ASURE SOFTWARE INC 10-Q

ITEM 1. FINANCIAL STATEMENTS ASURE SOFTWARE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) June 30, 2022 December 31, 2021 (unaudited) ASSETS Current assets: Cash, cash equivalents, and restricted cash $ 14,594 $ 13,427 Accounts receivable, net of allowance for doubtful accounts of $ 2,819 and $ 2,210 at June 30, 2022 and December 31, 2021, respectively 5,736 5,308 Inventory 289 246 Prepaid expenses and other current assets 10,112 13,475 Total current assets before funds held for clients 30,731 32,456 Funds held for clients 184,661 217,376 Total current assets 215,392 249,832 Property and equipment, net 9,076 8,945 Goodwill 86,011 86,011 Intangible assets, net 73,657 78,573 Operating lease assets, net 5,877 5,748 Other assets, net 4,590 4,136 Total assets $ 394,603 $ 433,245 LIABILITIES AND STOCKHOLDERS ’ EQUITY Current liabilities: Current portion of notes payable $ 1,947 $ 1,907 Accounts payable 862 565 Accrued compensation and benefits 3,453 3,568 Operating lease liabilities, current 1,382 1,551 Other accrued liabilities 4,532 2,436 Contingent purchase consideration 2,299 1,905 Deferred revenue 2,038 3,750 Total current liabilities before client fund obligations 16,513 15,682 Client fund obligations 184,428 217,144 Total current liabilities 200,941 232,826 Long-term liabilities: Deferred revenue 2,369 36 Deferred tax liability 1,669 1,595 Notes payable, net of current portion 33,908 33,120 Operating lease liabilities, noncurrent 5,000 4,746 Contingent purchase consideration 1,074 2,424 Other liabilities 102 258 Total long-term liabilities 44,122 42,179 Total liabilities 245,063 275,005 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; 20,455 and 20,412 shares issued, 20,141 and 20,028 shares outstanding at June 30, 2022 and December 31, 2021, respectively 205 204 Treasury stock at cost, 384 shares at June 30, 2022 and December 31, 2021 ( 5,017 ) ( 5,017 ) Additional paid-in capital 431,647 429,912 Accumulated deficit ( 275,637 ) ( 266,760 ) Accumulated other comprehensive loss ( 1,658 ) ( 99 ) Total stockholders’ equity 149,540 158,240 Total liabilities and stockholders’ equity $ 394,603 $ 433,245 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 LOSS (in thousands, except per share amounts) Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 (unaudited) (unaudited) Revenue: Recurring $ 19,014 $ 16,072 $ 42,018 $ 35,314 Professional services, hardware and other 1,286 1,096 2,615 1,656 Total revenue 20,300 17,168 44,633 36,970 Cost of Sales 8,039 7,223 16,908 14,533 Gross profit 12,261 9,945 27,725 22,437 Operating expenses: Sales and marketing 4,589 3,622 9,486 7,233 General and administrative 8,696 6,821 16,181 13,319 Research and development 1,472 1,343 3,293 2,467 Amortization of intangible assets 3,352 2,528 6,784 5,056 Total operating expenses 18,109 14,314 35,744 28,075 Loss from operations ( 5,848 ) ( 4,369 ) ( 8,019 ) ( 5,638 ) Interest expense, net ( 1,085 ) ( 223 ) ( 1,901 ) ( 447 ) Other income, net 1,147 8,654 1,147 8,654 (Loss) Income from operations before income taxes ( 5,786 ) 4,062 ( 8,773 ) 2,569 Income tax expense 74 298 104 403 Net (loss) income ( 5,860 ) 3,764 ( 8,877 ) 2,166 Other comprehensive loss: Unrealized loss on marketable securities ( 1,754 ) ( 69 ) ( 1,063 ) ( 208 ) Comprehensive (loss) income $ ( 7,614 ) $ 3,695 $ ( 9,940 ) $ 1,958 Basic and diluted (loss) earnings per share Basic $ ( 0.29 ) $ 0.20 $ ( 0.44 ) $ 0.11 Diluted $ ( 0.29 ) $ 0.20 $ ( 0.44 ) $ 0.11 Weighted average basic and diluted shares Basic 20,106 19,040 20,067 19,033 Diluted 20,106 19,203 20,067 19,198 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, 2021 20,028 $ 204 $ ( 5,017 ) $ 429,912 $ ( 266,760 ) $ ( 99 ) $ 158,240 Stock issued upon option exercise and vesting of restricted stock units 43 1 — — — — 1 Share based compensation — — — 729 — — 729 Net loss — — — — ( 3,017 ) — ( 3,017 ) Other comprehensive loss — — — — — ( 1,063 ) ( 1,063 ) Balance at March 31, 2022 20,071 $ 205 $ ( 5,017 ) $ 430,641 $ ( 269,777 ) $ ( 1,162 ) $ 154,890 Stock issued upon option exercise and vesting of restricted stock units 33 — — — — — — Stock issued, ESPP 38 — — 192 — — 192 Share based compensation — — — 814 — — 814 Share issuance costs — — — — — — — Net loss — — — — ( 5,860 ) — ( 5,860 ) Other comprehensive loss — — — — — ( 496 ) ( 496 ) Balance at June 30, 2022 20,142 $ 205 $ ( 5,017 ) $ 431,647 $ ( 275,637 ) $ ( 1,658 ) $ 149,540 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, 2020 18,970 $ 193 $ ( 5,017 ) $ 419,827 $ ( 269,954 ) $ 604 $ 145,653 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 $ ( 271,552 ) $ 465 $ 144,651 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 $ ( 267,788 ) $ 396 $ 149,419 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) Six Months Ended June 30, 2022 2021 (unaudited) Cash flows from operating activities: Net (loss) income $ ( 8,877 ) $ 2,166 Adjustments to reconcile (loss) income to net cash provided by (used in) operations: Depreciation and amortization 9,363 7,905 Amortization of operating lease assets 868 830 Amortization of debt financing costs and discount 345 60 Net amortization of premiums and accretion of discounts on available-for-sale securities 205 31 Provision for doubtful accounts 198 1 Provision for deferred income taxes 75 358 Gain on extinguishment of debt ( 180 ) ( 8,654 ) Net realized gains on sales of available-for-sale securities ( 406 ) ( 269 ) Share-based compensation 1,544 1,340 Loss (gain) on disposals of long-term assets 1 ( 21 ) Change in fair value of contingent purchase consideration ( 955 ) — Changes in operating assets and liabilities: Accounts receivable ( 627 ) ( 129 ) Inventory ( 51 ) 107 Prepaid expenses and other assets 3,890 ( 190 ) Operating lease right-of-use assets ( 997 ) ( 277 ) Accounts payable 280 ( 16 ) Accrued expenses and other long-term obligations 2,099 ( 1,440 ) Operating lease liabilities 85 ( 591 ) Deferred revenue 621 ( 3,109 ) Net cash provided by (used in) operating activities 7,481 ( 1,898 ) Cash flows from investing activities: Acquisition of intangible asset ( 2,039 ) — Purchases of property and equipment ( 306 ) ( 86 ) Software capitalization costs ( 1,805 ) ( 2,311 ) Purchases of available-for-sale securities ( 19,870 ) ( 236 ) Proceeds from sales and maturities of available-for-sale securities 2,450 7,813 Net cash (used in) provided by investing activities ( 21,570 ) 5,180 Cash flows from financing activities: Payments of notes payable — ( 3,090 ) Payments of contingent purchase consideration — ( 1,784 ) Net proceeds from issuance of common stock 192 468 Net change in client fund obligations ( 32,716 ) ( 113,251 ) Net cash used in financing activities ( 32,524 ) ( 117,657 ) Net decrease in cash, cash equivalents, restricted cash, and restricted cash equivalents ( 46,613 ) ( 114,375 ) Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of period 198,743 324,985 Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period $ 152,130 $ 210,610 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) Six Months Ended June 30, 2022 2021 (unaudited) Reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents to the Condensed Consolidated Balance Sheets Cash and cash equivalents $ 14,594 $ 20,292 Restricted cash and restricted cash equivalents included in funds held for clients 137,536 190,318 Total cash, cash equivalents, restricted cash, and restricted cash equivalents $ 152,130 $ 210,610 Supplemental information: Cash paid for interest $ 1,435 $ 449 Cash paid for income taxes $ 175 $ 378 Non-cash investing and financing activities: Notes payable issued for acquisitions $ 411 $ — 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) (Amounts in thousands, except share and per share data unless otherwise noted) NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION Asure Software, Inc., (“Asure”, the “Company”, “we” and “our”), a Delaware corporation, is a 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 become the most trusted HCM resource to entrepreneurs everywhere by helping our clients grow their businesses. 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 HR Services. 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. 