in full in June 2021. During the three months ended June 30, 2021 the Company recorded a gain on the forgiveness of the PPP Loan and accrued interest in the amount of $ 8,654 . The gain on the forgiveness of the PPP Loan is reflected on our Condensed Consolidated Statements of Comprehensive Income, and is a non-taxable event. Term Loan with Wells Fargo N.A. In March 2014, we entered into a credit agreement (the “Credit Agreement”) with Wells Fargo, as administrative agent, and the lenders that are party thereto. In connection with the Credit Agreement, we and our wholly owned active subsidiaries entered into a Guaranty and Security Agreement with Wells Fargo Bank, guaranteeing all obligations under the Credit Agreement and granted a security interest in substantially all of our and our subsidiaries’ assets. The Credit Agreement was amended and restated multiple times, with the most recent amendment and restatement effective December 31, 2019. The Credit Agreement was also amended, but not restated, on August 10, 2020. Following the amendment, the Credit Agreement provided for $ 10,000 in term loans and a $ 5,000 revolver and provided for new applicable margin rates for determining the interest payable on loans and amended certain of our financial covenants as described in our 2020 Annual Report on Form 10-K. For the period ending December 31, 2020, no amount was outstanding and $ 4,500 was available for borrowing under the revolver. During the three months ended September 30, 2021, we terminated the Credit Agreement. We paid Wells Fargo an aggregate amount of approximately $ 9,925 in full payment of our outstanding obligations, including $ 9,750 due on the note and immaterial amounts of interest, fees and other expenses. 14 Table of Contents ASURE SOFTWARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (in thousands, except per share amounts) Senior Credit Facility with Structural Capital Investments III, LP On September 10, 2021, the Company entered into a Loan and Security Agreement with Structural Capital Investments III, LP (“Structural” and together with the other lenders that are or become parties thereto, the “Lenders”), and Ocean II PLO LLC, as administrative and collateral agent for Structural and the Lenders (“Agent”), under the terms of which the Lenders have committed to lend us up to $ 50,000 in term loan financing to support our growth needs (the “Facility”) until March 31, 2022. The Company also entered into a secured promissory note with the Agent evidencing our obligations under the Facility. The Company’s obligations are further guaranteed by each of our subsidiaries and secured by our assets and the assets of our subsidiaries. At the onset of the agreement, we paid to the Lenders an origination fee of $ 500 . Interest accrues on any outstanding balance at a rate equal to the greater of 9.0% or the Prime Rate, plus 5.75% (the “Basic Rate”) and is payable in advance. In addition, interest is paid in kind (“PIK”) at a rate of 1.00% or 1.25% based on our APR Ratio, measured on a quarterly basis. The PIK interest is added to our outstanding balance and accrues interest at the Basic Rate. Interest only payments are due until October 2023, with an option to extend until October 2024, dependent on certain financial or revenue metrics before the end of the first twenty-four months of the Facility. Principal payments begin after the expiration of the interest only period, and are based on a five year amortization schedule, with a balloon payment due in October 2025. The table above in this Note 5 — Notes Payable summarizing future principal payments assumes the Company will not extend the period of interest only payments to October 2024. Upon payment in full of the obligations under the Facility, we are to pay Lenders a final payment fee equal to 1.0% of the increase in our market capitalization since the onset of the agreement, at that time valued at $182,400. The Company has agreed to provide the Lenders the right to participate in a future offering—whether public or private—on the same terms and conditions as other investors for an amount not to exceed $3,000. There are no financial covenants if our net cash position is equal to or greater than zero. If our net cash position is less than zero, the Company would be subject to the following financial covenants: (i) unrestricted cash of no less than $5,000, (ii) maintain an APR ratio of no less than 0.70:1.00 through September 10, 2023, and (iii) maintain an APR ratio of no