ASURE SOFTWARE INC 10-Q

ITEM 1. FINANCIAL STATEMENTS ASURE SOFTWARE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) (Unaudited) June 30, 2023 December 31, 2022 ASSETS Current assets: Cash, cash equivalents, and restricted cash $ 21,613 $ 17,010 Accounts receivable, net of allowance for doubtful accou nts of $ 4,863 a nd $ 3,248 at June 30, 2023 and December 31, 2022, respectively 16,629 12,123 Inventory 134 251 Prepaid expenses and other current assets 3,960 10,304 Total current assets before funds held for clients 42,336 39,688 Funds held for clients 186,517 203,588 Total current assets 228,853 243,276 Property and equipment, net 12,588 11,439 Goodwill 86,011 86,011 Intangible assets, net 60,635 66,594 Operating lease assets, net 5,898 7,065 Other assets, net 7,033 5,523 Total assets $ 401,018 $ 419,908 LIABILITIES AND STOCKHOLDERS ’ EQUITY Current liabilities: Current portion of notes payable $ 6,557 $ 4,106 Accounts payable 1,365 2,194 Accrued compensation and benefits 4,826 5,791 Operating lease liabilities, current 1,525 1,860 Other accrued liabilities 6,542 3,728 Contingent purchase consideration 2,299 2,955 Deferred revenue 3,293 8,461 Total current liabilities before client fund obligations 26,407 29,095 Client fund obligations 188,863 206,088 Total current liabilities 215,270 235,183 Long-term liabilities: Deferred revenue 1,334 788 Deferred tax liability 1,589 1,503 Notes payable, net of current portion 30,226 30,795 Operating lease liabilities, noncurrent 5,631 6,459 Other liabilities 154 114 Total long-term liabilities 38,934 39,659 Total liabilities 254,204 274,842 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 author ized; 21,089 and 20,628 shares issued, 20,705 and 20,244 shares outstanding at June 30, 2023 and December 31, 2022, respectively 211 206 Treasury stock at cost, 384 shares at June 30, 2023 and December 31, 2022 ( 5,017 ) ( 5,017 ) Additional paid-in capital 438,767 433,586 Accumulated deficit ( 284,652 ) ( 281,226 ) Accumulated other comprehensive loss ( 2,495 ) ( 2,483 ) Total stockholders’ equity 146,814 145,066 Total liabilities and stockholders’ equity $ 401,018 $ 419,908 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 1 Table of Contents ASURE SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (in thousands, except per share amounts) (Unaudited) Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Revenue: Recurring $ 22,960 $ 19,014 $ 50,916 $ 42,018 Professional services, hardware and other 7,460 1,286 12,568 2,615 Total revenue 30,420 20,300 63,484 44,633 Cost of Sales 8,402 8,039 17,066 16,908 Gross profit 22,018 12,261 46,418 27,725 Operating expenses: Sales and marketing 8,515 4,589 15,715 9,486 General and administrative 10,336 8,696 20,292 16,181 Research and development 1,325 1,472 3,304 3,293 Amortization of intangible assets 3,294 3,352 6,596 6,784 Total operating expenses 23,470 18,109 45,907 35,744 (Loss) income from operations ( 1,452 ) ( 5,848 ) 511 ( 8,019 ) Interest expense, net ( 1,593 ) ( 1,085 ) ( 3,538 ) ( 1,901 ) Other (expense) income, net ( 93 ) 1,147 ( 9 ) 1,147 Loss from operations before income taxes ( 3,138 ) ( 5,786 ) ( 3,036 ) ( 8,773 ) Income tax expense 627 74 390 104 Net loss ( 3,765 ) ( 5,860 ) ( 3,426 ) ( 8,877 ) Other comprehensive loss: Unrealized loss on marketable securities ( 493 ) ( 496 ) ( 12 ) ( 1,559 ) Comprehensive loss $ ( 4,258 ) $ ( 6,356 ) $ ( 3,438 ) $ ( 10,436 ) Basic and diluted loss per share Basic $ ( 0.18 ) $ ( 0.29 ) $ ( 0.17 ) $ ( 0.44 ) Diluted $ ( 0.18 ) $ ( 0.29 ) $ ( 0.17 ) $ ( 0.44 ) Weighted average basic and diluted shares Basic 20,651 20,106 20,500 20,067 Diluted 20,651 20,106 20,500 20,067 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 2 Table of Contents ASURE SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (in thousands) (Unaudited) Common Stock Outstanding Common Stock Amount Treasury Stock Additional Paid-in Capital Accumulated Deficit Other Comprehensive Loss Total Stockholders’ Equity Balance at December 31, 2022 20,244 $ 206 $ ( 5,017 ) $ 433,586 $ ( 281,226 ) $ ( 2,483 ) $ 145,066 Stock issued upon option exercise and vesting of restricted stock units 375 4 — 1,984 — — 1,988 Share based compensation — — — 1,337 — — 1,337 Net income — — — — 339 — 339 Other comprehensive income — — — — — 481 481 Balance at