What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-08 compared with 2022-11-07 · 99 added, 137 removed, 110 unchanged (68% of the section changed)

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-Q contains forward-looking statements about our financial results, which may include expected or projected U.S GAAP and non-U.S.

GAAP financial and other operating and non-operating results, including, by way of example, revenue, net income, diluted earnings per share, operating cash flow growth, operating margin improvement, deferred revenue growth, expected revenue run rate, bookings, expected tax rates, stock-based compensation expenses, amortization of purchased intangibles, amortization of debt discount and shares outstanding.

This Form 10-Q contains certain statements made by management that may constitute “forward-looking” statements within the meaning of the safe harbor provisions of the U.S.

Private Securities Litigation Reform Act of 1995.

These forward-looking statements about our financial results may include expected or projected U.S GAAP and non-U.S.

GAAP financial and other operating and non-operating results.

The words “believe,” “may,” “will,” “estimate,” “projects,” “anticipate,” “intend,” “expect,” “should,” “plan,” and similar expressions are intended to identify forward-looking statements.

Examples of “forward-looking statements” include statements we make regarding our operating performance, future results of operations and financial position, revenue growth, earnings or other projections.

We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs.

The achievement or success of the matters covered by such forward-looking statements involves risks, uncertainties and assumptions, over many of which we have no control.

If any such risks or uncertainties materialize or if any of the assumptions prove incorrect, the Company’s results could differ materially from the results expressed or implied by the forward-looking statements we make.

The risks and uncertainties referred to above include—but are not limited to—risks associated with possible fluctuations in the Company’s financial and operating results;

the Company’s rate of growth and anticipated revenue run rate, including impact of the current environment, the spread of major pandemics or epidemics (including COVID-19), interruptions to supply chains and extended shut down of businesses, political unrest, including the current issues between Russian and Ukraine, reductions in employment and an increase in business failures, specifically among our clients, the Company’s ability to convert deferred revenue and unbilled deferred revenue into revenue and cash flow, and ability to maintain continued growth of deferred revenue and unbilled deferred revenue;

errors, interruptions or delays in the Company’s services or the Company’s Web hosting;

breaches of the Company’s security measures;

The risks and uncertainties referred to above include—but are not limited to—risks associated with breaches of the Company’s security measures;

risks associated with the Company’s rate of growth and anticipated revenue run rate, including impact of the current environment, interruptions to supply chains and extended shut down of businesses, political unrest, including the current issues between Russian and Ukraine, reductions in employment and an increase in business failures, specifically among our clients, the Company’s ability to convert deferred revenue and unbilled deferred revenue into revenue and cash flow, and ability to maintain continued growth of deferred revenue and unbilled deferred revenue;

possible fluctuations in the Company’s financial and operating results;

the expiration of major revenue streams such as Earned Retention Tax Credits;

regulatory pressures on economic relief enacted as a result of the COVID-19 pandemic that change or cause different interpretations with respect to eligibility for such programs;

privacy concerns and laws and other regulations may limit the effectiveness of our applications;

factors affecting the Company’s term loan;

domestic and international regulatory developments, including changes to or applicability to our business of privacy and data securities laws, money transmitter laws and anti-money laundering laws;

the financial and other impact of any previous and future acquisitions;

the nature of the Company’s business model, including risks related to government contracts;

the Company’s ability to continue to release, gain customer acceptance of and provide support for new and improved versions of the Company’s services;

successful customer deployment and utilization of the Company’s existing and future services;

changes in the Company’s sales cycle;

various financial aspects of the Company’s subscription model;

unexpected increases in attrition or decreases in new business;

the Company’s ability to realize benefits from strategic partnerships and strategic investments;

the emerging markets in which the Company operates;

unique aspects of entering or expanding in international markets, including the compliance with United States export control laws, the Company’s ability to hire, retain and motivate employees and manage the Company’s growth;

changes in the Company’s customer base;

technological developments;

litigation and any related claims, negotiations and settlements, including with respect to intellectual property matters or industry-specific regulations;

unanticipated changes in the Company’s effective tax rate;

regulatory pressures on economic relief enacted as a result of the COVID-19 pandemic that change or cause different interpretations with respect to eligibility for such programs;

factors affecting the Company’s term loan;

fluctuations in the number of Company shares outstanding and the price of such shares;

