What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-27 compared with 2022-03-14 · 50 added, 73 removed, 194 unchanged (39% of the section changed)

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metropolitan cities where fewer of our competitors have a presence.

We sell our solutions through both direct and partner models.

We sell our solutions through both direct and partner channels.

We supplement our direct sales efforts with partner programs that afford us access to opportunities in various geographic and industry niches.

Asure has two types of partners:

Reseller Partners that white label our products while providing value-added services to their clients (our indirect clients) and Referral Partners that provide us with SMB leads but do not resell our solutions.

Reseller Partners that white label our product s while providing value-added services to their clients (our indirect clients) and Referral Partners that provide us with SMB leads but do not resell our solutions.

As of December 31, 2022, Asure had more than 100,000 clients, split between approximately 15,000 direct and the remaining 85,000 indirect clients who have contracts with Reseller Partners.

Asure has several forms of revenue that result from our business model:

Software-as-a-service revenue is generated when clients utilize our product suite for their recurring human resource needs—primarily payroll, tax, and garnishment withdrawals and subsequent disbursements.

Software-as-a-service revenue is generated when clients utilize our product suite for their recurring human resource needs—primarily payroll, tax, HR compliance, time and attendance, and AsureMarketplace™.

This also contains revenue generated from quarterly and annual reporting requirements to local, state and federal regulatory agencies.

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Maintenance and support revenue is generated from servicing our hardware on our clients’ behalf and providing training on how to operate both our hardware and software products.

Professional services revenue is generated from our clients’ needs that would normally be fulfilled by an internal human resources department.

This service is delivered in several different packages, from a base level providing the library and documentation necessary to keep a business running, to having Asure carry out the entire human resource needs of our clients.

The frequency varies by client—whose needs may be ongoing or merely require a standalone project be completed.

Professional services revenue is generated from our clients’ needs that would normally be fulfilled by an internal payroll system or human resources department.

Our tax management solutions revenue is derived from providing clients with innovative payroll tax processing software and service solutions and includes revenue generated from Employee Retention Tax Credit tax filing activity related to the CARES Act.

Interest from client funds is generated when we gain possession of funds intended to be disbursed based on the clients’ needs.

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• Consolidated revenue of $95,828 for 2022, representing a 26% increase over revenue in 2021

• Paycheck Protection Program loan and accrued interest forgiveness of $8,654

• Employee Retention Tax Credit of $10,533 included in other income

• Departure from our credit revolver with Wells Fargo and signing of a $50,000 credit facility with Structural Capital Investments

• Acquisition of two payroll businesses, partially funded by our new credit facility

• Integration with Employee Navigator, allowing employee data to be kept in sync with our payroll system even if the employee elects to choose a different insurance carrier on the platform

• Helped small business clients file for in excess of $200,000 in ERTC credits

Impact of the COVID-19 Pandemic

On March 11, 2020, the World Health Organization declared the COVID-19 outbreak to be a global pandemic.

In response, federal, state and local governments imposed various restrictions on social and commercial activity to promote social distancing in an effort to slow the spread of the disease.

Across many industries, temporary and permanent business closures as well as business occupancy limitations have resulted in layoffs and employee furloughs since late March 2020.

Because we charge our clients on a per-employee basis for certain services we provide, decreased headcount at our clients at of the onset of the pandemic negatively impacted our recurring revenue during 2020.

At the onset of the COVID-19 pandemic, a limited number of new clients temporarily delayed service implementation.

As the COVID-19 pandemic and variants continue to create uncertainty and the potential for ongoing business disruptions, we may experience similar client-driven delays in service implementation in the future.

Prior to the COVID-19 pandemic, our sales force traveled frequently to sell our solution.

The current remote work environment presents a unique opportunity for our sales force—each sales employee is able to meet virtually with a greater number of client prospects in a given day than they would if conducting in-person meetings.

Although we have not experienced such challenges to date, if clients and client prospects are not as willing or available to engage by video conference and teleconference, the shift from in-person to virtual sales meetings could negatively affect our sales efforts, impede client acquisition and lengthen our sales cycles, which would negatively impact our business and results of operations and could impact our financial condition in the future.

In 2021, we continued to invest in sales and marketing and in research and development to drive future growth and expand our market share.

Lower employment levels among our clients and the other pandemic-related factors described above continued to have a negative impact on our recurring revenues, although at lesser levels than in 2020.

Accordingly, we experienced an improvement in net income for the year ended December 31, 2021 as compared to the year ended December 31, 2020.

