ASURE SOFTWARE INC 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (PCAOB ID: 688 ) 35 Consolidated Balance Sheets 37 Consolidated Statements of Comprehensive Income (Loss) 38 Consolidated Changes in Stockholders’ Equity 39 Consolidated Statements of Cash Flows 40 Notes to the Consolidated Financial Statements 42 34 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Stockholders and Board of Directors of Asure Software, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Asure Software, Inc. (the “Company”) as of December 31, 2022 and 2021, the related consolidated statements of comprehensive income (loss), changes in stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matters do not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Evaluation of the recoverability of the carrying value of goodwill and long-lived assets As described in Note 1 to the financial statements, the Company performed a recoverability test of its long-lived assets by comparing the estimated future cash flows from its asset group to its carrying value. As described in Note 5 to the financial statements, the Company performed its annual evaluation of goodwill for impairment by comparing the estimated fair value of the reporting unit to its carrying value. The Company determined that as of the valuation date there was only one asset group and one reporting unit. The Company used a discounted cash flow model to estimate the fair value of the reporting unit. The Company’s cash flow model used to test the recoverability of its long-lived assets and evaluate goodwill for impairment requires management to make subjective estimates and assumptions, particularly related to the forecast of future revenues. 35 Table of Contents The principal considerations for our determination that performing procedures relating to evaluating the recoverability of the carrying value of goodwill and long-lived assets is a critical audit matter are that there is significant judgment by management in both the identification of the reporting unit and asset group, and in the estimation of future cash flows. This in turn led to high degree of auditor judgment, subjectivity and effort in performing audit procedures in evaluating audit evidence related to management’s identification of reporting unit and asset group, and management’s estimates and assumptions used in the forecasts and discounted cash flow models, and the audit effort involved the use of professionals with specialized skill and knowledge to assist in evaluating the audit evidence obtained. Addressing the matter involved performing procedures and evaluating evidence in connection with forming our overall audit opinion on the financial statements. These procedures included, among others, (i) evaluating management’s determination of a single reporting unit; (ii) evaluating management’s determination of a single asset group; and (iii) testing management’s process of estimating forecasted cash flows by comparing the forecasts to historical results, internal communications to management and board of directors, forecast information included in analyst and industry reports for the Company, and other macroeconomic indicators. In addition, our procedures to evaluate the recoverability of goodwill included a sensitivity analysis of the implied control premium by comparing the fair value determined by the Company against the market capitalization of the Company at the valuation date. Professionals with specialized skill and knowledge were used to assist in the evaluation of the fair value of the reporting unit /s/ Marcum LLP Marcum LLP We have served as the Company’s auditor since 2016. Los Angeles, California February 27, 2023 36 Table of Contents ASURE SOFTWARE, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) December 31, 2022 December 31, 2021 ASSETS Current assets: Cash, cash equivalents, and restricted cash $ 17,010 $ 13,427 Accounts receivable, net of allowance for doubtful accounts of $ 3,248 and $ 2,210 at December 31, 2022 and December 31, 2021, respectively 12,123 5,308 Inventory 251 246 Prepaid expenses and other current assets 10,304 13,475 Total current assets before funds held for clients 39,688 32,456 Funds held for clients 203,588 217,376 Total current assets 243,276 249,832 Property and equipment, net 11,439 8,945 Goodwill 86,011 86,011 Intangible assets, net 66,594 78,573 Operating lease assets, net 7,065 5,748 Other assets, net 5,523 4,136 Total assets $ 419,908 $ 433,245 LIABILITIES AND STOCKHOLDERS ’ EQUITY Current liabilities: Current portion of notes payable $ 4,106 $ 1,907 Accounts payable 2,194 565 Accrued compensation and benefits 5,791 3,568 Operating lease liabilities, current 1,860 1,551 Other accrued liabilities 3,728 2,436 Contingent purchase consideration 2,955 1,905 Deferred revenue 8,461 3,750 Total current liabilities before client fund obligations 29,095 15,682 Client fund obligations 206,088 217,144 Total current liabilities 235,183 232,826 Long-term liabilities: Deferred revenue 788 36 Deferred tax liability 1,503 1,595 Notes payable, net of current portion 30,795 33,120 Operating lease liabilities, noncurrent 6,459 4,746 Contingent purchase consideration — 2,424 Other liabilities 114 258 Total long-term liabilities 39,659 42,179 Total liabilities 274,842 275,005 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; 20,628 and 20,412 shares issued, 20,244 and 20,028 shares outstanding at December 31, 2022 and December 31, 2021, respectively 206 204 Treasury stock at cost, 384 shares at December 31, 2022 and December 31, 2021 ( 5,017 ) ( 5,017 ) Additional paid-in capital 433,586 429,912 Accumulated deficit ( 281,226 ) ( 266,760 ) Accumulated other comprehensive income ( 2,483 ) ( 99 ) Total stockholders’ equity 145,066 158,240 Total liabilities and stockholders’ equity $ 419,908 $ 433,245 The accompanying notes are an integral part of these Consolidated Financial Statements. 37 Table of Contents ASURE SOFTWARE, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in thousands, except per share amounts) Year Ended December 31, 2022 2021 Revenue: Recurring $ 86,222 $ 71,078 Professional services, hardware and other 9,606 4,986 Total revenue 95,828 76,064 Cost of Sales 33,318 29,500 Gross profit 62,510 46,564 Operating expenses: Sales and marketing 20,260 15,448 General and administrative 33,924 27,720 Research and development 6,147 5,410 Amortization of intangible assets 13,486 10,948 Total operating expenses 73,817 59,526 Loss from operations ( 11,307 ) ( 12,962 ) Interest expense and other, net ( 4,438 ) ( 2,038 ) Gain on extinguishment of debt — 8,312 Employee retention tax credit — 10,533 Other income, net 1,391 150 (Loss) income from operations before income taxes ( 14,354 ) 3,995 Income tax expense 112 802 Net (loss) income ( 14,466 ) 3,193 Other comprehensive loss: Unrealized loss on marketable securities ( 2,384 ) ( 703 ) Comprehensive (loss) income $ ( 16,850 ) $ 2,490 Basic and diluted (loss) earnings per share Basic $ ( 0.72 ) $ 0.17 Diluted $ ( 0.72 ) $ 0.16 Weighted average basic and diluted shares Basic 20,117 19,313 Diluted 20,117 19,509 The accompanying notes are an integral part of these Consolidated Financial Statements. 