March 31, 2023 20,619 $ 210 $ ( 5,017 ) $ 436,907 $ ( 280,887 ) $ ( 2,002 ) $ 149,211 Stock issued upon option exercise and vesting of restricted stock units 40 — — 42 — — 42 Stock issued, ESPP 46 1 — 236 — — 237 Share based compensation — — — 1,582 — — 1,582 Net loss — — — — ( 3,765 ) — ( 3,765 ) Other comprehensive loss — — — — — ( 493 ) ( 493 ) Balance at June 30, 2023 20,705 $ 211 $ ( 5,017 ) $ 438,767 $ ( 284,652 ) $ ( 2,495 ) $ 146,814 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 3 Table of Contents ASURE SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (in thousands) (Unaudited) Common Stock Outstanding Common Stock Amount Treasury Stock Additional Paid-in Capital Accumulated Deficit Other Comprehensive Loss Total Stockholders’ Equity Balance at December 31, 2021 20,028 $ 204 $ ( 5,017 ) $ 429,912 $ ( 266,760 ) $ ( 99 ) $ 158,240 Stock issued upon option exercise and vesting of restricted stock units 43 1 — — — — 1 Share based compensation — — — 729 — — 729 Net loss — — — — ( 3,017 ) — ( 3,017 ) Other comprehensive loss — — — — — ( 1,063 ) ( 1,063 ) Balance at March 31, 2022 20,071 $ 205 $ ( 5,017 ) $ 430,641 $ ( 269,777 ) $ ( 1,162 ) $ 154,890 Stock issued upon option exercise and vesting of restricted stock units 33 — — — — — — Stock issued, ESPP 38 — — 192 — — 192 Share based compensation — — — 814 — — 814 Net loss — — — — ( 5,860 ) — ( 5,860 ) Other comprehensive loss — — — — — ( 496 ) ( 496 ) Balance at June 30, 2022 20,142 $ 205 $ ( 5,017 ) $ 431,647 $ ( 275,637 ) $ ( 1,658 ) $ 149,540 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 4 Table of Contents ASURE SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) Six Months Ended June 30, 2023 2022 Cash flows from operating activities: Net loss $ ( 3,426 ) $ ( 8,877 ) Adjustments to reconcile loss to net cash provided by operations: Depreciation and amortization 9,675 9,363 Amortization of operating lease assets 775 868 Amortization of debt financing costs and discount 355 345 Non-cash interest expense 1,431 — Net amortization of premiums and accretion of discounts on available-for-sale securities ( 31 ) 205 Provision for doubtful accounts 1,873 198 Provision for deferred income taxes 86 75 Gain on extinguishment of debt — ( 180 ) Net realized losses on sales of available-for-sale securities ( 1,024 ) ( 406 ) Share-based compensation 2,919 1,544 Loss on disposals of long-term assets 92 1 Change in fair value of contingent purchase consideration ( 69 ) ( 955 ) Changes in operating assets and liabilities: Accounts receivable ( 6,379 ) ( 627 ) Inventory 118 ( 51 ) Prepaid expenses and other assets 4,520 3,890 Operating lease right-of-use assets 189 ( 997 ) Accounts payable ( 830 ) 280 Accrued expenses and other long-term obligations 928 2,099 Operating lease liabilities ( 485 ) 85 Deferred revenue ( 4,621 ) 621 Net cash provided by operating activities 6,096 7,481 Cash flows from investing activities: Acquisition of intangible asset — ( 2,039 ) Purchases of property and equipment ( 1,020 ) ( 306 ) Software capitalization costs ( 3,301 ) ( 1,805 ) Purchases of available-for-sale securities ( 18,885 ) ( 19,870 ) Proceeds from sales and maturities of available-for-sale securities 5,940 2,450 Net cash used in investing activities ( 17,266 ) ( 21,570 ) Cash flows from financing activities: Payments of notes payable ( 643 ) — Net proceeds from issuance of common stock 2,266 192 Net change in client fund obligations ( 17,225 ) ( 32,716 ) Net cash used in financing activities ( 15,602 ) ( 32,524 ) Net decrease in cash, cash equivalents, restricted cash, and restricted cash equivalents ( 26,772 ) ( 46,613 ) Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of period 164,042 198,743 Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period $ 137,270 $ 152,130 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 5 Table of Contents ASURE SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (in thousands) (Unaudited) Six Months Ended June 30, 2023 2022 Reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents to the Condensed Consolidated Balance Sheets Cash and cash equivalents $ 21,613 $ 14,594 Restricted cash and restricted cash equivalents included in funds held for clients 115,657 137,536 Total cash, cash equivalents, restricted cash, and restricted cash equivalents $ 137,270 $ 152,130 Supplemental information: Cash paid for interest $ 2,119 $ 1,435 Cash paid for income taxes $ 466 $ 175 Non-cash investing and financing activities: Acquisition of intangible assets $ 954 $ — Notes payable issued for acquisitions $ — $ 411 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 6 Table of Contents ASURE SOFTWARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Amounts in thousands, except per share data unless otherwise noted) NOTE 1 - THE COMPANY AND BASIS OF PRESENTATION Asure Software, Inc. (“Asure”, the “Company”, “we” and “our”), a Delaware corporation, is a provider of 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. The Company’s approach to HR compliance services incorporates artificial intelligence technology to enhance scalability and efficiency while prioritizing client interactions. We offer our services directly and indirectly through our network of Reseller Partners. 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 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 and will continue to invest in research and development to expand our solutions. O ur solutions reduce the administrative burden on employers and increase employee productivity while managing the employment lifecycle. The Asure HCM suite includes five product lines: Asure Payroll & Tax, Asure Tax Management Solutions, Asure Time & Attendance, Asure HR Compliance, 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, New Jersey, New York, Tennessee, and Vermont. We have prepared the accompanying unaudited Condensed Consolidated Financial Statements in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) and accordingly, they do not include all information and footnotes required under U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. In the opinion of management, these interim financial statements contain all adjustments, consisting of normal, recurring adjustments, necessary for a fair presentation of our financial position as of June 30, 2023, comprehensive loss and changes in stockholders’ equity for the three and six months ended June 30, 2023 and June 30, 2022, and cash flows for the six months ended June 30, 2023 and June 30, 2022. Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements. These reclassifications had no effect on the consolidated financial position or consolidated results of operations of the Company. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with our audited Consolidated Financial Statements and notes thereto filed with the SEC in our annual report on Form 10-K for the fiscal year ended December 31, 2022 (our “2022 Annual Report on Form 10-K”). The Company’s results for any interim period are not necessarily indicative of results for a full fiscal year. 7 Table of Contents NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES Preparation of the Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Condensed Consolidated Financial Statements and the reported amounts of revenues and expenses during the reporting period. These estimates are subjective in nature and involve judgments. The more significant estimates made by management include the valuation allowance for the gross deferred tax assets, the determination of the fair value of its long-lived assets, and the fair value of assets acquired and liabilities assumed during acquisitions. We base our estimates on historical experience and on various other assumptions management believes reasonable under the given circumstances. These estimates could be materially different under different conditions and assumptions. 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 had a restricted cash balance of $500 related to the collateralization of a letter of credit issued by South State Bank in connection with its money transmission licenses, which was released in the first quarter of 2023. As of June 30, 2023, the Company had no restricted cash. RECENT ACCOUNTING PRONOUNCEMENTS In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments — Credit Losses (Topic 326), which 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 standard became effective for interim and annual periods beginning after December 15, 2022. Effective January 1, 2023, the Company adopted the provisions of ASU No. 2016-13 and determined that adoption did