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 June 30, 2022 and the results of operations, statements of changes in stockholders’ equity for the three and six months ended June 30, 2022 and June 30, 2021, and our statements of cash flows for the six months ended June 30, 2022 and June 30, 2021. 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, 2021 (our “2021 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, 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. 7 Table of Contents CASH, CASH EQUIVALENTS, AND RESTRICTED CASH 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. Restricted cash consists of cash balances which are restricted as to withdrawal or usage. As of June 30, 2022, the Company has $500 of restricted cash related to our agreement with South State Bank. 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. In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326): This update establishes a new approach to estimate credit losses on certain financial instruments. The update requires financial assets measured at amortized cost to be presented at the net amount expected to be collected. The amended guidance will also update the impairment model for available-for-sale debt securities, requiring entities to determine whether all or a portion of the unrealized loss on such securities is a credit loss. The Company is currently evaluating this standard and the potential effects of these changes to its consolidated financial statements and will adopt this new standard in the fiscal year beginning January 1, 2023. ACCUMULATED OTHER COMPREHENSIVE LOSS As of June 30, 2022 and December 31, 2021, accumulated other comprehensive loss consisted of net unrealized gains and losses on available-for-sale securities. NOTE 3 - BUSINESS COMBINATIONS AND ASSET ACQUISITIONS 2021 In September 2021, the Company acquired certain assets (the “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 244 shares of the Company’s common stock, which the parties agreed had an aggregate value of $ 2,213 as of September 30, 2021, and (iii) the delivery of a promissory note in the amount of $ 2,213 . The promissory note was adjusted to $2,223 to account for post close and working capital adjustments. The 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 “Second Asset Purchase Agreement”), which were used to provide payroll processing services. The aggregated purchase price for these assets was $ 24,150 , paid as follows: (i) $ 15,000 was paid in cash at closing, (ii) the delivery of 523 shares of the Company’s common stock which both parties agreed had an aggregate value of $ 4,800 at closing, and (iii) the delivery of a promissory note of $ 4,350 . The promissory note also 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. Additionally, we utilized a Monte Carlo simulation to determine the fair value of the contingent consideration. For the year ended December 31, 2021, there was a measurement period adjustment to the fair value of the contingent consideration of $ 465 . For the quarter ended June 30, 2022, there was a measurement period adjustment to the fair value of the contingent consideration of $1,350. The promissory note was adjusted to $4,533 to account for post close and working capital adjustments. 2022 Effective January 1, 2022, the Company acquired customer relationships of a payroll business for a cash payment of $ 1,970 , which included $ 31 of transaction costs, and the delivery of a promissory note in the amount of $ 411 . The acquired customer relationships are recorded as an intangible asset and are being amortized on a straight-line basis over eight years. 8 Table of Contents NOTE 4 - 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 June 30, 2022 and December 31, 2021, respectively (in thousands): Total Carrying Value Level 1 Level 2 Level 3 June 30, 2022 Assets: Funds held for clients Money market funds $ 2,583 $ 2,583 $ — $ — Available-for-sale securities 47,125 — 47,125 — Total $ 49,708 $ 2,583 $ 47,125 $ — Liabilities: Contingent purchase consideration (1) $ 3,373 $ — $ — $ 3,373 Total $ 3,373 $ — $ — $ 3,373 December 31, 2021 Assets: Funds held for clients Money market funds $ 1,116 $ 1,116 $ — $ — Available-for-sale securities 32,060 — 32,060 — Total $ 33,176 $ 1,116 $ 32,060 $ — Liabilities: Contingent purchase consideration (1) $ 4,329 $ — $ — $ 4,329 Total $ 4,329 $ — $ — $ 4,329 (1) See Note 3 — Business Combinations and Asset Acquisitions for further discussion regarding the contingent purchase consideration. 