38 Table of Contents ASURE SOFTWARE, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (in thousands) 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 235 2 — 359 — — 361 Stock issued, ESPP 56 1 — 339 — — 340 Stock issued — acquisitions 767 8 — 6,420 6,428 Share based compensation — — — 2,990 — — 2,990 Share issuance costs — — — ( 23 ) — — ( 23 ) Net income — — — — 3,193 — 3,193 Other comprehensive loss — — — — — ( 703 ) ( 703 ) 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 136 $ 1 $ — $ 89 $ — $ — $ 90 Stock issued, ESPP 80 1 — 406 — — 407 Stock issued — acquisitions — — — — — — — Share based compensation — — — 3,179 — — 3,179 Share issuance costs — — — — — — — Net loss — — — — ( 14,466 ) — ( 14,466 ) Other comprehensive loss — — — — — ( 2,384 ) ( 2,384 ) Balance at December 31, 2022 20,244 $ 206 $ ( 5,017 ) $ 433,586 $ ( 281,226 ) $ ( 2,483 ) $ 145,066 The accompanying notes are an integral part of these Consolidated Financial Statements. 39 Table of Contents ASURE SOFTWARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31, 2022 2021 Cash flows from operating activities: Net (loss) income $ ( 14,466 ) $ 3,193 Adjustments to reconcile (loss) income to net cash provided by operations: Depreciation and amortization 18,708 16,246 Amortization of operating lease assets 1,702 1,574 Amortization of debt financing costs and discount 718 309 Net amortization of premiums and accretion of discounts on available-for-sale securities 280 194 Provision for doubtful accounts 803 1 Provision for deferred income taxes ( 92 ) 707 Gain on extinguishment of debt — ( 8,312 ) Net realized gains on sales of available-for-sale securities ( 1,221 ) ( 542 ) Share-based compensation 3,179 2,990 Loss (gain) on disposals of long-term assets 25 ( 32 ) Change in fair value of contingent purchase consideration ( 1,245 ) ( 160 ) Goodwill and intangible asset adjustment 18 — Changes in operating assets and liabilities: Accounts receivable ( 7,618 ) ( 1,293 ) Inventory ( 14 ) 142 Prepaid expenses and other assets 2,993 ( 11,083 ) Operating lease right-of-use assets ( 3,020 ) ( 1,371 ) Accounts payable 1,611 ( 725 ) Accrued expenses and other long-term obligations 3,828 629 Operating lease liabilities 2,023 ( 348 ) Deferred revenue 5,462 ( 741 ) Net cash provided by operating activities 13,674 1,378 Cash flows from investing activities: Acquisition of intangible asset ( 2,289 ) ( 25,526 ) Purchases of property and equipment ( 2,318 ) ( 133 ) Software capitalization costs ( 4,228 ) ( 4,141 ) Purchases of available-for-sale securities ( 37,232 ) ( 29,051 ) Proceeds from sales and maturities of available-for-sale securities 10,068 21,881 Net cash used in investing activities ( 35,999 ) ( 36,970 ) Cash flows from financing activities: Proceeds from notes payable — 29,425 Payments of notes payable ( 1,688 ) ( 14,657 ) Payments of contingent purchase consideration ( 130 ) ( 1,784 ) Debt financing fees — ( 878 ) Net proceeds from issuance of common stock 497 678 Net change in client fund obligations ( 11,055 ) ( 103,434 ) Net cash used in financing activities ( 12,376 ) ( 90,650 ) Net decrease in cash, cash equivalents, restricted cash, and restricted cash equivalents ( 34,701 ) ( 126,242 ) 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 $ 164,042 $ 198,743 The accompanying notes are an integral part of these Consolidated Financial Statements. 40 Table of Contents ASURE SOFTWARE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (in thousands) Year Ended December 31, 2022 2021 Reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents to the Consolidated Balance Sheets Cash and cash equivalents and restricted cash $ 17,010 $ 13,427 Restricted cash and restricted cash equivalents included in funds held for clients 147,032 185,316 Total cash, cash equivalents, restricted cash, and restricted cash equivalents $ 164,042 $ 198,743 Supplemental information: Cash paid for interest $ 3,397 $ 1,413 Cash paid for income taxes $ 233 $ 366 Net assets added from acquisitions $ — $ 763 Non-cash investing and financing activities: Contingent purchase consideration issued for acquisitions $ — $ 2,574 Notes payable issued for acquisitions $ 411 $ 4,386 Stock issuance for acquisitions $ — $ 6,428 The accompanying notes are an integral part of these Consolidated Financial Statements. 41 Table of Contents ASURE SOFTWARE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS 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. AsureMarketplace™ provides clients and their employees the benefits of secure verifications of employment and income through existing core HCM technology. 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 five product lines: Asure Payroll & Tax, Asure HR, Asure Time & Attendance, Asure HR Services, and AsureMarketplace™. 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. PRINCIPLES OF CONSOLIDATION We have prepared our Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and have included the accounts of our wholly owned subsidiaries. We have eliminated all intercompany transactions and balances in consolidation. SEGMENTS The chief operating decision maker is Asure’s Chief Executive Officer who reviews financial information presented on a company-wide basis. Accordingly, in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 280, we determined that the Company has a single reporting segment and operating unit structure. USE OF ESTIMATES Preparation of the 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 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. CONTINGENCIES Although we have been, and in the future may be, the defendant or plaintiff in various actions arising in the normal course of business, as of December 31, 2022, we were not party to any material legal proceedings. 42 Table of Contents RECENTLY ISSUED 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. 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 December 31, 2022, the Company ha s $500 of restricted cash related to collateralizing a letter of credit issued by South State Bank in connection with its money transmission licenses. INVESTMENTS Available-for-sale securities are carried at fair value, with the unrealized gains and losses reported in accumulated other comprehensive income (loss). The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. The amortization of premiums and accretion of discounts is included in interest income. Realized gains and losses and declines in value judged to be other-than-temporary, if any, on available-for-sale securities are included in other income (expense). The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in interest income. FUNDS HELD FOR CLIENTS Funds held for clients represent assets that are held for the purposes of satisfying the obligations to remit funds relating to the Company’s payroll and payroll tax filing services and are classified as client fund obligations on our Consolidated Balance Sheets. Funds held for clients are held in demand deposit or brokerage accounts at financial institutions and are classified as a current asset on our Consolidated Balance Sheets. Client fund obligations represent the Company’s contractual obligations to remit funds to satisfy clients’ payroll and tax payment obligations and are recorded on the Consolidated Balance Sheets at the time that the Company impounds funds from clients. The client fund obligations represent liabilities that will be repaid