the nature of the Company’s business model;

interest rates;

collection of receivables;

various financial aspects of the Company’s subscription model;

impairment of intangible assets;

restrictive debt covenants;

interruptions or delays in the Company’s services or the Company’s Web hosting;

access to additional capital;

the Company’s ability to hire, retain and motivate employees and manage the Company’s growth;

litigation and any related claims, negotiations and settlements, including with respect to intellectual property matters or industry-specific regulations;

volatility and weakness in bank and capital markets;

factors affecting the Company’s deferred tax assets and ability to value and utilize them;

the potential negative impact of indirect tax exposure;

the risks and expenses associated with the Company’s real estate and office facilities space;

volatility and low trading volume of our common stock;

collection of receivables;

and general developments in the economy, financial markets, credit markets and the impact of current and future accounting pronouncements and other financial reporting standards.

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Asure assumes no obligation and does not intend to update these forward-looking statements, except as required by law.

The following review of Asure’s financial position as of September 30, 2022 and December 31, 2021, and results of operations for the three and nine months ended September 30, 2022 and 2021 should be read in conjunction with our 2021 Annual Report on Form 10-K filed with the SEC on March 14, 2022.

The following review of Asure’s financial position as of March 31, 2023 and December 31, 2022, and results of operations for the three months ended March 31, 2023 and 2022 should be read in conjunction with our 2022 Annual Report on Form 10-K filed with the SEC on February 27, 2023.

Asure’s internet website address is www.asuresoftware.com.

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Asure’s internet website and the information contained in our website or connected to our website are not incorporated into this Quarterly Report on Form 10-Q, however we do post information on the investor relations page of our website that we believe may be of interest to our investors.

Asure is a leading provider of cloud-based Human Capital Management (“HCM”) software and services.

We help small and medium-sized businesses (“SMBs”) grow by offering the HR tools necessary to build a better workforce, providing the resources to stay compliant with ever changing federal, state, and local tax jurisdictions and labor laws, ultimately freeing their cash flows so they can spend their financial capital on growing their business rather than back-office overhead that impedes growth.

Asure’s HCM suite, named AsureHCM, includes cloud-based Payroll & Tax, HR, and Time & Attendance software as well as 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.

We are a leading provider of cloud-based HCM solutions, delivered as a software-as-a-service (“SaaS”) for SMBs.

From recruitment to retirement, our solutions help more than 80,000 SMBs across the United States grow their businesses.

About 15,000 of our clients are direct and approximately 65,000 remaining clients are indirect as they have contracts with Reseller Partners that white label our solutions.

We strive to be the most trusted HCM resource to entrepreneurs and are focused on less densely populated U.S.

Asure is a provider of cloud-based Human Capital Management (“HCM”) software solutions delivered as Software-as-a-Service (“SaaS”) for small and medium-sized businesses (“SMBs”).

We offer human resources (“HR”) tools necessary to build a thriving workforce, provide the resources to stay compliant with dynamic federal, state, and local tax jurisdictions and their respective labor laws, freeing cash flows so SMBs can spend their financial capital on growing their businesses rather than administrative overhead that can impede growth.

Our solutions also provide new ways for employers to connect with and to differentiate themselves with their employees in order to enhance their relationships with their talent.

Asure’s HCM suite (“Asure HCM”) includes Payroll & Tax solutions, HR compliance and services, Time & Attendance software and data integrations that enable employers and their employees to enhance efficiencies and take advantage of value-added solutions, which we refer to as AsureMarketplace™.

AsureMarketplace™ automates interactions between our HCM systems with third-party providers to enhance efficiency, improve accuracy and to extend the range of services offered to employers and their employees.

We offer our services directly and indirectly through our network of Reseller Partners.

From recruitment to retirement, our solutions help more than 100,000 SMBs across the United States.

Approximately 15,000 of our clients are direct and the 85,000 remaining clients are indirect, as they have contracts with Reseller Partners who white label our solutions.

We strive to be the most trusted HCM resource to SMBs.

We target less densely populated U.S.

metropolitan cities where fewer of our competitors have a presence.

Our solution strategy solves three primary challenges that prevent businesses from growing:

Our solutions solve three primary challenges that prevent businesses from growing:

HR complexity, allocation of human and financial capital, and the ability to build great teams.

We have invested in, and intend to continue to invest in, research and development to expand our solution.