We expect net income to be negatively affected by the impact of the pandemic on our recurring revenue and our deliberate, increased level of investment in sales and marketing and research and development to drive the growth of our business.

The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) passed by Congress in 2020 (and subsequent amendments) tackled the economic plight caused by the pandemic, and placed Asure in a unique position to help clients navigate the bureaucratic framework to apply for Employee Retention Tax Credits (“ERTC”).

We updated our product suite in light of this recent legislation to guide our clients to file for in excess of $200,000 ERTC credits.

• Launch of AsureMarketplace™, to automate interactions between Asure’s HCM systems with third-party providers to enhance efficiency, improve accuracy and to extend the range of services offered to employers and their employees.

OPERATING SEGMENT

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Operating segments are defined as components of an enterprise for which the chief operating decision maker, who in our case is the Chief Executive Officer, in deciding how to allocate resources and assess performance, evaluates separate financial information regularly.

During 2021, and over the last six years, we have completed a number of acquisitions.

Over the last seven years, we have completed a number of acquisitions.

These acquisitions have allowed us to expand our offerings, presence and reach in various market segments of the human capital management market.

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RESULTS OF OPERATIONS (in thousands)

The following table sets forth, for the fiscal periods indicated, the percentage of total revenues represented by certain items in the Company’s Consolidated Statements of Comprehensive Income (Loss):

Year Ended December 31,

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Recurring Revenues

Recurring revenues include fees for our payroll, payroll tax, time and labor management, and other Asure solutions as well as fees charged for form filings and delivery of client payroll checks and reports.

Recurring revenues include fees for our payroll, payroll tax, tax management, time and labor management, HR compliance services, AsureMarketplace and other Asure solutions as well as fees charged for form filings and delivery of client payroll checks and reports.

These revenues are derived from fixed amounts charged per billing period and sometimes an additional fee per employee or transaction processed.

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Therefore, we expect the seasonality of our revenue cycle to decrease to the extent clients utilize more of our non-payroll applications.

This revenue line also includes interest earned on funds held for clients.

We collect funds from clients in advance of either the applicable due date for payroll tax submissions or the applicable disbursement date for employee payment services.

This revenue line also includes interest earned on funds held for clients as well as revenues generated via fixed fee arrangements for provisioning and filing for ERTC credits.

Interest earned is generated from funds we collect from clients in advance of either the applicable due date for payroll tax submissions or the applicable disbursement date for employee payment services.

These collections from clients are typically disbursed from one to 30 days after receipt, with some funds being held for up to 120 days.

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The amount of interest we earn from the investment of client funds is also impacted by changes in interest rates.

Revenue for the year ended December 31, 2021 was $76,064, an increase of $10,557, or 16%, from $65,507 for the year ended December 31, 2020.

Recurring revenue increased due to organic growth within our client base as client employee counts rebounded following the 2020 impact of COVID-19, due to the impact of acquisitions and higher interest revenue.

Asure also generates revenues from provisioning and filing for Earned Retention Tax Credits.

Revenue generated for such activity is based on multi-year contracts with volume commitments and is recorded as recurring revenues.

Recurring revenue for the year ended December 31, 2022 was $86,222, an increase of $15,144, or 21%, from $71,078 for the year ended December 31, 2021.

Recurring revenue increased due to organic growth within our client base, the impact of acquisitions, higher interest revenue and from the AsureMarketplace™.

Professional Services, Hardware and Other Revenues

Professional Services, Hardware and Other Revenues represents implementation fees, one-time consulting projects, on-premise maintenance, and hardware devices to enhance our software products.

Professional services, hardware and other revenue increased $2,794, or 127%, for the year ended December 31, 2021 from the similar period in 2020, due to the implementation of our ERTC service in 2021.

Professional Services, Hardware and Other Revenues represents implementation fees, one-time consulting projects, on-premise maintenance, hardware devices to enhance our software products as well as ERTC revenues that are transactional in nature.

Professional services, hardware and other revenue increased $4,620, or 93%, for the year ended December 31, 2022 from the similar period in 2021 , due to higher ERTC revenues.

Although our total customer base is widely spread across industries, our sales are concentrated in SMBs.

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Sales and marketing expenses primarily consist of salaries and related expenses for sales and marketing staff, including stock-based expenses, commissions, as well as marketing programs, which include events, corporate communications and product marketing activities.