within one year of the balance sheet date. The Company has reported client fund obligations as a current liability on the Consolidated Balance Sheets. As part of the material weakness identified in 2019 that was subsequently remediated, the Company recovered approximately $ 4,290 in funds and insurance proceeds. The Company recognized $ 3,961 of these funds as receivables in other assets on the Consolidated Balance Sheets at December 31, 2019 with an offsetting liability in client fund obligations. The Company collected the full $ 4,290 during the first quarter of 2020 and disbursed $ 482 of these funds resulting in a segregated $ 3,808 in funds held for clients with an offsetting liability in client fund obligations at December 31, 2020. In 2021, the Company disbursed an additional $ 976 of these funds, resulting in a segregated $ 2,832 in funds held for clients with an offsetting liability in client fund obligations at December 31, 2021. In 2022, the Company escheated $ 2,705 to the state of Delaware. The residual balance of $ 127 is still in the process of being returned to the clients or will be escheated to the appropriate states. 43 Table of Contents FAIR VALUE OF FINANCIAL INSTRUMENTS We apply the authoritative guidance on fair value measurements for financial assets and liabilities that are measured at fair value on a recurring basis, and non-financial assets and liabilities such as goodwill, intangible assets and property and equipment that are measured at fair value on a non-recurring basis. CONCENTRATION OF CREDIT RISK Cash and cash equivalents are deposited at various area banks, which at times may exceed federally insured limits. The Company monitors the viability of the banking institutions carrying its assets on a regular basis, and has the ability to transfer cash to various institutions during times of risk. The Company has not experienced any losses related to these cash balances, and believes its credit risk to be minimal. ACCOUNTS RECEIVABLE, NET We grant credit to customers in the ordinary course of business. We limit concentrations of credit risk related to our trade accounts receivable due to our large number of customers, including third-party resellers, and their dispersion across several industries and geographic areas. We perform ongoing credit evaluations of our customers and maintain reserves for potential credit losses. We require advanced payments or secured transactions when deemed necessary. We review potential customers’ credit ratings to evaluate customers’ ability to pay an obligation within the payment term, which is usually net thirty days. If we receive reasonable assurance of payment and know of no barriers to legally enforce the payment obligation, we may extend credit to customers. We place accounts on “Credit Hold” if a placed order exceeds the credit limit or sooner if circumstances warrant. We follow our credit policy consistently and routinely monitor our delinquent accounts for indications of collectability. We maintain an allowance for doubtful accounts at an amount we estimate to be sufficient to provide adequate protection against losses resulting from extending credit to our customers. We base this allowance, in the aggregate, on historical collection experience, age of receivables and general economic conditions. The allowance for doubtful accounts also considers the need for specific customer reserves based on the customer’s payment experience, credit worthiness and age of receivable balances. Our bad debts have not been material and have been within management expectations. PROPERTY AND EQUIPMENT We record property and equipment, including software, furniture and equipment, at cost less accumulated depreciation. We record depreciation using the straight-line method over the estimated economic useful lives of the assets, which range from two to five years . Property and equipment also includes leasehold improvements which we record at cost less accumulated amortization. We record amortization of leasehold improvements using the straight-line method over the shorter of the lease term or over the life of the respective assets, as applicable. We recognize gains or losses related to retirements or disposition of fixed assets in the period incurred. We expense repair and maintenance costs as incurred. We periodically review the estimated economic useful lives of our property and equipment and make adjustments, if necessary, according to the latest information available. BUSINESS COMBINATIONS We have accounted for our acquisitions using the acquisition method of accounting based on ASC 805—Business Combinations, which requires recognition and measurement of all identifiable assets acquired and liabilities assumed at their full fair value as of the date we obtain control. We have determined the fair value of assets acquired and liabilities assumed based upon our estimates of the fair values of assets acquired and liabilities assumed in the acquisitions. Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired. While we have used our best estimates and assumptions to measure the fair value of the identifiable assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, not to exceed one year from the date of acquisition, any changes in the estimated fair values of the net assets recorded for the acquisitions will result in an adjustment to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, we record any subsequent adjustments to our consolidated statements of comprehensive loss. 44 Table of Contents GOODWILL AND OTHER INTANGIBLE ASSETS 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. We test goodwill for impairment on an annual basis in the fourth fiscal quarter of each year, and between annual tests if indicators of potential impairment exist, by first assessing qualitative factors to determine whether it is necessary to perform the quantitative goodwill impairment test. We amortize intangible assets not considered to have an indefinite useful life using the straight-line method over their useful lives. We currently amortize our acquired intangible assets with definite lives over periods ranging from one to nine years . Each reporting period, we evaluate the estimated remaining useful life of intangible assets and assess whether events or changes in circumstances warrant a revision to the remaining period of amortization or indicate that impairment exists. IMPAIRMENT OF LONG-LIVED ASSETS Long-lived assets, including intangible assets with definite lives, are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset. We have determined that there was no impairment of long-lived assets including intangible assets with definite lives, for the year ended December 31, 2022. ORIGINAL ISSUE DISCOUNTS We recognize original issue discounts (“OID”), when incurred on the issuance of debt, as a reduction of the current loan obligations that we amortize to interest expense over the life of the related indebtedness using the effective interest rate method. We record the amortization as interest expense – amortization of OID in the Consolidated Statements of Comprehensive Income (Loss). At the time of any repurchases or retirements of related debt, we write off the remaining amount of net original issue discounts and include them in the calculation of gain or loss on extinguishment in the Consolidated Statements of Comprehensive Income (Loss). REVENUE RECOGNITION Our revenue consists of software-as-a-service (“SaaS”) offerings and time-based software subscription license arrangements that also, typically, include hardware, maintenance/support, and professional services elements. We recognize revenue on an output basis when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. Our contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenue to each performance obligation based on its relative standalone selling price. We determine standalone selling prices based on the amount that we believe the market is willing to pay determined through historical analysis of sales data as well as through use of the residual approach when we can estimate the standalone selling price for one or more, but not all, of the promised goods or services. 