not have a material impact on our consolidated financial statements. ACCUMULATED OTHER COMPREHENSIVE LOSS As of June 30, 2023 and December 31, 2022, accumulated other comprehensive loss consisted of net unrealized gains and losses on available-for-sale securities. NOTE 3 - BUSINESS COMBINATIONS AND ASSET ACQUISITIONS 2022 Effective January 1, 2022, the Company acquired customer relationships of a payroll business for a cash payment of $ 1,970 , which included $ 31 of transaction costs, and the delivery of a promissory note in the amount of $ 411 . The acquired customer relationships are recorded as an intangible asset and are being amortized on a straight-line basis over eight years. In May 2023, the Company paid the remaining balance of $ 422 on the promissory note, consisting of $ 411 in principal and $ 11 in accrued interest. As of June 30, 2023, there are no further amounts due or owing under the subordinated promissory note. 8 Table of Contents 2021 and 2020 In September 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 $ 4,667 as of June 30, 2023. One promissory note also includes contingent consideration for which the Company calculated the final value to be $ 587 as of June 30, 2023. The contingent consideration was added as an increase to the principal balance due on the promissory note during the second quarter of 2023. In July 2020, the Company acquired certain assets of a payroll tax business. The Asset Purchase Agreement set forth two subsequent purchase consideratio n payments, which are contingent on certain thresholds. The first contingent purchase consideration was paid in June 2021. The outstanding contingent purchase consideration of $ 2,299 was valued based on the trailing twelve-month revenue at October 31, 2021 and was paid in shares of the Company’s common stock in July 2023, see Note 12, Subsequent Events for information regarding final payment of the outstanding contingent purchase consideration occurring after June 30, 2023. NOTE 4 - INVESTMENTS AND FAIR VALUE MEASUREMENTS Accounting Standards Codification (ASC) 820 “Fair Value Measurement” (ASC 820) defines fair value, establishes a framework for measuring fair value under U.S. GAAP and enhances disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. ASC 820 describes a fair value hierarchy based on the following three levels of inputs that may be used to measure fair value, of which the first two are considered observable and the last unobservable: Level 1: Quoted prices in active markets for identical assets or liabilities; Level 2: Quoted prices in active markets for similar assets or liabilities; quoted prices in markets that are not active for identical or similar assets or liabilities; and model-driven valuations whose significant inputs are observable; and Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. 9 Table of Contents The following table presents the fair value hierarchy for our financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2023 and December 31, 2022, respectively (in thousands): Total Carrying Value Level 1 Level 2 Level 3 June 30, 2023 Assets: Funds held for clients Money market funds $ 14 $ 14 $ — $ — Available-for-sale securities 70,860 — 70,860 — Total $ 70,874 $ 14 $ 70,860 $ — Liabilities: Contingent purchase consideration (1) $ 2,299 $ — $ — $ 2,299 Total $ 2,299 $ — $ — $ 2,299 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) $ 2,955 $ — $ — $ 2,955 Total $ 2,955 $ — $ — $ 2,955 (1) See Note 3 — Business Combinations and Asset Acquisitions for further discussion regarding the contingent purchase consideration. 10 Table of Contents Restricted cash equivalents and investments classified as available-for-sale within funds held for clients consisted of the following (in thousands): Amortized Cost Gross Unrealized Gains (1) Gross Unrealized Losses (1) Aggregate Estimated Fair Value June 30, 2023 Restricted cash equivalents $ 14 $ — $ — $ 14 Available-for-sale securities: Certificates of deposit 976 3 ( 2 ) 977 Corporate debt securities 67,108 11 ( 2,134 ) 64,985 Municipal bonds 4,774 — ( 328 ) 4,446 U.S. Government agency securities 500 — ( 48 ) 452 Total available-for-sale securities 73,358 14 ( 2,512 ) 70,860 Total (2) $ 73,372 $ 14 $ ( 2,512 ) $ 70,874 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 (1) Unrealized gains and losses on available-for-sale securities are included as a component of comprehensive loss. As of June 30, 2023 and December 31, 2022, there were 8 and 3 securities, respectively, in an unrealized gain position and there were 160 and 124 securities in an unrealized loss position, respectively. As of June 30, 2023, these unrealized losses were less than $ 82 individually and $ 2,512 in the aggregate. As of December 31, 2022, these unrealized losses were less than $ 96 individually and $ 2,480 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 credit losses. Factors considered in determining whether a loss is a credit loss include the length of time and extent to which fair value has been less than the cost basis, the credit rating of the investment, and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. (2) At June 30, 2023 and December 31, 2022, none of these securities were classified as cash and cash equivalents on the accompanying Condensed Consolidated Balance Sheets. Funds held for clients represent assets that the Company has classified as restricted for use solely for the purposes of satisfying the obligations to remit funds relating to the Company’s payroll and payroll tax filing services, which are classified as client funds obligations on our Condensed Consolidated Balance Sheets. Funds held for clients have been invested in the following categories (in thousands): June 30, 2023 December 31, 2022 Restricted cash and cash equivalents held to satisfy client funds obligations $ 115,657 $ 147,032 Restricted short-term marketable securities held to satisfy client funds obligations 9,762 9,174 Restricted long-term marketable securities held to satisfy client funds obligations 61,098 47,382 Total funds held for clients $ 186,517 $ 203,588 11 Table of Contents Expected maturities of available-for-sale securities as of June 30, 2023 are as follows (in thousands): One year or less $ 9,762 After one year through five years 61,098 Total $ 70,860 NOTE 5 - GOODWILL AND OTHER INTANGIBLE ASSETS December 31, 2022 Acquisitions June 30, 2023 Goodwill $ 86,011 $ — $ 86,011 We believe significant synergies are expected to arise from our strategic acquisitions and their assembled work forces. This factor contributed to a purchase price that was in excess of the fair value of the net assets acquired and, as a result, we recorded goodwill for each acquisition. A portion of acquired goodwill will be amortizable for tax purposes. As of June 30, 2023, there has been no impairment of goodwill based on the qualitative assessments performed by the Company. Gross Intangible Assets December 31, 2022 Acquisitions June 30, 2023 Customer relationships $ 116,971 $ — $ 116,971 Developed technology 12,001 — 12,001 Reseller relationships 1,344 954 2,298 Trade names 880 — 880 Non-compete agreements 1,032 — 1,032 $ 132,228 $ 954 $ 133,182 The gross carrying amount and accumulated amortization of our intangible assets as of June 30, 2023 are as follows (in thousands, except weighted average periods): Weighted Average Amortization Period (in Years) Gross Accumulated Amortization Net June 30, 2023 Customer relationships 8.7 $ 116,971 $ ( 59,235 ) $ 57,736 Developed technology 6.9 12,001 ( 10,601 ) 1,400 Reseller relationships 6.5 2,298 ( 926 ) 1,372 Trade names 3.0 880 ( 863 ) 17 Non-compete agreements 5.2 1,032 ( 922 ) 110 8.4 $ 133,182 $ ( 72,547 ) $ 60,635 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 12 Table of Contents We record amortization expenses using the straight-line method over the estimated useful lives of the intangible assets, as noted above. Amortization expenses recorded in Operating Expenses were $ 6,596 and $ 6,784 for the six months ended June 30, 2023 and 2022, respectively. Amortization expenses recorded in Cost of Sales were $ 318 and $ 593 for the six months ended June 30, 2023 and 2022, respectively. There was no impairment of intangibles during the six months ended June 30, 2023 based on the qualitative assessment performed by the Company. However, if market, political and other conditions over which we have no control continue to affect the capital markets and our stock price declines, we may experience an impairment of our intangibles in future quarters. The following table summarizes the future estimated amortization