Selling and marketing expenses for the year ended December 31, 2021 were $15,448, an increase of $1,899, or 14%, from $13,549 for the year ended December 31, 2020, primarily due to increased personnel costs offset by lower discretionary marketing spending as we focus on hiring direct sales personnel.

Selling and marketing expenses as a percentage of revenue decreased to 20% for the year ended December 31, 2021 from 21% for the same period in 2020.

Selling and marketing expenses for the year ended December 31, 2022 were $20,260, an increase of $4,812, or 31%, from $15,448 for the year ended December 31, 2021, primarily due to increased personnel costs, higher sales commissions owing to increased revenues and higher advertising expense.

Selling and marketing expenses as a percentage of revenue increased to 21% for the year ended December 31, 2022 from 20% for the same period in 2021.

We continue to expand and increase selling costs as we focus on hiring direct sales personnel, expanding recognition of our brand, and lead generation.

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General and administrative expenses primarily consist of salaries and related expenses, including stock-based expenses for finance and accounting, legal, internal audit, human resources and management information systems personnel, legal costs, professional fees, and other corporate expenses such as transaction costs for acquisitions.

General and administrative expenses for the year ended December 31, 2021 were $27,570, an increase of $3,644, or 15%, from $23,926 for the year ended December 31, 2020, primarily attributable to increased personnel, contracting and placement costs.

General and administrative expenses for the year ended December 31, 2022 were $33,924, an increase of $6,204, or 22%, from $27,720 for the year ended December 31, 2021, primarily attributable to increased personnel, contracting and bank charges.

General and administrative expenses as a percentage of revenue decreased to 35% for the year ended December 31, 2022 from 36% for the same period in 2021.

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Research and development (“R&D”) expenses consist primarily of salaries and related expenses, including stock-based expenses for employees supporting our R&D activities.

R&D expenses for the year ended December 31, 2021 were $5,410, a decrease of $549, or 9%, from $5,959 for the year ended December 31, 2020.

The decrease in R&D expense is primarily attributable to an increase in investment costs offset by an increase in capitalization costs.

R&D expenses for the year ended December 31, 2022 were $6,147, an increase of $737, or 14%, from $5,410 for the year ended December 31, 2021.

The increase in R&D expense is primarily attributable to an increase in personnel costs.

R&D expenses as a percentage of revenues decreased to 6% for the year ended December 31, 2022 from 7% for the same period in 2021.

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We will continue to expand the breadth of integration between our solutions, allowing direct clients and resellers the ability to easily add and implement components across our entire solution set.

We believe that our expanded investment in product, engineering, SaaS hosting, mobile and hardware technologies lays the groundwork for broader market opportunities and represents a key aspect of our competitive differentiation.

We believe that our expanded investment in product, engineering, SaaS hosting, mobile and hardware technologies lay the groundwork for broader market opportunities and represents a key aspect of our competitive differentiation.

Native mobile applications, common user interface, expanded web service integration and other technologies are all part of our initiatives.

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Amortization expense in operating expenses for the year ended December 31, 2022 was $13,486, an increase of $2,538, or 23%, from $10,948 for the year ended December 31, 2021.

Amortization expense as a percentage of revenue was 14% and 15% for the years ended December 31, 2021 and 2020, respectively.

Amortization expense as a percentage of revenue was 14% for the years ended December 31, 2022 and 2021, respectively.

Interest Expense and Other, Net

Interest expense and other, net for the year ended December 31, 2022 was an expense of $4,438 compared to an expense of $2,038 for the year ended December 31, 2021.

The increase in interest expense and other, net relative to the prior year is attributable to new borrowings under our credit facility with Structural Capital Investments III LP, which were used to fund the acquisitions of two of our payroll resellers in the third quarter of 2021.

The increase in interest expense and other, net relative to the prior year is attributable to higher average borrowings under our credit facility with Structural Capital Investments III LP.

Interest expense and other, net as a percentage of revenue was an expense of 5% and 3% for the years ended December 31, 2022 and December 31, 2021, respectively.

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Gain on Extinguishment of Debt

Gain on extinguishment of debt for the year ended December 31, 2021 was $8,312, compared with $138 for the year ended December 31, 2020.

The gain in 2021 is primarily related to the forgiveness of an unsecured Paycheck Protection Program loan from Pinnacle Bank under the CARES Act.

The amount forgiven was $8,654 and is discussed in Note 6 — Notes Payable.

There was no gain on extinguishment of debt for the year ended December 31, 2022, compared with a gain of $8,312 for the year ended December 31, 2021.