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. A typical SaaS/software subscription arrangement will also include hardware, setup and implementation services. 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 Statement of Comprehensive Income (Loss). Revenue allocated to other performance obligations included in the arrangement is recognized as outlined in the paragraphs below. Hardware devices sold to customers are sold as either a standard product sell arrangement where title to the hardware passes to the customer or under a hardware-as-a-service (“HaaS”) arrangement where the title to the hardware remains with Asure. Revenue allocated to hardware sold as a standard product are recognized on an output basis when title passes to the customer, typically the date we ship the hardware. Revenue allocated to hardware under a hardware-as-a-service arrangement are recognized on an output basis, recorded ratably as the service is provided over the non-cancellable term of the HaaS arrangement, typically one year. Revenue recognized from hardware devices sold to customers via either of the two above types of arrangements are reported as Hardware revenue on the Consolidated Statement of Comprehensive Income (Loss). 45 Table of Contents Our professional services offerings typically include data migration, set up, training, and implementation services. Set up and implementation services typically occur at the start of the software arrangement while certain other professional services, depending on the nature of the services and customer requirements, may occur several months later. We can reasonably estimate professional services performed for a fixed fee and we recognize allocated revenue on an output basis on a proportional performance basis as the service is provided. We recognize allocated revenue on an output basis for professional services engagements billed on a time and materials basis as the service is provided. 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. Revenue recognized from professional services offerings are reported as Professional service revenue on the Consolidated Statement of Comprehensive Income (Loss). We recognize allocated revenue for maintenance/support on an output basis ratably over the non-cancellable term of the support agreement. Initial maintenance/support terms are typically one to three years and are renewable on an annual basis. Revenue recognized from maintenance/support are reported as Recurring on the Consolidated Statement of Comprehensive Income (Loss). We do not recognize revenue for agreements with rights of return, refundable fees, cancellation rights or substantive acceptance clauses until these return, refund or cancellation rights have expired or acceptance has occurred. Our arrangements with resellers do not allow for any rights of return. Our payment terms vary by the type of customer and the customer’s payment history and the products or services offered. The term between invoicing and when payment is due is not significant and as such our contracts do not include a significant financing component. 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. We recognize deferred revenue when we complete the service and over the terms of the arrangements, primarily ranging from one to three years. In addition, ERTC revenues that are generated under percentage of recovery arrangements with referral partners are deferred until the client collects the credit. ADVERTISING COSTS We expense advertising costs as we incur them. Advertising expens es were $ 1,057 and $ 108 f or the years ended December 31, 2022 and 2021, respectively. We recorded these expenses as part of sales and marketing expenses on our Consolidated Statements of Comprehensive Income (Loss). LEASE OBLIGATIONS At the commencement date of a lease, we recognize a liability to make lease payments and an asset representing the right-of-use underlying asset during the lease term. The lease liability is measured at the present value of lease payments over the lease term. As our leases typically do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date taking into consideration necessary adjustments for collateral, depending on the facts and circumstances of the lessee and the leased asset, and term to match the lease term. The operating lease asset is measured at cost, which includes the initial measurement of the lease liability and initial direct costs incurred by the Company and excludes lease incentives. Operating lease assets and liabilities are shown separately in our Consolidated Balance Sheets. Lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Operating lease costs are recognized on a straight-line basis over the lease term. Lease agreements that contain both lease and non-lease components are generally accounted for separately. INCOME TAXES 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. Under the liability method, we determine deferred tax assets and liabilities based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect in the years in which we expect the differences to reverse. 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. 46 Table of Contents SHARE BASED COMPENSATION We estimate the fair value of each award granted from our stock option plan at the date of grant using the Black-Scholes option pricing model. The fair value is recognized as expense over the service period, net of estimated forfeitures, using the straight-line method. The estimation of share-based awards that will ultimately vest requires judgment, and, to the extent actual results or updated estimates differ from current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. We primarily consider historical experience when estimating expected forfeitures. NOTE 2 - BUSINESS COMBINATIONS 2020 In July 2020, we acquired certain assets of a payroll tax business (the “Asset Purchase Agreement”). The initial purchase price for the assets was $ 4,250 , which we paid in cash at closing. The Asset Purchase Agreement set forth two subsequent purchase consideration payments, which are contingent on certain thresholds. The first contingent purchase consideration of $ 1,975 , was offset by certain net amounts owed to us by the seller primarily related to transition services in the amount of $ 191 , was paid in June 2021 (a total payment of $ 1,784 ). We utilized a Monte Carlo simulation to determine the fair value of the contingent consideration. The adjustment to the fair value of the contingent consideration as of December 31, 2022 was an increase of $ 394 . The contingent purchase consideration of $2,299 was valued based on the trailing twelve-month revenue at October 31, 2021 and will be settled in 2023. 