less than 0.60:1.00 from September 10, 2023 through the remainder of the term of the Facility. The APR ratio would be the ratio of our tested debt to our annual recurring revenue and would be measured on a quarterly basis. Our Tested Debt consists of our outstanding obligations under the Facility (exclusive of PIK interest) and any indebtedness issued or earnouts owed to sellers in connection with acquisitions. NOTE 6 – CONTRACTS WITH CUSTOMERS AND REVENUE CONCENTRATION Receivables Receivables from contracts with customers, net of allowance for doubtful accounts of $ 2,730 , were $ 4,595 at September 30, 2021. Receivables from contracts with customers, net of allowance for doubtful accounts of $ 2,194 , were $ 3,848 at December 31, 2020. No customers represented more than 10% of our net accounts receivable balance as of September 30, 2021 and December 31, 2020, respectively. Deferred Commissions Deferred commission costs from contracts with customers were $ 4,475 and $ 3,792 at September 30, 2021 and December 31, 2020, respectively. The amount of amortization recognized for the three and nine months ended September 30, 2021 was $ 424 and $ 963 , respectively, and for the three and nine months ended September 30, 2020 was $ 220 and $ 660 , respectively. 15 Table of Contents ASURE SOFTWARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (in thousands, except per share amounts) Deferred Revenue During the three and nine months ended September 30, 2021, revenue of $ 460 and $ 4,308 , and the three and nine months ended September 30, 2020, revenue of $ 259 and $ 3,652 , respectively, was recognized from the deferred revenue balance at the beginning of each period. Transaction Price Allocated to the Remaining Performance Obligations As of September 30, 2021, approximately $ 23,945 of revenue is expected to be recognized from remaining performance obligations. We expect to recognize revenue on approximately 71 % of these remaining performance obligations over the next 12 months, with the balance recognized thereafter. Revenue Concentration During the three and nine months ended September 30, 2021 and 2020, there were no customers that individually represented 10% or more of consolidated revenue. NOTE 7 – LEASES We have entered into office space lease agreements, which qualify as operating leases under ASU No. 2016-02, “Leases (Topic 842)”. Under such leases, the lessors receive annual minimum (base) rent. The leases have original terms (excluding extension options) ranging from one year to ten years . Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We record base rent expense under the straight-line method over the term of the lease. In the accompanying Condensed Consolidated Statements of Comprehensive Income (Loss), rent expense is included in operating expenses under general and administrative expenses. The components of the rent expense for the three and nine months ended September 30, 2021 and 2020 were as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Operating lease cost $ 496 $ 540 $ 1,610 $ 1,613 Sublease income ( 11 ) ( 11 ) ( 32 ) ( 107 ) Net rent expense $ 485 $ 529 $ 1,578 $ 1,506 For purposes of calculating the operating lease assets and lease liabilities, extension options are not included in the lease term unless it is reasonably certain we will exercise the option, or the lessor has the sole ability to exercise the option. The weighted average discount rate of our operating leases is 8 % as of September 30, 2021 and December 31, 2020, respectively. The weighted average remaining lease term is five years and six years as of September 30, 2021 and December 31, 2020, respectively. Supplemental cash flow information related to operating leases for the nine months ended September 30, 2021 and 2020 are as follows (in thousands): Nine Months Ended September 30, 2021 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash outflows from operating leases $ 1,740 $ 1,699 Non-cash operating activities: Operating lease assets obtained in exchange for new operating lease liabilities $ 1,279 $ 1,052 16 Table of Contents ASURE SOFTWARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (in thousands, except per share amounts) Future minimum commitments over the life of all operating leases, which exclude variable rent payments, are as follows (in thousands): 2021 (three months) $ 598 2022 1,997 2023 1,574 2024 1,384 2025 974 2026 610 Thereafter 1,193 Total minimum lease payments 8,330 Less: imputed interest ( 1,569 ) Total lease