The gain in 2021 was primarily related to the forgiveness of an unsecured Paycheck Protection Program (“PPP”) loan 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 was $8,654.

Employee Retention Tax Credit

An Employee Retention Tax Credit (“ERTC”) of $10,533 was recorded for the year ended December 31, 2021.

There was no comparable item in the year ended December 31, 2020.

There was no Employee Retention Tax Credit (“ERTC”) recorded for the year ended December 31, 2022.

An ERTC of $10,533 was recorded in the year ended December 31, 2021.

The ERTC is a refundable tax credit against certain employment taxes provided under the CARES Act.

We qualified for the ERTC in 2021 and recorded an aggregate benefit of $10,533 in the third quarter of 2021, which is discussed in Note 10 — Employee Retention Tax Credit.

For the year ended December 31, 2021 and 2020, we recorded an income tax expense attributable to continuing operations of $802 and $337, respectively, an increase of $465 or 138%.

We qualified for the ERTC in 2021 and recorded an aggregate benefit of $10,533 in the third quarter of 2021.

For the year ended December 31, 2022 and 2021, we recorded an income tax expense attributable to continuing operations of $112 and $802, respectively, a decrease of $690 or 86%.

Income (Loss) From Operations

We generated income from operations of $3,193, or $0.17 per share, during the year ended December 31, 2021, compared to a loss from operations of $16,311, or $1.03 per share, during the years ended December 31, 2020.

Income and loss from operations as a percentage of total revenues was 4% and 25% for the years ended December 31, 2021 and 2020, respectively.

We incurred a loss from operations of $(14,466), or $(0.72) per share, during the year ended December 31, 2022, compared to income from operations of $3,193, or $0.17 per share, during the years ended December 31, 2021.

Loss and income from operations as a percentage of total revenues was (15)% and 4% for the years ended December 31, 2022 and 2021, respectively.

LIQUIDITY AND CAPITAL RESOURCES (in thousands)

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Working Capital .

We had working capital of $17,006 at December 31, 2021, an increase of $8,798 from working capital of $8,208 at December 31, 2020.

We had working capital of $8,093 at December 31, 2022, a decrease of $8,913 from working capital of $17,006 at December 31, 2021.

Working capital as of December 31, 2022 and December 31, 2021 includes $8,461 and $3,750 of short-term deferred revenue, respectively.

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Operating Activities .

Net cash provided by operating activities of $1,378 for the year ended December 31, 2021 was primarily driven by non-cash adjustments to our net income of approximately $12,975, primarily due to depreciation and amortization, and net income of $3,193.

This was offset by changes in operating assets and liabilities, which resulted in a use of $14,790 in cash.

Net cash provided by operating activities of $2,235 for the year ended December 31, 2020 was driven by non-cash adjustments to our net loss of approximately $20,414, primarily due to depreciation and amortization, offset by our net loss of $16,311.

Net cash provided by operating activities of $13,674 for the year ended December 31, 2022 was primarily driven by non-cash adjustments to our net loss of approximately $22,875.

This was offset by changes in operating assets and liabilities, which resulted in cash provided of $5,265.

Net cash provided by operating activities of $1,378 for the year ended December 31, 2021 was driven by non-cash adjustments to our net income of approximately $12,975, primarily due to depreciation and amortization, offset by our net income of $3,193.

For the year ended December 31, 2021, changes in operating assets and liabilities resulted in a use of $14,790 in cash.

Investing Activities .

Net cash used in investing activities of $36,970 for the year ended December 31, 2021 is primarily due to our third quarter acquisitions totaling $25,526.

Net cash used in investing activities of $19,407 for the year ended December 31, 2020 is primarily due to the purchase and sale of available-for-sale securities.

Net cash used in investing activities of $35,999 for the year ended December 31, 2022 is primarily due to purchases of available-for-sale securities of $37,232.

Net cash used in investing activities of $36,970 for the year ended December 31, 2021 is primarily due to the purchase and sale of available-for-sale securities as well as acquisitions.

Financing Activities .

Net cash used in financing activities was $12,376 for the year ended December 31, 2022, which primarily consisted of a net decrease in client fund obligations of $11,055 and payments of notes payable of $1,688.

These amounts were offset by proceeds from our notes payable of $29,425.

Net cash provided by financing activities was $208,097 for the year ended December 31, 2020, which primarily consisted of a net increase in client fund obligations of $190,328.

Net cash used in financing activities was $90,650 for the year ended December 31, 2021, which primarily consisted of a net decrease in client fund obligations of $103,434.