2021 In September 2021, the Company acquired certain assets (the “Second Asset Purchase Agreement”) of a payroll business, which was used to provide payroll processing services. The aggregate purchase price that the Company paid for these assets was $ 14,750 , paid as follows: (i) $ 10,325 in cash at closing, (ii) the delivery of a promissory note in the amount of $ 2,223 , and (iii) the delivery of 244 shares of the Company’s common stock as of December 31, 2022. Also in September 2021, we acquired certain assets of a payroll business (the “Third Asset Purchase Agreement”). The initial purchase price for the assets was $ 24,150 , of which $ 15,000 was paid in cash at closing. The Third Asset Purchase Agreement also included the delivery of 523 shares of the Company’s common stock, which both parties agreed had an aggregate value of $ 4,800 at closing. Finally, the Third Asset Purchase Agreement set forth a promissory note valued at $ 4,080 and a contingent consideration estimate of $655 as of December 31, 2022. 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. 47 Table of Contents NOTE 3 - INVESTMENTS AND FAIR VALUE MEASUREMENTS Accounting Standards Codification (ASC) 820 “Fair Value Measurement” (ASC 820) defines fair value, establishes a framework for measuring fair value under U.S. GAAP and enhances disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820 describes a fair value hierarchy based on the following three levels of inputs that may be used to measure fair value, of which the first two are considered observable and the last unobservable: Level 1: Quoted prices in active markets for identical assets or liabilities; Level 2: Quoted prices in active markets for similar assets or liabilities; quoted prices in markets that are not active for identical or similar assets or liabilities; and model-driven valuations whose significant inputs are observable; and Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. The following table presents the fair value hierarchy for our financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2022 and December 31, 2021, respectively (in thousands): Total Carrying Value Level 1 Level 2 Level 3 December 31, 2022 Assets: Funds held for clients Money market funds $ 2,829 $ 2,829 $ — $ — Available-for-sale securities 56,556 — 56,556 — Total $ 59,385 $ 2,829 $ 56,556 $ — Liabilities: Contingent purchase consideration (1) $ 2,954 $ — $ — $ 2,954 Total $ 2,954 $ — $ — $ 2,954 December 31, 2021 Assets: Cash equivalents Money market funds $ — $ — $ — $ — 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 2 — Business Combinations for further discussion regarding the contingent purchase consideration. 48 Table of Contents The contractual obligations and earn out provision are accounted for as a contingent liability and fair value is determined using Level 3 inputs, as estimating the fair value of these contingent liabilities require the use of significant and subjective inputs that may and are likely to change over the duration of the liabilities. The following table discloses the change in the gross contingent purchase consideration on the Company’s Consolidated Balance Sheets as of December 31, 2022 (in thousands): December 31, 2021 $ 4,329 Contingent purchase consideration paid ( 130 ) Change in fair value of contingent liability ( 1,245 ) Issued for acquisitions — December 31, 2022 $ 2,954 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 December 31, 2022 Restricted cash equivalents $ 2,829 $ — $ — $ 2,829 Available-for-sale securities: Certificates of deposit 983 4 ( 2 ) 985 Corporate debt securities 52,251 1 ( 2,023 ) 50,229 Municipal bonds 5,297 — ( 405 ) 4,892 U.S. Government agency securities 500 — ( 50 ) 450 Total available-for-sale securities 59,031 5 ( 2,480 ) 56,556 Total (2) $ 61,860 $ 5 $ ( 2,480 ) $ 59,385 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 income (loss). As of December 31, 2022 and December 31, 2021, there were 3 and 10 securities, respectively, in an unrealized gain position and there were 124 and 57 securities in an unrealized loss position, respectively. As of December 31, 2022, these unrealized losses were less than $ 96 individually and $ 2,480 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 December 31, 2022 and December 31, 2021, none of these securities were classified as cash and cash equivalents on the accompanying Consolidated Balance Sheets. 49 Table of Contents 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 Consolidated Balance Sheets. Funds held for clients have been invested in the following categories (in thousands): 2022 2021 Restricted cash and cash equivalents held to satisfy client funds obligations $ 147,032 $ 185,316 Restricted short-term marketable securities held to satisfy client funds obligations 9,174 5,559 Restricted long-term marketable securities held to satisfy client funds obligations 47,382 26,501 Total funds held for clients $ 203,588 $ 217,376 Expected maturities of available-for-sale securities as of December 31, 2022 are as follows (in thousands): One year or less $ 9,174 After one year through five years 47,382 $ 56,556 NOTE 4 - PROPERTY AND EQUIPMENT Property and equipment as of December 31, 2022 and 2021 consisted of the following (in thousands): Estimated Useful Life (in years) 2022 2021 Furniture and equipment 2 to 5 $ 7,552 $ 6,935 Software development costs 3 18,678 14,449 Software 2 to 5 2,808 2,808 Leasehold improvements 2 to 5 1,878 1,638 Gross property and equipment 30,916 25,830 Less: accumulated depreciation and amortization ( 19,477 ) ( 16,885 ) Property and equipment, net $ 11,439 $ 8,945 We record the amortization of our finance leases as depreciation expense on our Consolidated Statements of Comprehensive Income (Loss). Depreciation and amortization expenses relating to property and equipment were $ 4,044 and $ 3,808 for the years ended December 31, 2022 and 2021, respectively. We acquired software development costs from prior acquisitions and we continue to invest in software development. We are developing products which we intend to offer utilizing software as-a-service (“SaaS”). We follow the guidance of ASC 350-40, Intangibles—Goodwill and Other—Internal-Use Software, for development costs related to these new products. Costs incurred in the planning stage are expensed as incurred while costs incurred in the application and infrastructure stage are capitalized, assuming such costs are deemed to be recoverable. Costs incurred in the operating stage are generally expensed as incurred except for significant upgrades and enhancements. Capitalized software costs are amortized over the software’s estimated useful life, which management has determined to be three years . During the years ended December 31, 2022 and 2021, we capitalized $ 4,228 and $ 4,141 of software development costs, respectively. NOTE 5 - GOODWILL AND OTHER INTANGIBLE ASSETS 2021 Acquisitions 2022 Goodwill $ 86,011 $ — $ 86,011 50 Table of Contents 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 December 31, 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 1,012 332 1,344 Trade names 880 — 880 Non-compete agreements 1,032 — 1,032 $ 129,536 $ 2,692 $ 132,228 The gross carrying amount and accumulated amortization of our intangible assets as of December 31, 2022 are as follows (in thousands, except weighted average periods): Weighted Average Amortization Period (in Years) Gross Accumulated Amortization Net December 31, 2022 Customer relationships 8.7 $ 116,971 $ ( 52,700 ) $ 64,271 Developed technology 6.6 12,001 ( 10,283 ) 1,718 Reseller relationships 6.9 1,344 ( 889 ) 455 Trade names 3.0 880 ( 847 ) 33 Non-compete agreements 5.2 1,032 ( 915 ) 117 8.4 $ 132,228 $ ( 65,634 ) $ 66,594 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 $ 13,486 and $ 10,948 for the years ended December 31, 2022 and 2021, respectively. Amortization expenses recorded in Cost of Sales were $ 1,186 and $ 1,489 for the years ended December 31, 2022 and 2021, respectively. There was no impairment of intangibles during the year ended December 31, 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. 