Asure HCM, our user-friendly solution, reduces the administrative burden on employers and increases employee productivity while managing the complete employment lifecycle.

Impact of the COVID-19 Pandemic

In March 2020, the World Health Organization declared the COVID-19 outbreak to be a global pandemic that resulted in federal, state and local government imposed restrictions that have since been lifte d.

As of June 1, 2021, we have opened our offices and resumed in person work.

We continue to take proactive measures, including regular cleaning of the offices, and monitoring of the Center for Disease Control guidelines for returning to work.

We will continue to actively monitor the situation and may take further actions that alter our business operatio ns as may be required by federal, state or local authorities or that we determine are in the best interests of our employees and clients.

In 2022, we continue to aggressively invest in sales and marketing and in research and development to drive future growth and expand our market share.

Lower headcount at our clients and other pandemic-related factors, which had a negative impact on recurring revenue, combined with increased sales and marketing and research and development expenses, cumulatively had an adverse impact on our operating results for the quarter ended September 30, 2022.

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.

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

The current remote work environment presents a unique opportunity because 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.

We are unable to estimate the continuing impact the COVID-19 pandemic could have on our business and results of operations in the future due to numerous uncertainties, including the severity of the disease, the occurrence of variant strains, the duration of the outbreak, actions that may be taken by governmental authorities, the impact it may have on the business of our clients and other factors identified in Part I, Item 1A “Risk Factors” in our 2021 Annual Report on Form 10-K.

On September 30, 2021, our subsidiary, Evolution Payroll Processing LLC (“EPP”), acquired certain assets of a payroll business, which were used to provide payroll processing services.

The aggregate purchase price we paid for the assets was $24,150, including:

(i) $15,000 in cash at closing, (ii) the delivery of 523 shares of the Company’s common stock which the parties agreed had an aggregate value of $4,800 as of September 30, 2021, and (iii) the delivery of a promissory note of $4,350.

The promissory note amount as of September 30, 2022 was $4,080 due to a principal payment made during the period.

Also on September 30, 2021, EPP acquired certain assets of a payroll business, which were used to provide payroll processing services.

The aggregate purchase price for these assets was $14,750, paid as follows:

(i) $10,325 in cash at closing, (ii) the delivery of 244 shares of the Company’s common stock which the parties agreed had an aggregate value of $2,213 as of September 30, 2021, and (iii) the delivery of a promissory note in the amount of $2,213.

The promissory note was adjusted to $2,223 to account for post close and working capital adjustments.

On January 1, 2022, the Company acquired certain assets of a Reseller Partner, which were used to provide payroll processing services.

We have and will continue to invest in research and development to expand our solutions.

Our solutions reduce the administrative burden on employers and increases employee productivity while managing the employment lifecycle.

On January 1, 2022, we acquired certain assets of a reseller partner, which were used to provide payroll processing services.

The partner is located in the northeastern United States.

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(i) $1,939 in cash at closing and (ii) the delivery of a promissory note in the amount of $411.

The Company paid the full amount due, including interest, on this promissory note on May 1, 2023.

On September 30, 2021, the Company acquired certain assets of two payroll businesses, which were used to provide payroll processing services.

In connection with these acquisitions there are two outstanding promissory notes payable in the amounts of $2,223 and $4,080 as of March 31, 2023, respectively .

The acquisition related to the promissory note in the amount of $4,080 also included contingent consideration for which we utilized a Monte Carlo simulation to determine the fair value of the contingent consideration as of March 31, 2023.

For the quarter ended March 31, 2023, there was a measurement period adjustment to the fair value of a decrease in the contingent consideration of $69.

For the three months ended March 31, 2023 the fair value of the contingent consideration was finally calculated at $587, which was added as an increase to the outstanding principal balance due on the promissory note in the second quarter of 2023.

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 Condensed Consolidated Statements of Comprehensive Loss:

Three Months Ended September 30, Nine Months Ended September 30,

2022 2021 2022 2021

Three Months Ended March 31,

Revenues 100 % 100 %

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Other income(expense), net — % — %

Gain on extinguishment of debt — % (2) % — % 15 %

Loss from operations before income taxes (20) % 31 % (20) % 15 %

Net loss (21) % 30 % (20) % 14 %

Income (loss) from operations before income taxes — % (12) %

Net income (loss) 1 % (12) %

Revenues are comprised of recurring revenues, professional services, hardware, and other revenues.

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As a percentage of total revenues, we expect our mix of recurring revenues, and professional services, hardware and other revenues to remain relatively constant.

While revenue mix varies by product, recurring revenue represented over 93% of total revenue in nine months ended September 30, 2022, compared to 94% in nine months ended September 30, 2021.

While revenue mix varies by product, recurring revenue represented over 84% of total revenue in three months ended March 31, 2023, compared to 94% in three months ended March 31, 2022.

Our revenue was derived from the following sources (in thousands):

Three Months Ended September 30, Variance

2022 2021 $ %

Recurring $ 19,959 $ 16,374 $ 3,585 22 %

Professional services, hardware and other 1,944 1,607 337 21 %

Total 21,903 17,981 3,922 22 %

Nine Months Ended September 30, Variance

Three Months Ended March 31, Variance

2023 2022 $ %

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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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Recurring revenues include revenues relating to the annual processing of payroll forms, such as Form W-2 and Form 1099, and revenues from processing unscheduled payroll runs (such as bonuses) for our clients.

Because payroll forms are typically processed in the first quarter of the year and many of our clients are subject to form filing requirements mandated by the ACA, first quarter revenues and margins are generally higher than in subsequent quarters.

Because payroll forms are typically processed in the first quarter of the year and many of our clients are subject to form filing requirements mandated by the Affordable Care Act (“ACA”), first quarter revenues and margins are generally higher than in subsequent quarters.

We anticipate our revenues will continue to exhibit this seasonal pattern related to ACA form filings for so long as the ACA (or replacement legislation) includes employer reporting requirements.

In addition, we often experience increased revenues during the fourth quarter due to unscheduled payroll runs for our clients that occur before the end of the year.

Over time, 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.

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 as well as revenues generated via fixed fee arrangements for provisioning and filing for Employee Retention Tax Credit (“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 three months ended September 30, 2022 was $21,903, an increase of $3,922, or 22%, from $17,981 for the three months ended September 30, 2021.

Recurring revenue increase is primarily due to our acquisitions at the end of the third quarter 2021 as well as organic growth related to our Asure HCM suite of services.

Revenue for the nine months ended September 30, 2022 was $66,536, an increase of $11,585, or 21%, from $54,951 for the nine months ended September 30, 2021.

Recurring revenue increase is primarily due to our acquisitions at the end of the third quarter 2021 as well as organic growth related to our Asure HCM suite of services.

Asure also generates revenues from provisioning and filing for ERTC.

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

Recurring revenue for the three months ended March 31, 2023 was $27,956, an increase of $4,952, or 22%, from $23,004 for the three months ended March 31, 2022.

Recurring revenue increase is primarily due to an increase of approximately $1,874 in interest earned on funds held for clients, an increase of $1,336 in HR compliance revenue, and an increase of $1,157 in revenue from 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 $337, or 21%, for the three months ended September 30, 2022 from the similar period in 2021, primarily due to organic growth related to HR services and payroll tax service projects.

Professional services, hardware and other revenue increased $1,296, or 40%, for the nine months ended September 30, 2022 from the similar period in 2021, primarily due to organic growth related to HR services and payroll tax service projects.

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 $3,779, or 284%, for the three months ended March 31, 2023 from the similar period in 2022, primarily due to growth in non-recurring ERTC revenue.

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

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Gross Profit and Gross Margin

Consolidated gross profit for the three months ended September 30, 2022 was $13,647, an increase of $2,779, or 26%, from $10,868 for the three months ended September 30, 2021.

Gross margin as a percentage of revenue was 62% for the three months ended September 30, 2022 as compared to 60% for the three months ended September 30, 2021.

Our increase in gross margin is primarily attributable to the increase in revenue and more efficient operations.

Consolidated gross profit for the nine months ended September 30, 2022 was $41,372, an increase of $8,067, or 24%, from $33,305 for the nine months ended September 30, 2021.

Gross margin as a percentage of revenue was 62% for the nine months ended September 30, 2022 as compared to 61% for the nine months ended September 30, 2021.

Our increase in gross margin is primarily attributable to the increase in revenue and more efficient operations.

Consolidated gross profit for the three months ended March 31, 2023 was $24,400, an increase of $8,936, or 58%, from $15,464 for the three months ended March 31, 2022.

Gross margin as a percentage of revenue was 74% for the three months ended March 31, 2023 as compared to 64% for the three months ended March 31, 2022.

Our increase in gross margin is primarily attributable to the increase in revenue and more efficient operations resulting primarily from a decrease in salaries and benefits driven by consolidation and standardization efforts across the Company, which have reined in costs.

Our cost of sales relates primarily to direct product costs, compensation for operations and related consulting expenses, hardware expenses, facilities and related expenses and the amortization of our purchased software development costs.

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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 three months ended September 30, 2022 were $4,752, an increase of $855, or 22%, from $3,897 for the three months ended September 30, 2021, primarily due to increase in advertising and marketing spending, as well as an increase in commissions resulting from higher bookings.

Selling and marketing expenses as a percentage of revenue remained flat at 22% for the three months ended September 30, 2022 from 22% for the same period in 2021.

Selling and marketing expenses for the nine months ended September 30, 2022 were $14,238, an increase of $3,108, or 28%, from $11,130 for the nine months ended September 30, 2021, primarily due to increase in advertising and marketing spending, as well as an increase in commissions resulting from higher bookings.

Selling and marketing expenses as a percentage of revenue increased to 21% for the nine months ended September 30, 2022 from 20% for the same period in 2021.

Selling and marketing expenses for the three months ended March 31, 2023 were $7,200, an increase of $2,303, or 47%, from $4,897 for the three months ended March 31, 2022, 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 22% for the three months ended March 31, 2023 from 20% for the same period in 2022.

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 three months ended September 30, 2022 were $8,023, an increase of $1,018, or 15%, from $7,005 for the three months ended September 30, 2021, primarily attributable to increased personnel and contracting costs.

General and administrative expenses as a percentage of revenue decreased to 37% for the three months ended September 30, 2022 from 39% for the same period in 2021.

General and administrative expenses for the nine months ended September 30, 2022 were $24,204, an increase of $3,880, or 19%, from $20,324 for the nine months ended September 30, 2021, primarily attributable to increased personnel and contracting costs.

General and administrative expenses as a percentage of revenue decreased to 36% for the nine months ended September 30, 2022 from 37% for the same period in 2021.

General and administrative expenses for the three months ended March 31, 2023 were $9,956, an increase of $2,471, or 33%, from $7,485 for the three months ended March 31, 2022, primarily attributable to increased personnel, share-based compensation, and contracting costs.

General and administrative expenses as a percentage of revenue decreased to 30% for the three months ended March 31, 2023 from 31% for the same period in 2022.

Research and Development Expenses

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 three months ended September 30, 2022 were $1,230, a decrease of $275, or 18%, from $1,505 for the three months ended September 30, 2021.

The decrease in R&D expense is a result of an increase in capitalizable software expenses resulting from a focus on developmental projects.

R&D expenses as a percentage of revenue decreased to 6% for the three months ended September 30, 2022 from 8% for the same period in 2021.

R&D expenses for the nine months ended September 30, 2022 were $4,523, an increase of $551, or 14%, from $3,972 for the nine months ended September 30, 2021.

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

R&D expenses as a percentage of revenue remained flat at 7% for the nine months ended September 30, 2022 for the same period in 2021.

R&D expenses for the three months ended March 31, 2023 were $1,979, an increase of $158, or 9%, from $1,821 for the three months ended March 31, 2022.

The increase in R&D expense is primarily attributable to an increase in personnel costs driven by continued enhancements of our products and technologies.

R&D expenses as a percentage of revenue decreased to 6% for the three months ended March 31, 2023 from 7% for the same period in 2022.

We will continue to enhance our products and technologies through expansion of our technological resources by increasing headcount and development partnerships, as well as through organic improvements and acquired intellectual property.

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, and 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 of Intangible Assets

Amortization expense in operating expenses for the three months ended September 30, 2022 was $3,350, an increase of $816, or 32%, from $2,534 for the three months ended September 30, 2021.

Amortization expense as a percentage of revenue increased to 15% for the three months ended September 30, 2022 from 14% for the same period in 2021, respectively.

Amortization expense in operating expenses for the nine months ended September 30, 2022 was $10,134, an increase of $2,544, or 34%, from $7,590 for the nine months ended September 30, 2021.

Amortization expense as a percentage of revenue increased to 15% for the nine months ended September 30, 2022 from 14% for the same period in 2021, respectively.

Amortization expense in operating expenses for the three months ended March 31, 2023 was $3,302, a decrease of $130, or 4%, from $3,432 for the three months ended March 31, 2022.

Amortization expense as a percentage of revenue decreased to 10% for the three months ended March 31, 2023 from 14% for the same period in 2022, respectively.

Interest Expense, Net

Interest expense, net for the three months ended September 30, 2022 was $1,122 compared to $530 for the three months ended September 30, 2021.

The change in interest expense and other is primarily attributed to the decrease in fair value of the seller notes from acquisitions.

Interest expense, net as a percentage of revenue was 5% for the three months ended September 30, 2022 compared to 3% for the three months ended September 30, 2021.

Interest expense, net for the three months ended March 31, 2023 was $1,944 compared to $820 for the three months ended March 31, 2022.

Interest expense, net as a percentage of revenue was 6% and 3% for the three months ended March 31, 2023 and March 31, 2022, respectively.

The increase in interest expense, net in the current period is primarily due to our credit facility with Structural Capital Investments II LP signed in the third quarter of 2021 as discussed in Note 6 - Notes Payable.

Interest expense, net for the nine months ended September 30, 2022 was $3,006 compared to $977 for the nine months ended September 30, 2021.

The increase in interest expense, net relative to the prior year is attributable to new borrowings under our credit facility with Structural Capital Investments III LP as discussed in Note 6 - Notes Payable.

Interest expense, net as a percentage of revenue was 5% and 2% for the nine months ended September 30, 2022 and September 30, 2021, respectively.

Other Income, Net

Other income, net for the three months ended September 30, 2022 was $399 compared to $10,191 for the three months ended September 30, 2021.

Other income, net as a percentage of revenue was 2% for the three months ended September 30, 2022 compared to 59% for the same period ended September 30, 2021.

For the three months ended September 30, 2022, the amounts in other income, net primarily consisted of contingent liability adjustments and debt extinguishment.

For the three months ended September 30, 2021, the amounts in other income, net consisted of debt extinguishment related to the Company’s Paycheck Protection Program loan and amounts accrued for the Employee Retention Tax Credit.

Other income, net for the nine months ended September 30, 2022 was $1,349 compared to $18,845 for the nine months ended September 30, 2021.

Other income, net as a percentage of revenue was 2% and 19% for the nine months ended September 30, 2022 and September 30, 2021, respectively.

For the nine months ended September 30, 2022, the amounts in other income, net primarily consisted of contingent liability adjustments and debt extinguishment.

For the nine months ended September 30, 2021, the amounts in other income, net consisted of debt extinguishment related to the Company’s Paycheck Protection Program loan and amounts accrued for the Employee Retention Tax Credit.

For the three months ended September 30, 2022 and 2021, we recorded an income tax expense attributable to continuing operations of $102 and $260, respectively, a decrease of $158 or 61%.

For the nine months ended September 30, 2022 and 2021, we recorded an income tax expense attributable to continuing operations of $206 and $663, respectively, a decrease of $457 or 69%.

We incurred a loss of $4,533, or $0.22 per share, during the three months ended September 30, 2022, compared to net income of $5,328, or $0.28 per share, during the three months ended September 30, 2021.

Loss and income as a percentage of total revenues was 21% and 30% for the three months ended September 30, 2022 and 2021, respectively.

We incurred a loss of $13,410, or $0.67 per share, during the nine months ended September 30, 2022, compared to income of $7,494, or $0.39 per share, during the nine months ended September 30, 2021.

Loss and income as a percentage of total revenues was 20% and 14% for the nine months ended September 30, 2022 and 2021, respectively.

Other income, net for the three months ended March 31, 2023 was $83 compared to $4 for the three months ended March 31, 2022.

Other income, net as a percentage of revenue was negligible for the three months ended March 31, 2023 and March 31, 2022, respectively.

For the three months ended March 31, 2023, the amounts in other income, net primarily consisted of contingent liability adjustments.

For the three months ended March 31, 2023 and 2022, we recorded an income tax benefit attributable to continuing operations of $237 and expense of $30, respectively, a decrease of $267 or 890%.

Net Income (Loss)

We generated income of $339, or $0.02 per share, during the three months ended March 31, 2023, compared to a loss of $3,017, or $0.15 per share, during the three months ended March 31, 2022.

Income and loss as a percentage of total revenues was 1% and 12% for the three months ended March 31, 2023 and 2022, respectively.

LIQUIDITY AND CAPITAL RESOURCES (in thousands)

September 30, 2022 December 31, 2021

March 31, 2023 December 31, 2022

Cash and cash equivalents (1)

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Working Capital .

We had working capital of $5,179 at September 30, 2022, a decrease of $11,827 from working capital of $17,006 at December 31, 2021.

Working capital as of September 30, 2022 and December 31, 2021 includes $4,173 and $3,750 of short-term deferred revenue, respectively.

We had working capital of $14,191 at March 31, 2023, an increase of $6,098 from working capital of $8,093 at December 31, 2022.

Working capital as of March 31, 2023 and December 31, 2022 includes $4,182 and $8,461 of short-term deferred revenue, respectively.

Deferred revenue is an obligation to perform future services.

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Operating Activities .

Net cash provided by operating activities of $6,957 for the nine months ended September 30, 2022 was primarily driven by non-cash adjustments to our net loss of approximately $17,917, primarily due to depreciation and amortization.

This was offset by our net loss of $13,410 and changes in operating assets and liabilities, which resulted in cash provided of $3,777.

Net cash used in operating activities of $1,144 for the nine months ended September 30, 2021 was driven by non-cash adjustments to our net income of approximately $7,026, primarily due to depreciation and amortization, offset by our net income of $7,494.

For the nine months ended September 30, 2021, changes in operating assets and liabilities resulted in a use of $15,473 in cash.

Net cash provided by operating activities of $4,588 for the three months ended March 31, 2023 was primarily driven by non-cash adjustments to our net income of approximately $7,787, primarily due to depreciation and amortization.

This was offset by changes in operating assets and liabilities, which resulted in a use of $3,538 in cash.

Net cash provided by operating activities of $2,530 for the three months ended March 31, 2022 was driven by non-cash adjustments to our net loss of approximately $5,967, primarily due to depreciation and amortization, offset by our net loss of $3,017.

For the three months ended March 31, 2022, changes in operating assets and liabilities resulted in a use of $420 in cash.

Investing Activities .

Net cash used in investing activities of $33,991 for the nine months ended September 30, 2022 is primarily due to our first quarter acquisition totaling $2,289 and purchases of available-for-sale securities and maturities of $33,454.

Net cash used in investing activities of $21,042 for the nine months ended September 30, 2021 is primarily due to the proceeds from sales and maturities of available-for-sale securities of $1,926.

Net cash used in investing activities of $6,647 for the three months ended March 31, 2023 is primarily due to purchases of available-for-sale securities and maturities of $10,189, offset by proceeds from sales and maturities of available-for-sale securities of $5,426.

Net cash used in investing activities of $6,719 for the three months ended March 31, 2022 is primarily due to purchases of available-for-sale securities and maturities of $4,504.

Financing Activities .

Net cash used in financing activities was $34,032 for the nine months ended September 30, 2022, which primarily consisted of a net decrease in client fund obligations of $32,527.

Net cash used in financing activities was $133,990 for the nine months ended September 30, 2021, which primarily consisted of a net decrease in client fund obligations of $146,206.

Net cash provided by financing activities was $21,128 for the three months ended March 31, 2023, which primarily consisted of a net increase in client fund obligations of $19,372.

Net cash provided by financing activities was $21,296 for the three months ended March 31, 2022, which consisted solely of a net increase in client fund obligations of $21,296.

Sources of Liquidity .

As of September 30, 2022, the Company’s principal sources of liquidity consisted of approximately $10,885 of cash, cash equivalents and restricted cash, together with cash generated from operations of our business over the next twelve months.

As of March 31, 2023, the Company’s principal sources of liquidity consisted of approximately $21,438 of cash, cash equivalents and restricted cash, together with cash generated from operations of our business over the next twelve months.

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;

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For a description of our critical accounting policies, see Management’s Discussion and Analysis in our Annual Report on Form 10-K for the year ended December 31, 2022.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes to our exposure from market risks from those disclosed in our 2022 Annual Report on Form 10-K.

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-Q

Item 2. Management’s Discussion and Analysis