9 Table of Contents 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 June 30, 2022 Restricted cash equivalents $ 2,600 $ — $ — $ 2,600 Available-for-sale securities: Certificates of deposit 1,234 5 ( 3 ) 1,236 Corporate debt securities 39,712 94 ( 1,369 ) 38,437 Municipal bonds 7,327 — ( 336 ) 6,991 U.S. Government agency securities 500 — ( 39 ) 461 Total available-for-sale securities 48,773 99 ( 1,747 ) 47,125 Total (2) $ 51,373 $ 99 $ ( 1,747 ) $ 49,725 December 31, 2021 Restricted cash equivalents $ 1,116 $ — $ — $ 1,116 Available-for-sale securities: Certificates of deposit 1,240 7 ( 4 ) 1,243 Corporate debt securities 22,597 2 ( 76 ) 22,523 Municipal bonds 7,825 3 ( 24 ) 7,804 U.S. Government agency securities 500 — ( 10 ) 490 Total available-for-sale securities 32,162 12 ( 114 ) 32,060 Total (2) $ 33,278 $ 12 $ ( 114 ) $ 33,176 (1) Unrealized gains and losses on available-for-sale securities are included as a component of comprehensive loss. As of June 30, 2022 and December 31, 2021, there were 22 and 10 securities, respectively, in an unrealized gain position and there were 85 and 57 securities in an unrealized loss position, respectively. As of June 30, 2022, these unrealized losses were less than $ 68 individually and $ 1,761 in the aggregate. As of December 31, 2021, these unrealized losses were less than $ 11 individually and $ 114 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. (2) At June 30, 2022 and December 31, 2021, 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): June 30, 2022 December 31, 2021 Restricted cash and cash equivalents held to satisfy client funds obligations $ 137,536 $ 185,316 Restricted short-term marketable securities held to satisfy client funds obligations 7,161 5,559 Restricted long-term marketable securities held to satisfy client funds obligations 39,964 26,501 Total funds held for clients $ 184,661 $ 217,376 10 Table of Contents Expected maturities of available-for-sale securities as of June 30, 2022 are as follows (in thousands): One year or less $ 7,161 After one year through five years 39,964 Total $ 47,125 NOTE 5 - GOODWILL AND OTHER INTANGIBLE ASSETS 2021 Acquisitions 2022 Goodwill $ 86,011 $ — $ 86,011 We believe significant synergies are expected to arise from our 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 June 30, 2022, there has been no impairment of goodwill based on the qualitative assessments performed by the Company. Gross Intangible Assets 2021 Acquisitions 2022 Customer relationships $ 114,611 $ 2,360 $ 116,971 Developed technology 12,001 — 12,001 Reseller relationships 1,012 100 1,112 Trade names 880 — 880 Non-compete agreements 1,032 — 1,032 $ 129,536 $ 2,460 $ 131,996 The gross carrying amount and accumulated amortization of our intangible assets as of June 30, 2022 are as follows (in thousands, except weighted average periods): Weighted Average Amortization Period (in Years) Gross Accumulated Amortization Net June 30, 2022 Customer relationships 8.7 $ 116,971 $ ( 46,158 ) $ 70,813 Developed technology 6.6 12,001 ( 9,691 ) 2,310 Reseller relationships 7.2 1,112 ( 874 ) 238 Trade names 3.0 880 ( 713 ) 167 Non-compete agreements 5.2 1,032 ( 903 ) 129 8.4 $ 131,996 $ ( 58,339 ) $ 73,657 December 31, 2021 Customer relationships 8.7 $ 114,611 $ ( 39,535 ) $ 75,076 Developed technology 6.6 12,001 ( 9,098 ) 2,903 Reseller relationships 7.2 1,012 ( 864 ) 148 Trade names 3.0 880 ( 579 ) 301 Non-compete agreements 5.2 1,032 ( 887 ) 145 8.4 $ 129,536 $ ( 50,963 ) $ 78,573 11 Table of Contents 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 $ 6,784 and $ 5,056 for the six months ended June 30, 2022 and 2021, respectively. Amortization expenses recorded in Cost of Sales were $ 593 and $ 757 for the six months ended June 30, 2022 and 2021, respectively. There was no impairment of intangibles during the six months ended June 30, 2022 based on the qualitative assessment performed by the Company. However, if market, political and other conditions over which we have no control continue to affect the capital markets and our stock price declines, we may experience an impairment of our intangibles in future quarters. The following table summarizes the future estimated amortization expense relating to our intangible assets as of June 30, 2022 (in thousands): 2022 $ 7,302 2023 13,558 2024 13,297 2025 12,511 2026 9,400 2027 7,225 Thereafter 10,364 $ 73,657 NOTE 6 - NOTES PAYABLE The following table summarizes our outstanding debt as of the dates indicated (in thousands): Maturity Cash Interest Rate June 30, 2022 December 31, 2021 Subordinated Notes Payable – Acquisitions (1) 7/1/2021 – 9/30/2026 2.00 % - 3.00 % $ 8,634 $ 8,178 Senior Credit Facility 10/1/2025 10.50 % 30,246 30,224 Gross Notes Payable $ 38,880 $ 38,402 (1) See Note 3 — Business Combinations and Asset Acquisitions 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 June 30, 2022 Current portion of notes payable $ 2,309 $ ( 362 ) $ 1,947 Notes payable, net of current portion 36,571 ( 2,663 ) 33,908 Total $ 38,880 $ ( 3,025 ) $ 35,855 December 31, 2021 Current portion of notes payable $ 2,079 $ ( 172 ) $ 1,907 Notes payable, net of current portion 36,323 ( 3,203 ) 33,120 Total $ 38,402 $ ( 3,375 ) $ 35,027 The following table summarizes the future principal payments related to our outstanding debt as of June 30, 2022 (in thousands): 2022 $ 1,898 2023 4,827 2024 6,623 2025 23,307 2026 2,225 Total $ 38,880 12 Table of Contents 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 June 30, 2022. Of the amount committed by the Lenders, the company drew $30,000 in September 2021, at the closing and the remaining $20,000 has lapsed. 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 6 — 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 7 – CONTRACTS WITH CUSTOMERS AND REVENUE CONCENTRATION Receivables Receivables from contracts with customers, net of allowance for doubtful accounts of $ 2,819 , were $ 5,736 at June 30, 2022. Receivables from contracts with customers, net of allowance for doubtful accounts of $ 2,210 , were $ 5,308 at December 31, 2021. No customers represented more than 10% of our net accounts receivable balance as of June 30, 2022 and December 31, 2021, respectively. Deferred Commissions Deferred commission costs from contracts with customers were $ 5,467 and $ 4,684 at June 30, 2022 and December 31, 2021, respectively. The amount of amortization recognized for the three and six months ended June 30, 2022 $ 435 and $ 780 , respectively, and for the three and six months ended June 30, 2021 was $ 307 and $ 539 , respectively. Deferred Revenue During the three and six months ended June 30, 2022, revenue of $ 293 and $ 3,205 , and the three and six months ended June 30, 2021, revenue of $ 442 and $ 3,848 , respectively, was recognized from the deferred revenue balance at the beginning of each period. 13 Table of Contents Transaction Price Allocated to the Remaining Performance Obligations As of June 30, 2022, approximately $ 26,340 of revenue is expected to be recognized from remaining performance obligations. We expect to recognize revenue on approximately 73 % of these remaining performance obligations over the next 12 months, with the balance recognized thereafter. Revenue Concentration During the three and six months ended June 30, 2022 and 2021, there were no customers that individually represented 10% or more of consolidated revenue. NOTE 8 - 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 Loss, rent expense is included in operating expenses under general and administrative expenses. The components of the rent expense for the six months ended June 30, 2022 and 2021 are as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Operating lease cost $ 576 $ 544 $ 1,142 $ 1,114 Sublease income ( 11 ) ( 11 ) ( 21 ) ( 21 ) Net rent expense $ 565 $ 533 $ 1,121 $ 1,093 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 June 30, 2022 and December 31, 2021, respectively. The weighted average remaining lease term is five years and six years as of June 30, 2022 and December 31, 2021, respectively. Supplemental cash flow information related to operating leases for the six months ended June 30 are as follows (in thousands): Six Months Ended June 30, 2022 2021 Cash paid for amounts included in the measurement of lease liabilities: Operating cash outflows from operating leases $ 1,133 $ 1,198 Non-cash operating activities: Operating lease assets obtained in exchange for new operating lease liabilities $ 1,512 $ 325 14 Table of Contents Future minimum commitments over the life of all operating leases, which exclude variable rent payments, are as follows (in thousands): 2022 $ 974 2023 1,824 2024 1,684 2025 1,296 2026 831 2027 626 Thereafter 566 Total minimum lease payments 7,801 Less: imputed interest ( 1,419 ) Total lease liabilities $ 6,382 NOTE 9 - 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 will continue to govern any outstanding awards granted thereunder. The number of shares available for issuance under the 2018 Plan is equal to the sum of (i) 4,350 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 2,312 options and RSUs granted and outstanding pursuant to the 2018 Plan as of June 30, 2022. As of June 30, 2022, the number of shares available for issuance under the 2018 Plan is 1,535 . Share based compensation for our stock option plans for the three months ended June 30, 2022 and June 30, 2021 was $ 814 and $ 714 , respectively and for the six months ended June 30, 2022 and June 30, 2021 $ 1,542 and $ 1,340 . We issued no common stock related to exercises of stock options for the three months ended June 30, 2022 and issued 85 shares of common stock related to exercises for the three months ended June 30, 2021. We issued 30 and 28 shares of common stock upon the vesting of restricted stock units, net for the three months ended June 30, 2022 and 2021, respectively. NOTE 10 - NET LOSS PER SHARE We compute net loss per share based on the weighted average number of common shares outstanding for the period. Diluted net 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 2,312 and 2,172 for the three and six months ended June 30, 2022 and 2021, 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. 15 Table of Contents The following table sets forth the computation of basic and diluted net loss per common share for the three and six months ended June 30 (in thousands, except per share amounts): Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Basic: Net income (loss) $ ( 5,860 ) $ 3,764 $ ( 8,877 ) $ 2,166 Weighted-average shares of common stock outstanding 20,106 19,040 20,067 19,033 Basic loss per share $ ( 0.29 ) $ 0.20 $ ( 0.44 ) $ 0.11 Diluted: Net income (loss) $ ( 5,860 ) $ 3,764 $ ( 8,877 ) $ 2,166 Weighted-average shares of common stock outstanding 20,106 19,203 20,067 19,198 Diluted loss per share $ ( 0.29 ) $ 0.20 $ ( 0.44 ) $ 0.11 NOTE 11 - SUBSEQUENT EVENTS In July 2022, the Company reached an agreement with the holders of the subordinated note payable, issued in connection with the purchase of a business the Company acquired in 2018 to settle outstanding indemnification claims for $190, which reduced the outstanding balance of the subordinated note payable (including interest) to $600. This note was adjusted to $600 as of June 30, 2022. Also in July 2022, the Company agreed to the amount of the contingent consideration earned in connection with the acquisition of its payroll tax processing business in July 2020, and adjusted the amount of this contingent consideration as of June 30, 2022, to $2,229. There remains an outstanding principal balance on the subordinated note payable issued in connection with the purchase of a business we acquired in 2020, which note matured on July 1, 2022. $634 of the principal balance was paid on July 1, 2022. A $232 payment on the principal balance was withheld as security for outstanding claims for which we are entitled to indemnification under the purchase agreement. The Company will make payment, subject to its rights of set-off under the purchase agreement, when the claims are resolved. Due to its rights under the purchase agreement and the terms of this note, the Company is not in default under the note.