51 Table of Contents The following table summarizes the future estimated amortization expense relating to our intangible assets as of December 31, 2022 (in thousands): 2023 $ 13,601 2024 13,339 2025 12,553 2026 9,442 2027 7,267 Thereafter 10,392 $ 66,594 NOTE 6 - NOTES PAYABLE The following table summarizes our outstanding debt as of the dates indicated (in thousands): Maturity Cash Interest Rate December 31, 2022 December 31, 2021 Subordinated Notes Payable – Acquisitions (1) 12/31/2022 – 9/30/2026 2.00 % - 3.00 % $ 6,947 $ 8,178 Senior Credit Facility 10/1/2025 13.25 % 30,607 30,224 Total Notes Payable $ 37,554 $ 38,402 (1) See Note 2 — Business Combinations 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 December 31, 2022 Current portion of notes payable $ 4,774 $ ( 668 ) $ 4,106 Notes payable, net of current portion 32,780 ( 1,985 ) 30,795 Total $ 37,554 $ ( 2,653 ) $ 34,901 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 December 31, 2022 (in thousands): 2023 $ 4,774 2024 6,367 2025 23,439 2026 2,974 2027 — Total $ 37,554 Subordinated Notes Payable - Acquisitions 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. Payment on the principal balance was withheld as security for outstanding claims for which the Company is entitled to indemnification under the purchase agreement. The Company will make payment, subject to its right to offset 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 was not in default under the note. See Note 13 - Subsequent Events for information related to the resolution of these outstanding claims and the outstanding principal balance on this subordinated note payable. 52 Table of Contents See Note 2 — Business Combinations for further discussion regarding the issuance of subordinated notes payable related to acquisitions. PPP Loan with Pinnacle Bank Due to the effects of COVID-19 on our business and the related need to support our operations, we received an unsecured Paycheck Protection Program loan in the amount of $ 8,856 (the “PPP Loan”) in April 2020 from Pinnacle Bank (the “Lender”) under the Coronavirus Aid, Relief and Economic Security Act. In June 2021, we received notice from our Lender that the Small Business Administration (“SBA”) had approved our application for forgiveness of our PPP Loan. The amount forgiven of $ 8,560 was the amount we requested in our forgiveness application but was less than the original principal balance due, in part, to changes in SBA guidance following the date of our original loan application. Following the grant of forgiveness, we had an outstanding principal balance of $ 296 and an additional immaterial amount of accrued interest in our PPP Loan, both of which were paid in full in June 2021. During the three months ended June 30, 2021 the Company recorded a gain on the forgiveness of the PPP Loan and accrued interest in the amount of $ 8,654 . The gain on the forgiveness of the PPP Loan is reflected on our Consolidated Statements of Comprehensive Income (Loss), and is a non-taxable event. 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 had 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 - 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. 53 Table of Contents We record base rent expense under the straight-line method over the term of the lease. In the accompanying Consolidated Statements of Comprehensive Income (Loss), rent expense is included in operating expenses under general and administrative expenses. The components of the rent expense for the years ended December 31, 2022 and 2021, are as follows (in thousands): 2022 2021 Operating lease cost $ 2,326 $ 2,171 Sublease income ( 89 ) ( 43 ) Net rent expense $ 2,237 $ 2,128 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 December 31, 2022 and December 31, 2021, respectively. The weighted average remaining lease term is five years and five years as of December 31, 2022 and December 31, 2021, respectively. Supplemental cash flow information related to operating leases for the years ended December 31, 2022 and 2021 are as follows (in thousands): 2022 2021 Cash paid for amounts included in the measurement of lease liabilities: Operating cash outflows from operating leases $ 2,326 $ 2,338 Non-cash operating activities: Operating lease assets obtained in exchange for new operating lease liabilities $ 1,317 $ 1,240 Future minimum commitments over the life of all operating leases, which exclude variable rent payments, are as follows (in thousands): 2023 $ 2,474 2024 2,154 2025 1,765 2026 1,313 2027 1,121 Thereafter 1,643 Total minimum lease payments 10,470 Less: imputed interest ( 2,151 ) Total lease liabilities $ 8,319 NOTE 8 - CONTRACTS WITH CUSTOMERS AND REVENUE CONCENTRATION Receivables Receivables from contracts with customers, net of allowance for doubtful accounts of $ 3,248 , were $ 12,123 at December 31, 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 December 31, 2022 and December 31, 2021, respectively. Deferred Commissions Deferred commission costs from contracts with customers were $ 6,660 and $ 4,684 at December 31, 2022 and December 31, 2021, respectively. The amount of amortization recognized for the years ended December 31, 2022 and December 31, 2021 was $ 1,644 and $ 1,318 , respectively. Deferred Revenue During the years ended December 31, 2022 and December 31, 2021, revenue of $ 3,415 and $ 4,410 , respectively, was recognized from the deferred revenue balance at the beginning of each period. 