Sources of Liquidity .

As of December 31, 2021, the Company’s principal sources of liquidity consisted of approximately $13,427 of cash, cash equivalents and restricted cash, cash generated from operations of our business over the next twelve months, and $20,000 available for borrowing under our $50,000 credit facility with Structural Capital Investments III, LP, which is discussed in Note 5 — Notes Payable, to the Consolidated Financial Statements.

As of December 31, 2022, the Company’s principal sources of liquidity consisted of approximately $17,010 of cash, cash equivalents and restricted cash, and cash generated from operations of our business over twelve months, and $3,457 of Employee Retention Tax Credit cash recei ved as of December 31, 2022.

Additionally, $7,076 of Employee Retention Tax Credit cash was received subsequent to December 31, 2022.

We cannot assure that we can grow our cash balances or limit our cash consumption and thus maintain sufficient cash balances for our planned operations or future acquisitions.

Future business demands may lead to cash utilization at levels greater than recently experienced.

However, we believe to have sufficient liquidity as of December 31, 2022 to support our business operations for the next 12 months.

We may need to raise additional capital in the future in order to grow our existing software operations and to seem additional strategic acquisitions in the near future.

However, we cannot assure that we will be able to raise additional capital on acceptable terms, or at all.

However, we cannot ensure that we will be able to raise additional capital on acceptable terms, or at all.

CRITICAL ACCOUNTING POLICIES

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We recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings.

We recorded a $1,500 cumulative effect adjustment to opening retained earnings as of January 1, 2018 related to an increase in deferred commissions.

There was no impact to revenue as a result of applying Topic 606.

The primary impact of adopting Topic 606 is to sales commissions related to onboarding new clients that were previously expensed.

Under the new standard, these costs are now capitalized as deferred commissions and amortized over the estimated customer life of five to ten years.

U nder the new standard, these costs are now capitalized as deferred commissions and amortized over the estimated customer life of five to ten years.

The terms of our contracts with customers range from month to month for some Asure HCM direct clients to longer terms ranging from one to three years, some of which are renewable for successive terms.

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Revenue allocated to the SaaS/software subscription performance obligations are recognized on an output basis ratably as the service is provided over the non-cancellable term of the SaaS/subscription service and are reported as Recurring revenue on the Consolidated Statements of Comprehensive Income (Loss).

Revenues generated via fixed fee arrangements for provisioning and filing for Employee Retention Tax Credits with referral partners are also recorded as recurring revenue.

Revenue allocated to other performance obligations included in the arrangement is recognized as outlined in the paragraphs below.

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We recognize allocated revenue on an output basis on all other professional services engagements upon the earlier of the completion of the service’s deliverable or the expiration of the customer’s right to receive the service.

Revenues generated for provisioning and filing for ERTC credits that are based on percentage of recovery are recorded as professional services revenues.

Revenue recognized from professional services offerings are reported as Professional service revenue on the Consolidated Statements of Comprehensive Income (Loss).

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The transaction prices of our contracts do not include consideration amounts that are variable and do not include noncash consideration.

Deferred revenue includes amounts invoiced to customers in excess of revenue we recognize, and is comprised of deferred SaaS/software, HaaS, Maintenance and support, and Professional services revenue.

Deferred revenue includes amounts invoiced to customers in excess of revenue we recognize, and is comprised of deferred SaaS/software, HaaS, Maintenance and support, Professional services revenue and ERTC revenue.

We recognize deferred revenue when we complete the service and over the terms of the arrangements, primarily ranging from one to three years.

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We record any excess of the carrying amounts over the fair values as impairments in that fiscal period.

In 2019, we accelerated the amortization after a reassessment of the useful lives of certain trade names in relation to our rebranding efforts.

There has been no other impairment of intangible assets and long-lived assets for the periods presented.

Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired in a business combination.

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There was no impairment of goodwill in either 2022 or 2021.

In 2019, we recognized an impairment loss on goodwill.

See Note 5 — Goodwill and Other Intangible Assets in the accompanying Consolidated Financial Statements for additional information regarding goodwill.

We account for income taxes using the liability method under ASC 740, Accounting for Income Taxes, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events included in the financial statements.

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We reduce deferred tax assets by a valuation allowance when it is more likely than not that we will not realize some component or all of the deferred tax assets.

See Note 2 – Significant Account Policies in the accompanying Consolidated Financial Statements for more information about Recent Accounting Pronouncements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis