ASURE SOFTWARE INC 10-Q

ITEM 1. FINANCIAL STATEMENTS ASURE SOFTWARE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) September 30, 2022 December 31, 2021 (unaudited) ASSETS Current assets: Cash, cash equivalents, and restricted cash $ 10,885 $ 13,427 Accounts receivable, net of allowance for doubtful accounts of $ 2,751 and $ 2,210 at September 30, 2022 and December 31, 2021, respectively 6,821 5,308 Inventory 323 246 Prepaid expenses and other current assets 10,658 13,475 Total current assets before funds held for clients 28,687 32,456 Funds held for clients 181,969 217,273 Total current assets 210,656 249,729 Property and equipment, net 11,364 8,945 Goodwill 86,011 86,011 Intangible assets, net 70,238 78,573 Operating lease assets, net 7,969 5,748 Other assets, net 4,886 4,136 Total assets $ 391,124 $ 433,142 LIABILITIES AND STOCKHOLDERS ’ EQUITY Current liabilities: Current portion of notes payable $ 3,064 $ 1,907 Accounts payable 1,322 565 Accrued compensation and benefits 4,179 3,568 Operating lease liabilities, current 1,686 1,551 Other accrued liabilities 4,137 2,333 Contingent purchase consideration 2,299 1,905 Deferred revenue 4,173 3,750 Total current liabilities before client fund obligations 20,860 15,579 Client fund obligations 184,617 217,144 Total current liabilities 205,477 232,723 Long-term liabilities: Deferred revenue 252 36 Deferred tax liability 1,758 1,595 Notes payable, net of current portion 31,367 33,120 Operating lease liabilities, noncurrent 6,908 4,746 Contingent purchase consideration 670 2,424 Other liabilities 130 258 Total long-term liabilities 41,085 42,179 Total liabilities 246,562 274,902 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; 20,544 and 20,412 shares issued, 20,160 and 20,028 shares outstanding at September 30, 2022 and December 31, 2021, respectively 205 204 Treasury stock at cost, 384 shares at September 30, 2022 and December 31, 2021 ( 5,017 ) ( 5,017 ) Additional paid-in capital 432,445 429,912 Accumulated deficit ( 280,170 ) ( 266,760 ) Accumulated other comprehensive loss ( 2,901 ) ( 99 ) Total stockholders’ equity 144,562 158,240 Total liabilities and stockholders’ equity $ 391,124 $ 433,142 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 September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (unaudited) (unaudited) Revenue: Recurring $ 19,959 $ 16,374 $ 61,977 $ 51,688 Professional services, hardware and other 1,944 1,607 4,559 3,263 Total revenue 21,903 17,981 66,536 54,951 Cost of Sales 8,256 7,113 25,164 21,646 Gross profit 13,647 10,868 41,372 33,305 Operating expenses: Sales and marketing 4,752 3,897 14,238 11,130 General and administrative 8,023 7,005 24,204 20,324 Research and development 1,230 1,505 4,523 3,972 Amortization of intangible assets 3,350 2,534 10,134 7,590 Total operating expenses 17,355 14,941 53,099 43,016 Loss from operations ( 3,708 ) ( 4,073 ) ( 11,727 ) ( 9,711 ) Interest expense, net ( 1,122 ) ( 530 ) ( 3,006 ) ( 977 ) (Loss) gain on extinguishment of debt — ( 342 ) 180 8,312 Employee retention tax credit — 10,533 — 10,533 Other income, net 399 — 1,349 — (Loss) Income from operations before income taxes ( 4,431 ) 5,588 ( 13,204 ) 8,157 Income tax expense 102 260 206 663 Net (loss) income ( 4,533 ) 5,328 ( 13,410 ) 7,494 Other comprehensive loss: Unrealized loss on marketable securities ( 1,243 ) ( 79 ) ( 2,802 ) ( 287 ) Comprehensive (loss) income $ ( 5,776 ) $ 5,249 $ ( 16,212 ) $ 7,207 Basic and diluted (loss) earnings per share Basic $ ( 0.22 ) $ 0.28 $ ( 0.67 ) $ 0.39 Diluted $ ( 0.22 ) $ 0.28 $ ( 0.67 ) $ 0.39 Weighted average basic and diluted shares Basic 20,219 19,182 20,092 19,083 Diluted 20,219 19,330 20,092 19,243 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 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 Stock issued upon option exercise and vesting of restricted stock units 18 — — — — — — Share based compensation — — — 798 — — 798 Net loss — — — — ( 4,533 ) — ( 4,533 ) Other comprehensive loss — — — — — ( 1,243 ) ( 1,243 ) Balance at September 30, 2022 20,160 $ 205 $ ( 5,017 ) $ 432,445 $ ( 280,170 ) $ ( 2,901 ) $ 144,562 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 $ ( 269,953 ) $ 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. 4 Table of Contents ASURE SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Nine Months Ended September 30, 2022 2021 (unaudited) Cash flows from operating activities: Net (loss) income $ ( 13,410 ) $ 7,494 Adjustments to reconcile (loss) income to net cash provided by (used in) operations: Depreciation and amortization 14,018 11,690 Amortization of operating lease assets 1,268 1,146 Amortization of debt financing costs and discount 531 117 Net amortization of premiums and accretion of discounts on available-for-sale securities 279 123 Provision for doubtful accounts 304 1 Provision for deferred income taxes 163 559 Gain on extinguishment of debt ( 180 ) ( 8,312 ) Net realized gains on sales of available-for-sale securities ( 808 ) ( 390 ) Share-based compensation 2,341 2,124 Loss (gain) on disposals of long-term assets 1 ( 32 ) Change in fair value of contingent purchase consideration ( 1,350 ) ( 191 ) Adjustment to Intangibles 23 — Changes in operating assets and liabilities: Accounts receivable ( 1,816 ) ( 536 ) Inventory ( 85 ) 85 Prepaid expenses and other assets 2,855 ( 10,916 ) Operating lease right-of-use assets ( 3,489 ) ( 1,368 ) Accounts payable 738 11 Accrued expenses and other long-term obligations 2,637 111 Operating lease liabilities 2,298 116 Deferred revenue 639 ( 2,976 ) Net cash provided by (used in) operating activities 6,957 ( 1,144 ) Cash flows from investing activities: Acquisition of intangible asset ( 2,289 ) ( 25,526 ) Purchases of property and equipment ( 2,188 ) ( 100 ) Software capitalization costs ( 3,219 ) ( 3,152 ) Purchases of available-for-sale securities ( 33,454 ) ( 695 ) Proceeds from sales and maturities of available-for-sale securities 7,159 8,431 Net cash (used in) provided by investing activities ( 33,991 ) ( 21,042 ) Cash flows from financing activities: Proceeds from notes payable — 29,425 Payments of notes payable ( 1,688 ) ( 15,073 ) Payments of contingent purchase consideration ( 9 ) ( 1,784 ) Debt financing fees — ( 878 ) Net proceeds from issuance of common stock 192 526 Net change in client fund obligations ( 32,527 ) ( 146,206 ) Net cash used in financing activities ( 34,032 ) ( 133,990 ) Net decrease in cash, cash equivalents, restricted cash, and restricted cash equivalents ( 61,066 ) ( 156,176 ) Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of period 198,641 324,985 Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period $ 137,575 $ 168,809 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, 2022 2021 (unaudited) Reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents to the Condensed Consolidated Balance Sheets Cash and cash equivalents $ 10,885 $ 11,506 Restricted cash and restricted cash equivalents included in funds held for clients 126,690 157,303 Total cash, cash equivalents, restricted cash, and restricted cash equivalents $ 137,575 $ 168,809 Supplemental information: Cash paid for interest $ 2,247 $ 722 Cash paid for income taxes $ 246 $ 332 Net assets added from acquisitions $ — $ 763 Non-cash investing and financing activities: Contingent purchase consideration issued for acquisitions $ — $ 3,038 Notes payable issued for acquisitions $ 411 $ 4,386 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) (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 September 30, 2022 and the results of operations, statements of changes in stockholders’ equity for the three and nine months ended September 30, 2022 and September 30, 2021, and our statements of cash flows for the nine months ended September 30, 2022 and September 30, 2021. Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements. These reclassifications had no effect on the consolidated financial position or consolidated results of operations of the Company. 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 September 30, 2022, the Company has $500 of restricted cash related to collateralizing a letter of credit issued by South State Bank in connection with our money transmission licenses. 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 September 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 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. 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. 8 Table of Contents 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. 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 September 30, 2022, there was a measurement period adjustment to the fair value of the contingent consideration of $ 404 . For the nine months ended September 30, 2022 the fair value of the contingent consideration was $671, which will be added to promissory note in the fourth quarter of 2022. The promissory note amount as of September 30, 2022 was $ 4,080 due to a principal payment made during the period. 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. 9 Table of Contents 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, 2022 and December 31, 2021, respectively (in thousands): Total Carrying Value Level 1 Level 2 Level 3 September 30, 2022 Assets: Funds held for clients Money market funds $ 3,120 $ 3,120 $ — $ — Available-for-sale securities 55,279 — 55,279 — Total $ 58,399 $ 3,120 $ 55,279 $ — Liabilities: Contingent purchase consideration (1) $ 2,969 $ — $ — $ 2,969 Total $ 2,969 $ — $ — $ 2,969 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. 10 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 September 30, 2022 Restricted cash equivalents $ 3,120 $ — $ — $ 3,120 Available-for-sale securities: Certificates of deposit 985 4 ( 1 ) 988 Corporate debt securities 51,079 — ( 2,110 ) 48,969 Municipal bonds 5,310 — ( 435 ) 4,875 U.S. Government agency securities 500 — ( 53 ) 447 Total available-for-sale securities 57,874 4 ( 2,599 ) 55,279 Total (2) $ 60,994 $ 4 $ ( 2,599 ) $ 58,399 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 September 30, 2022 and December 31, 2021, there were 2 and 10 securities, respectively, in an unrealized gain position and there were 104 and 57 securities in an unrealized loss position, respectively. As of September 30, 2022, these unrealized losses were less than $ 99 individually and $ 2,601 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 September 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): September 30, 2022 December 31, 2021 Restricted cash and cash equivalents held to satisfy client funds obligations $ 126,690 $ 185,213 Restricted short-term marketable securities held to satisfy client funds obligations 7,215 5,559 Restricted long-term marketable securities held to satisfy client funds obligations 48,064 26,501 Total funds held for clients $ 181,969 $ 217,273 11 Table of Contents Expected maturities of available-for-sale securities as of September 30, 2022 are as follows (in thousands): One year or less $ 7,215 After one year through five years 48,064 Total $ 55,279 The previously reported comprehensive loss on the Condensed Consolidated Statement of Comprehensive Loss for the three-month and six-month period ended June 30, 2022, was inconsistent with the amount reported as “Other Comprehensive Loss” on the Condensed Consolidated Balance Sheet and the Condensed Consolidated Statement of Stockholders’ Equity as of and for the period ended June 30, 2022, which reported the correct changes in other comprehensive loss. For the three months ended June 30, 2022 the Company reported “Other Comprehensive Loss” of $7,614 versus the amount of $6,356. For the six months ended June 30, 2022 the Company reported “Other Comprehensive Loss” of $9,940 versus the amount of $10,436. The Company completed an analysis based on the guidance from Staff Accounting Bulletin No. 99 and determined that the related impacts were not material to any previously presented financial statements, and therefore decided to modify the reporting of this inconsistency on a prospective basis. NOTE 5 - GOODWILL AND OTHER INTANGIBLE ASSETS December 31, 2021 Acquisitions September 30, 2022 Goodwill $ 86,011 $ — $ 86,011 We believe significant synergies are expected to arise from our strategic acquisitions and their assembled work forces. 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, 2022, there has been no impairment of goodwill based on the qualitative assessments performed by the Company. Gross Intangible Assets December 31, 2021 Acquisitions September 30, 2022 Customer relationships $ 114,611 $ 2,360 $ 116,971 Developed technology 12,001 — 12,001 Reseller relationships 1,012 327 1,339 Trade names 880 — 880 Non-compete agreements 1,032 — 1,032 $ 129,536 $ 2,687 $ 132,223 12 Table of Contents The gross carrying amount and accumulated amortization of our intangible assets as of September 30, 2022 are as follows (in thousands, except weighted average periods): Weighted Average Amortization Period (in Years) Gross Accumulated Amortization Net September 30, 2022 Customer relationships 8.9 $ 116,971 $ ( 49,427 ) $ 67,544 Developed technology 6.6 12,001 ( 9,987 ) 2,014 Reseller relationships 7.6 1,339 ( 880 ) 459 Trade names 3.0 880 ( 780 ) 100 Non-compete agreements 5.2 1,032 ( 911 ) 121 8.4 $ 132,223 $ ( 61,985 ) $ 70,238 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 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 $ 10,134 and $ 7,590 for the nine months ended September 30, 2022 and 2021, respectively. Amortization expenses recorded in Cost of Sales were $ 889 and $ 1,135 for the nine months ended September 30, 2022 and 2021, respectively. There was no impairment of intangibles during the nine months ended September 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 September 30, 2022 (in thousands): 2022 $ 3,659 2023 13,600 2024 13,339 2025 12,554 2026 9,442 2027 7,267 Thereafter 10,377 $ 70,238 NOTE 6 - NOTES PAYABLE The following table summarizes our outstanding debt as of the dates indicated (in thousands): Maturity Cash Interest Rate September 30, 2022 December 31, 2021 Subordinated Notes Payable – Acquisitions (1) 7/1/2022 – 9/30/2026 2.00 % - 3.00 % $ 6,946 $ 8,178 Senior Credit Facility 10/1/2025 12.00 % 30,323 30,224 Gross Notes Payable $ 37,269 $ 38,402 (1) See Note 3 — Business Combinations and Asset Acquisitions for further discussion regarding the notes payable related to acquisitions. 13 Table of Contents 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, 2022 Current portion of notes payable $ 3,274 $ ( 210 ) $ 3,064 Notes payable, net of current portion 33,995 ( 2,628 ) 31,367 Total $ 37,269 $ ( 2,838 ) $ 34,431 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 September 30, 2022 (in thousands): 2022 $ 231 2023 3,043 2024 6,367 2025 6,330 2026 21,298 Total $ 37,269 Subordinated Notes Payable - Acquisitions In August 2022, the Company reached an agreement with the holders of the subordinated note payable, issued in connection with the purchase of a business acquired in 2018 to settle outstanding indemnification claims for $ 190 , which reduced the outstanding balance of the subordinated note payable (including interest) to $ 600 . There remained no outstanding balance on the note as of September 30, 2022. There remains an outstanding principal balance on the subordinated note payable issued in connection with the purchase of a business the Company 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. 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, which as of September 30, 2022 was 12.0%. 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. 14 Table of Contents 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 $ 2,751 , were $ 6,821 at September 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 September 30, 2022 and December 31, 2021, respectively. Deferred Commissions Deferred commission costs from contracts with customers were $ 5,875 and $ 4,684 at September 30, 2022 and December 31, 2021, respectively. The amount of amortization recognized for the three and nine months ended September 30, 2022 $ 412 and $ 1,192 , respectively, and for the three and nine months ended September 30, 2021 was $ 424 and $ 963 , respectively. Deferred Revenue During the three and nine months ended September 30, 2022, revenue of $ 156 and $ 3,362 , and the three and nine months ended September 30, 2021, revenue of $ 460 and $ 4,308 , 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, 2022, approximately $ 26,509 of revenue is expected to be recognized from remaining performance obligations. We expect to recognize revenue on approximately 82 % 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, 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. 15 Table of Contents 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 nine months ended September 30, 2022 and 2021 are as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Operating lease cost $ 610 $ 496 $ 1,759 $ 1,610 Sublease income ( 15 ) ( 11 ) ( 84 ) ( 32 ) Net rent expense $ 595 $ 485 $ 1,675 $ 1,578 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, 2022 and December 31, 2021, respectively. The weighted average remaining lease term is five years and five years as of September 30, 2022 and December 31, 2021, respectively. Supplemental cash flow information related to operating leases for the nine months ended September 30 are as follows (in thousands): Nine Months Ended September 30, 2022 2021 Cash paid for amounts included in the measurement of lease liabilities: Operating cash outflows from operating leases $ 1,561 $ 1,740 Non-cash operating activities: Operating lease assets obtained in exchange for new operating lease liabilities $ 2,221 $ 1,279 Future minimum commitments over the life of all operating leases, which exclude variable rent payments, are as follows (in thousands): 2022 $ 559 2023 2,267 2024 2,150 2025 1,765 2026 1,230 2027 1,204 Thereafter 1,509 Total minimum lease payments 10,684 Less: imputed interest ( 2,090 ) Total lease liabilities $ 8,594 16 Table of Contents 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 2,285 options and RSUs granted and outstanding pursuant to the 2018 Plan as of September 30, 2022. As of September 30, 2022, the number of shares available for issuance under the 2018 Plan is 1,439 . Share based compensation for our stock option plans for the three months ended September 30, 2022 and September 30, 2021 was $ 799 and $ 714 , respectively and for the nine months ended September 30, 2022 and September 30, 2021 $ 2,342 and $ 2,124 . We issued no common stock related to exercises of stock options for the three months ended September 30, 2022 and issued 9 shares of common stock related to exercises for the three months ended September 30, 2021. We issued 22 and 93 shares of common stock upon the vesting of restricted stock units, net for the three months ended September 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 2,285 and 2,040 for the three and nine months ended September 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. The following table sets forth the computation of basic and diluted net loss per common share for the three and nine months ended September 30 (in thousands, except per share amounts): Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Basic: Net income (loss) $ ( 4,533 ) $ 5,328 $ ( 13,410 ) $ 7,494 Weighted-average shares of common stock outstanding 20,219 19,182 20,092 19,083 Basic loss per share $ ( 0.22 ) $ 0.28 $ ( 0.67 ) $ 0.39 Diluted: Net income (loss) $ ( 4,533 ) $ 5,328 $ ( 13,410 ) $ 7,494 Weighted-average shares of common stock outstanding 20,219 19,330 20,092 19,243 Diluted loss per share $ ( 0.22 ) $ 0.28 $ ( 0.67 ) $ 0.39 17 Table of Contents