54 Table of Contents Transaction Price Allocated to the Remaining Performance Obligations As of December 31, 2022, approximately $ 25,032 of revenue is expected to be recognized from remaining performance obligations. We expect to recognize revenue on approximately 86 % of these remaining performance obligations over the next 12 months, with the balance recognized thereafter. Revenue Concentration During the year ended December 31, 2022 and 2021, there were no customers that individually represented 10% or more of consolidated revenue. NOTE 9 - STOCKHOLDERS’ EQUITY, EMPLOYEE BENEFIT PLANS AND SHARE-BASED COMPENSATION Shelf Registration In March 2021, we filed a universal shelf registration statement on Form S-3 with the Securities and Exchange Commission (“SEC”) to provide access to additional capital, if needed. Pursuant to the shelf registration statement, we may from time to time offer to sell in one or more offerings shares of our common stock or other securities having an aggregate value of up to $ 150,000 (which includes 1,480 of unsold securities that were previously registered on other registration statements effective at the time of this filing of our current S-3). The shelf registration statement relating to these securities became effective on April 21, 2021. As of December 31, 2022, there is $ 150,000 available under the shelf registration statement. Also in March 2021, we filed an acquisition shelf registration statement on Form S-4 with the SEC to allow for us to issue securities in future business combinations, Pursuant to the acquisition shelf registration statement, we may from time to time issue up to 12,500 shares of our common stock as consideration in future business combinations. The shelf registration statement relating to these securities became effective on April 21, 2021. As of December 31, 2022, there are 12,500 shares of common stock available for issuance under this acquisition shelf registration statement. Share Repurchase Program On March 10, 2020, our Board of Directors authorized a stock repurchase plan, under which we may repurchase up to $ 5,000 of our outstanding common stock. This stock repurchase program is in addition to 364 shares available under our stock repurchase plan existing prior to March 10, 2020. Under this stock repurchase program, we may repurchase shares in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Securities Exchange Act of 1934, as amended. The extent to which we repurchase our shares, and the timing of such repurchases, will depend upon a variety of factors, including market conditions, regulatory requirements and other corporate considerations, as determined by our management. The repurchase program may be extended, suspended or discontinued at any time. We expect to finance the program from existing cash resources. Stock and Stock Option Plans We have one active equity plan, the 2018 Incentive Award Plan (the “2018 Plan”). Employees and consultants of the Company, its subsidiaries and affiliates, as well as members of our board, are eligible to receive awards under the 2018 Plan. The 2018 Plan provides for the grant of stock options, including incentive stock options (“ISOs”) and nonqualified stock options (“NQSOs”), stock appreciation rights, restricted stock, restricted stock units ("RSUs"), performance bonus awards, performance stock unit awards, other stock or cash-based awards and dividend equivalents to eligible individuals. We generally grant stock options with exercise prices equal to the fair market value at the time of grant. The options generally vest over three to four years and are exercisable for a period of five to ten years beginning with the date of grant. The number of shares available for issuance under the 2018 Plan is 4,350 shares. We have 1,932 options and 281 RSUs granted and outstanding pursuant to the 2018 Plan as of December 31, 2022. 55 Table of Contents We use the Black-Scholes option valuation model to value employee stock awards. We estimate stock price volatility based upon our historical volatility. Estimated option life and forfeiture rate assumptions are derived from historical data. For stock-based compensation awards with graded vesting, we recognize compensation expense using the straight-line amortization method. Total compensation expense recognized in the Consolidated Statements of Comprehensive Income (Loss) for stock based awards was $ 3,179 and $ 2,990 for 2022 and 2021, respectively. The following table summarizes the weighted average assumptions used to develop their fair value for the years ending December 31: 2022 2021 Grant date fair value $ 2.47 $ 3.63 Risk-free interest rate 1.92 % 0.64 % Expected volatility 51 % 61 % Expected life 2.88 years 3.99 years Dividend yield — — As of December 31, 2022, we reserved shares of common stock for future issuance under the 2018 Plan as follows (in thousands): Options and RSUs outstanding 2,216 Shares available for future grant 2,343 Shares reserved 4,559 The following table summarizes activity related to options during the year ended December 31, 2022: Shares Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value Outstanding, beginning of year 1,871 $ 8.03 Granted 453 6.65 Exercised ( 13 ) 6.96 Cancelled ( 379 ) 7.81 Outstanding, end of year 1,932 $ 7.30 3.16 $ 4,034 Vested and expected to vest 1,793 $ 7.30 3.12 $ 3,754 Exercisable 941 $ 7.33 2.67 $ 1,988 The total intrinsic value of options exercised during the years ended December 31, 2022 and 2021 was $ 20 and $ 110 , respectively. As of December 31, 2022, total compensation cost not yet recognized related to nonvested share options was $ 2,669 , which is expected to be recognized over a weighted average period of 1.65 years. 56 Table of Contents The following table summarizes activity related to RSUs during the year ended December 31, 2022 (in thousands, except for weighted average grant date fair value): Shares Weighted Average Grant Date Fair Value Outstanding, beginning of year 217 $ 7.17 Granted 226 6.44 Released ( 123 ) 7.07 Forfeited ( 39 ) 7.13 Outstanding, end of year 281 $ 6.66 The total fair value of RSUs vested during the years ended December 31, 2022 and 2021 was $ 839 and $ 1,507 , respectively. As of December 31, 2022, total compensation cost net yet recognized related to nonvested RSUs was $ 1,490 , which is expected to be recognized over a weighted average period of 1.87 years. As of December 31, 2022, we had 2,343 shares available for grant pursuant to the 2018 Plan. 401(k) Savings Plan We sponsor a defined contribution 401(k) plan that is available to substantially all employees. Our Board of Directors may amend or terminate the plan at any time. We made a Safe Harbor non-elective contribution of $ 1,495 as of December 31, 2022. We accrued matching contributions to the plan of $ 261 as of December 31, 2021. Employee Stock Purchase Plan Our Employee Stock Purchase Plan (“Purchase Plan”) was approved by the stockholders in June 2017. The Purchase Plan allows all eligible employees to purchase a limited number of shares of our common stock during pre-specified offering periods at a discount established by the Board of Directors, not to exceed 15% of the fair market value of the common stock, at the beginning or end of the offering period (whichever i s lower). Under the ESPP, 475 shares were reserved for issuance of which there remains 228 shares available for future issuance. NOTE 10 - EMPLOYEE RETENTION TAX CREDIT In March 2020, the Coronavirus Aid, Relief, and Economic Security Act was signed into law, providing numerous tax provisions and other stimulus measures, including the Employee Retention Tax Credit (“ERTC”): a refundable tax credit against certain employment taxes. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 and the American Rescue Plan Act of 2021 extended and expanded the availability of the ERTC. We qualified for the ERTC in the first three quarters of 2021. During the quarter ended September 30, 2021, we recorded an aggregate benefit of $ 10,533 in our Consolidated Statements of Comprehensive Income (Loss) to reflect the ERTC payable to us for the first three quarters in 2021. In 2022, the Company received cash of $3,457, reflecting a portion of our ERTC. See Note 13 - Subsequent Events regarding activity related to ERTC payments occurring after December 31, 2022. NOTE 11 - INCOME TAXES 57 Table of Contents The components of the provision (benefit) for income taxes attributable to continuing operations for the years ended December 31, 2022 and 2021 are as follows (in thousands): 2022 2021 Current State $ 204 $ 95 Total current $ 204 $ 95 Deferred Federal $ 187 $ 292 State ( 279 ) 415 Total deferred $ ( 92 ) $ 707 Gross tax provision $ 112 $ 802 Our provision for income taxes attributable to continuing operations for the years ended December 31, 2022 and 2021 differ from the expected tax expense (benefit) amount computed by applying the statutory federal income tax rate of 21% to income before income taxes as a result of the following: 2022 2021 Computed at statutory rate $ ( 3,013 ) $ 846 State tax, net of federal benefit ( 1,181 ) ( 207 ) PPP loan forgiveness — ( 1,817 ) Permanent items and other ( 13 ) 34 Credit carryforwards 166 ( 308 ) Change in tax carryforwards not benefited 14 457 Change in valuation allowance 4,139 1,797 $ 112 $ 802 58 Table of Contents Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred taxes for the years ended December 31, 2022 and 2021 are as follows (in thousands): 2022 2021 Deferred tax assets Net operating leases $ 11,462 $ 11,522 Research and development credit carryforwards 3,407 3,600 Disallowed interest expense carryforwards 187 5 Stock compensation 1,011 480 Deferred revenue 9 27 Accrued expenses 1,739 984 Lease liabilities 2,163 1,637 Other 3 2 Gross deferred tax assets 19,981 18,257 Less: Valuation allowance ( 12,828 ) ( 8,689 ) Total deferred tax assets $ 7,153 $ 9,568 Deferred tax liabilities Acquired intangibles $ ( 1,257 ) $ ( 4,075 ) Fixed assets ( 205 ) ( 189 ) Capitalized software 313 ( 1,835 ) Deferred commissions ( 1,732 ) ( 1,218 ) Right-of-use assets ( 1,837 ) ( 1,494 ) Goodwill ( 3,938 ) ( 2,352 ) Total deferred tax liabilities $ ( 8,656 ) $ ( 11,163 ) Net deferred tax liabilities $ ( 1,503 ) $ ( 1,595 ) At December 31, 2022, we had federal net operating loss carryforwards of $ 47,386 , research and development credit carryforwards of $ 3,520 . The net operating loss and research and development credit carryforwards will expire in varying amounts from 2023 through 2042, if not utilized. Approximately $ 17,853 of the net operating loss carryforwards carry forward indefinitely, but can only offset up to 80% of taxable income. As a result of various acquisitions by us in prior years, we may be subject to a substantial annual limitation in the utilization of the net operating losses and credit carryforwards due to the “change in ownership” provisions of Section 382 of the Internal Revenue Code of 1986. The annual limitation may result in the expiration of net operating losses before utilization. Due to the uncertainty surrounding the timing of realizing the benefits of our favorable tax attributes in future tax returns, we have placed a valuation allowance against our net deferred tax assets, exclusive of jurisdictions in which we have net deferred tax liabilities. During the year ended December 31, 2022, the valuation allowance increased by $ 4,139 due primarily to operations. 59 Table of Contents Under ASC 740-10, Income Taxes, we periodically review the uncertainties and judgments related to the application of complex income tax regulations to determine income tax liabilities in several jurisdictions. We use a “more likely than not” criterion for recognizing an asset for unrecognized income tax benefits or a liability for uncertain tax positions. We have determined we have the following unrecognized assets or liabilities related to uncertain tax positions as of December 31, 2022. We do not anticipate any significant changes in such uncertainties and judgments during the next twelve months. To the extent we are required to recognize interest and penalties related to unrecognized tax liabilities, this amount will be recorded as an accrued liability. The reconciliation of our unrecognized tax benefits is as follows: Balance at December 31, 2020 $ 587 Additions based on tax positions related to the current year 23 Additions for tax positions of prior years 4 Reductions for tax positions of prior years — Balance at December 31, 2021 614 Additions based on tax positions related to the current year 40 Additions for tax positions of prior years — Reductions for tax positions of prior years ( 88 ) Balance at December 31, 2022 $ 566 As of December 31, 2022, we had $ 566 of unrecognized tax benefits, of which $ 15 would affect the effective tax rate if recognized. Our assessment of our unrecognized tax benefits is subject to change as a function of our financial statement audit. Our practice is to recognize interest and/or penalties related to income tax matters in income tax expense. During the twelve months ended December 31, 2022, we recognized $ 0 of interest and penalties in our income tax expense. We file tax returns in the U.S. federal jurisdiction and in several state jurisdictions. We are subject to U.S. federal income tax examinations for years ending on or after December 31, 2018 and are subject to state and local income tax examinations by tax authorities for years ending on or after December 31, 2017. We are not currently under audit for any federal or state jurisdictions. NOTE 12 - NET EARNINGS (LOSS) PER SHARE We compute net earnings (loss) per share based on the weighted average number of common shares outstanding for the period. Diluted net earnings (loss) per share reflects the maximum dilution that would have resulted from incremental common shares issuable upon the exercise of stock options. We compute the number of common share equivalents, which includes stock options, using the treasury stock method. We have excluded stock options and restricted stock units reflecting 108 shares for the year ended December 31, 2022 and 2,096 shares for the year ended December 31, 2021 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 earnings (loss) per common share for the years ended December 31 (in thousands, except per share amounts): 2022 2021 Basic: Net income (loss) $ ( 14,466 ) $ 3,193 Weighted-average shares of common stock outstanding 20,117 19,313 Basic earnings (loss) per share $ ( 0.72 ) $ 0.17 Diluted: Net income (loss) $ ( 14,466 ) $ 3,193 Weighted-average shares of common stock outstanding 20,117 19,509 Diluted earnings (loss) per share $ ( 0.72 ) $ 0.16 60 Table of Contents NOTE 13 - SUBSEQUENT EVENTS In January 2023, the Company resolved the outstanding claims for indemnification for which it was holding back payment of the subordinated note payable as security for such claim. As a result of the resolution of those claims, the remaining balance of $232 has been paid to the Seller ($182) and to the claimant ($50) in satisfaction of its claim. There are no further amounts due or owing under this subordinated note payable. As discussed in Note 10, the Company received the remaining balance of $7,076 for the ERTC benefit in January and February 2023. 61 Table of Contents ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DOCUMENTS None.