expense relating to our intangible assets as of June 30, 2023 (in thousands): 2023 $ 6,765 2024 13,498 2025 12,713 2026 9,601 2027 7,426 2028 5,957 Thereafter 4,675 $ 60,635 NOTE 6 - NOTES PAYABLE The following table summarizes our outstanding debt as of the dates indicated (in thousands): Maturity Cash Interest Rate June 30, 2023 December 31, 2022 Subordinated Notes Payable – Acquisitions (1) 12/31/2022 – 9/30/2026 2.00 % - 3.00 % $ 6,890 $ 6,947 Senior Credit Facility 10/1/2025 14.00 % 32,190 30,607 Gross Notes Payable $ 39,080 $ 37,554 (1) See Note 3 — Business Combinations and Asset Acquisitions and Subordinated Notes Payable - Acquisitions section below for further discussion regarding the notes payable related to acquisitions. The following table summarizes the debt issuance costs as of the dates indicated (in thousands): Gross Notes Payable Debt Issuance Costs and Debt Discount Net Notes Payable June 30, 2023 Current portion of notes payable $ 7,190 $ ( 633 ) $ 6,557 Notes payable, net of current portion 31,890 ( 1,664 ) 30,226 Total $ 39,080 $ ( 2,297 ) $ 36,783 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 The following table summarizes the future principal payments related to our outstanding debt as of June 30, 2023 (in thousands): 2023 $ 4,190 2024 6,420 2025 25,068 2026 3,402 Total $ 39,080 13 Table of Contents Subordinated Notes Payable - Acquisitions In January 2023, the Company resolved the outstanding claims for indemnification for which it was withholding 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 promissory note. In April 2023, the Company calculated the final contingent consideration due in connection with the acquisition of a payroll business in September 2021. As a result, the fair value of the contingent consideration of $587 was added as an increase to the principal balance due on the promissory note. In May 2023, the Company paid the outstanding balance of a subordinated note payable in connection with the acquisition of customer relationships of a payroll business that took place in 2022. As a result, the Company paid the remaining balance of $422 on the promissory note consisting of $411 in principal and $11 in accrued interest. As of June 30, 2023, there are no further amounts due or owing under the subordinated note payable. Senior Credit Facility with Structural Capital Investments III, LP On September 10, 2021, the Company entered into a Loan and Security Agreement (the “Loan 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 the Lenders (“Agent”), under the terms of which the Lenders have committed to lend us up to $ 50,000 in term loan financing to support our growth needs (the “Facility”). Of the amount committed by the Lenders, the Company drew $30,000 in September 2021, and the remaining $20,000 has lapsed. The Company also entered into a secured promissory note with the Agent evidencing our obligations under the Facility. The Company’s obligations are further guaranteed by each of our subsidiaries and secured by our assets and the assets of our subsidiaries. At the onset of the agreement, we paid to the Lenders an origination fee of $ 500 . Interest accrues on any outstanding balance at a rate equal to the greater of 9.0% or the Prime Rate, plus 5.75% (the “Basic Rate”) and is payable in advance, which as of June 30, 2023 was 14.00%. 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 agreed to pay Lenders a final payment fee equal to 1.0% of the increase in our market capitalization since September 10, 2021, 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 under the agreement 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 ARR ratio of no less than 0.70:1.00 through September 10, 2023, and (iii) maintain an ARR ratio of no less than 0.60:1.00 from September 10, 2023 through the remainder of the term of the Facility. The ARR 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. 14 Table of Contents NOTE 7 – CONTRACTS WITH CUSTOMERS AND REVENUE CONCENTRATION Receivables Receivables from contracts with customers, net of allowance for doubtful accounts of $ 4,863 , w ere $ 16,629 at June 30, 2023. Receivables from contracts with customers, net of allowance for doubtful accounts of $ 3,248 , were $ 12,123 at December 31, 2022. The increase in the receivable balance during the first six months of 2023 is primarily due to deferred payment terms on many of our Earned Retention Tax Credit commitments. No customer represented more than 10% of our net accounts receivable balance as of June 30, 2023 and December 31, 2022, respectively. Deferred Commissions Deferred commission costs from contracts with customers w ere $ 8,314 and $ 6,660 at June 30, 2023 and December 31, 2022, respectively. The amount of amortization recognized for the three and six months ended June 30, 2023 wa s $ 650 and $ 1,147 , respectively, and for the three and six months ended June 30, 2022 was $ 435 and $ 780 , respectively. Deferred Revenue During the three and six months ended June 30, 2023, reve nue of $ 170 and $ 5,783 , respectively, an d during the three and six months ended June 30, 2022, revenue of $ 293 and $ 3,205 , respectively, was recognized from the deferred revenue balance at the beginning of each period. Transaction Price Allocated to the Remaining Performance Obligations As of June 30, 2023, approximately $ 23,124 of revenue is expected to be recognized from remaining performance obligations. We expect to recognize revenue on approximately 87 % of these remaining performance obligations over the next 12 months, with the balance recognized thereafter. Revenue Concentration During the three and six months ended June 30, 2023 and 2022 , there were no customers that individually represented 10% or more of consolidated revenue. NOTE 8 - LEASES We have entered into office space lease agreements, which qualify as operating leases under ASU No. 2016-02, “Leases (Topic 842)”. Under such leases, the lessors receive annual minimum (base) rent. The leases have original terms (excluding extension options) ranging from one year to eight years . Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We record base rent expense under the straight-line method over the term of the lease. In the accompanying Condensed Consolidated Statements of Comprehensive Loss, rent expense is included in operating expenses under general and administrative expenses. The components of the rent expense for the three and six months ended June 30, 2023 and 2022 are as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Operating lease cost $ 884 $ 576 $ 1,415 $ 1,142 Sublease income ( 4 ) ( 11 ) ( 9 ) ( 21 ) Net rent expense $ 880 $ 565 $ 1,406 $ 1,121 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 9 % and 8 % as of June 30, 2023 and December 31, 2022, respectively. The weighted average remaining lease term is five years as of June 30, 2023 and December 31, 2022. 15 Table of Contents Supplemental cash flow information related to operating leases for the six months ended June 30 are as follows (in thousands): Six Months Ended June 30, 2023 2022 Cash paid for amounts included in the measurement of lease liabilities: Operating cash outflows from operating leases $ 1,439 $ 1,133 Non-cash operating activities: Operating lease assets obtained in exchange for new operating lease liabilities $ — $ 1,512 Future minimum commitments over the life of all operating leases, which exclude variable rent payments, are as follows (in thousands): 2023 $ 1,081 2024 2,017 2025 1,765 2026 1,313 2027 1,121 2028 1,074 Thereafter 568 Total minimum lease payments 8,939 Less: imputed interest ( 1,783 ) Total lease liabilities $ 7,156 NOTE 9 - SHARE-BASED COMPENSATION We have one active equity plan, the 2018 Incentive Award Plan (the “2018 Plan”). The 2018 Plan, approved by our shareholders, replaced our 2009 Equity Incentive Plan, as amended (the “2009 Plan”), however, the terms and conditions of the 2009 Plan will continue to govern any outstanding awards granted thereunder. In January 2023, we granted Performance Stock Units (“PSU”) to certain members of management under the 2018 Plan. Each PSU will convert into one restricted stock unit (“RSU”) at the end of the performance period. The number of RSUs into which the PSUs convert for each member of management who received the award will be a sliding scale between 0% to 200% of the target amount based on the Company’s achievement of certain performance metrics tied to the Company’s recurring revenue and gross profit for 2023. Once converted, the RSU will vest as follows: one-third on the date the PSU is converted (which is expected to be between January 1, 2024 and March 31, 2024), one-third will vest on January 2, 2025, and one-third will vest on January 2, 2026. The number of shares reserved for issuance under the 2018 Plan is 4,350 shares. We have an aggregate of 2,557 options, RSUs and PSUs granted and outstanding pursuant to the 2018 Plan as of June 30, 2023. As of June 30, 2023, the number of shares available for future grant under the 2018 Plan is 1,625 . Share based compensation for our stock option plans for the three months ended June 30, 2023 and June 30, 2022 was $ 1,582 and $ 814 , respectively, and for the six months ended June 30, 2023 and June 30, 2022 was $ 2,919 and $ 1,544 , respectively. We issued 6 shares of common stock related to exercises of stock options for the three months ended June 30, 2023 and issued no shares of common stock related to exercises for the three months ended June 30, 2022. We issued 26 and 30 shares of common stock upon the vesting of restricted stock units for the three months ended June 30, 2023 and 2022, respectively . NOTE 10 - NET LOSS PER SHARE We compute net income or loss per share based on the weighted average number of common shares outstanding for the period. Diluted net income per share reflects the maximum dilution that would have resulted from incremental common shares issuable upon the exercise of stock options or vesting of RSUs and in some cases PSUs. In periods of net income, we compute the adjustment to the denominator of our dilutive net earnings per share calculation to include these stock options, RSUs, and PSUs, as applicable, using the treasury stock method. Regardless of the period resulting in net income or net loss, we exclude the adjustment to the denominator of our dilutive net loss per share calculation to the extent that they are anti-dilutive. 16 Table of Contents The following table sets forth the computation of basic and diluted net loss per common share for the three and six months ended June 30 (in thousands, except per share amounts): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Basic: Net loss $ ( 3,765 ) $ ( 5,860 ) $ ( 3,426 ) $ ( 8,877 ) Weighted-average shares of common stock outstanding 20,651 20,106 20,500 20,067 Basic loss per share $ ( 0.18 ) $ ( 0.29 ) $ ( 0.17 ) $ ( 0.44 ) Diluted: Net loss $ ( 3,765 ) $ ( 5,860 ) $ ( 3,426 ) $ ( 8,877 ) Weighted-average shares of common stock outstanding 20,651 20,106 20,500 20,067 Diluted loss per share $ ( 0.18 ) $ ( 0.29 ) $ ( 0.17 ) $ ( 0.44 ) NOTE 11 - 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 Condensed Consolidated Statements of Comprehensive Loss to reflect the ERTC payable to us for the first three quarters in 2021 presented as other current assets within our Condensed Consolidated Balance Sheets. In 2022, the Company received cash of $3,457, reflecting a portion of our ERTC. In January and February 2023, the Company received the remaining balance of $7,076 for the ERTC benefit. NOTE 12 - SUBSEQUENT EVENTS In July 2023, the Company paid the outstanding contingent purchase consideration due in connection with the acquisition of a payroll tax business in July 2020, see Note 3 - Business Combinations and Asset Acquisitions for more detail on the July 2020 acquisition. As a result, the outstanding contingent consideration of $ 2,299 was extinguished with 214 shares of the Company’s common stock in lieu of cash and no further contingent purchase obligation remains. On August 7, 2023, the Company entered into an amendment to the Senior Credit Facility described in Note 6 – Notes Payable, whereby the Final Payment Fee (as defined in the Loan Agreement) was settled for $ 1,677 (the “Settled Amount”) which was paid on August 7, 2023. The Final Payment was originally equal to 1.0 % of the increase in our market capitalization since September 10, 2021, and was due upon payment in full of the obligations under the Senior Credit Facility. The Settled Amount is subject to adjustment and any adjusted amount, if due, is expected to be immaterial in amount and would be paid no later than August 18, 2023. In addition, we also paid the Lenders a fee equal to $ 250 , which will be credited against reimbursable expenses owed to Lenders in a future refinancing of the Senior Credit Facility if it occurs before December 31, 2024. 17 Table of Contents