liabilities $ 6,761 NOTE 8 – SHARE-BASED COMPENSATION We have one active equity plan, the 2018 Incentive Award Plan (the “2018 Plan”). The 2018 Plan, approved by our shareholders, replaced our 2009 Equity Incentive Plan, as amended (the “2009 Plan”), however, the terms and conditions of the 2009 Plan continue to govern any outstanding awards previously granted under the 2009 Plan. The number of shares available for issuance under the 2018 Plan is equal to the sum of (i) 2,350 shares, and (ii) any shares subject to issued and outstanding awards under the 2009 Plan as of the effective date of the 2018 Plan that expire, are canceled or otherwise terminate following the effective date of the 2018 Plan. We have outstanding options to purchase 1,872 shares at a weighted average exercise price of $ 8.01 . During the three and nine months ending September 30, 2021 we issued employee stock options to purchase 25 and 954 shares, respectively. The weighted average exercise price of these awards was $ 9.39 and $ 7.83 for the three and nine months ended September 30, 2021, respectively. These awards will vest over a three year period. We also had 193 outstanding restricted stock units as of September 30, 2021. As of September 30, 2021, we had 1,615 shares available for grant pursuant to the 2018 Plan. Share based compensation for our stock option plans for the three months ended September 30, 2021 and September 30, 2020 was $ 714 and $ 1,295 , respectively and for the nine months ended September 30, 2021 and September 30, 2020 was $ 1,340 and $ 1,025 , respectively. We issued 9 and 58 shares of common stock related to exercises of stock options for the three months ended September 30, 2021 and 2020, respectively. We forfeited 77 and issued 7 shares of common stock related to the issuance of vested restricted stock units, net for the three months ended September 30, 2021 and 2020, respectively. NOTE 9 – NET EARNINGS (LOSS) PER SHARE We compute net earnings (loss) per share based on the weighted average number of common shares outstanding for the period. Diluted net earnings (loss) per share reflects the maximum dilution that would have resulted from incremental common shares issuable upon the exercise of stock options. We compute the number of common share equivalents, which includes stock options, using the treasury stock method. We have excluded stock options and restricted stock units of approximately 2,014 and 2,040 for the three and nine months ended September 30, 2021, respectively, and 1,859 and 2,063 shares for the three and nine months ended September 30, 2020, respectively, from the computation of the diluted shares because the effect of including the stock options and restricted stock units would have been anti-dilutive. 17 Table of Contents ASURE SOFTWARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) (in thousands, except per share amounts) The following table sets forth the computation of basic and diluted net earnings (loss) per common share for the three and nine months ended September 30, 2021 and September 30, 2020 (in thousands, except per share amounts): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Basic: Net income (loss) $ 5,328 $ ( 4,759 ) $ 7,494 $ ( 10,470 ) Weighted-average shares of common stock outstanding 19,182 15,873 19,083 15,793 Basic earnings (loss) per share $ 0.28 $ ( 0.30 ) $ 0.39 $ ( 0.66 ) Diluted: Net income (loss) $ 5,328 $ ( 4,759 ) $ 7,494 $ ( 10,470 ) Weighted-average shares of common stock outstanding 19,330 15,873 19,243 15,793 Diluted earnings (loss) per share $ 0.28 $ ( 0.30 ) $ 0.39 $ ( 0.66 ) NOTE 10 – EMPLOYEE RETENTION TAX CREDIT In March 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES) was signed into law, providing numerous tax provisions and other stimulus measures, including the Employee Retention Tax Credit (“ERTC”): a refundable tax credit against certain employment taxes. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Rescue Plan Act of 2021 extended and expanded the availability of the ERTC. We have qualified for the ERTC in all three quarters of 2021. During the quarter ended September 30, 2021, we recorded an aggregate benefit of $ 10,533 in Other income (expense), net in our Condensed Consolidated Statements of Comprehensive Income (Loss) to reflect the ERTC for the three quarters in 2021. The receivable for the ERTC benefit as of September 30, 2021 is in Other current assets on our Condensed Consolidated Balance Sheets at September 30, 2021. 18 Table of Contents