ASURE SOFTWARE INC 10-Q

ITEM 1. FINANCIAL STATEMENTS ASURE SOFTWARE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) (Unaudited) September 30, 2023 December 31, 2022 ASSETS Current assets: Cash, cash equivalents, and restricted cash $ 32,787 $ 17,010 Accounts receivable, net of allowance for doubtful accou nts of $ 1,186 a nd $ 3,248 at September 30, 2023 and December 31, 2022, respectively 15,133 12,123 Inventory 93 251 Prepaid expenses and other current assets 3,907 10,304 Total current assets before funds held for clients 51,920 39,688 Funds held for clients 172,503 203,588 Total current assets 224,423 243,276 Property and equipment, net 13,436 11,439 Goodwill 86,011 86,011 Intangible assets, net 57,326 66,594 Operating lease assets, net 5,265 7,065 Other assets, net 8,036 5,523 Total assets $ 394,497 $ 419,908 LIABILITIES AND STOCKHOLDERS ’ EQUITY Current liabilities: Current portion of notes payable $ 195 $ 4,106 Accounts payable 1,696 2,194 Accrued compensation and benefits 5,770 5,791 Operating lease liabilities, current 1,510 1,860 Other accrued liabilities 5,170 3,728 Contingent purchase consideration — 2,955 Deferred revenue 3,392 8,461 Total current liabilities before client fund obligations 17,733 29,095 Client fund obligations 175,056 206,088 Total current liabilities 192,789 235,183 Long-term liabilities: Deferred revenue 666 788 Deferred tax liability 1,614 1,503 Notes payable, net of current portion 2,633 30,795 Operating lease liabilities, noncurrent 4,956 6,459 Other liabilities 177 114 Total long-term liabilities 10,046 39,659 Total liabilities 202,835 274,842 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; 25,235 and 20,628 shares issued, 24,851 and 20,244 shares outstanding at September 30, 2023 and December 31, 2022, respectively 252 206 Treasury stock at cost, 384 shares at September 30, 2023 and December 31, 2022 ( 5,017 ) ( 5,017 ) Additional paid-in capital 485,981 433,586 Accumulated deficit ( 286,858 ) ( 281,226 ) Accumulated other comprehensive loss ( 2,696 ) ( 2,483 ) Total stockholders’ equity 191,662 145,066 Total liabilities and stockholders’ equity $ 394,497 $ 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 September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Revenue: Recurring $ 23,833 $ 19,959 $ 74,749 $ 61,977 Professional services, hardware and other 5,501 1,944 18,069 4,559 Total revenue 29,334 21,903 92,818 66,536 Cost of Sales 8,054 8,256 25,120 25,164 Gross profit 21,280 13,647 67,698 41,372 Operating expenses: Sales and marketing 6,597 4,752 22,312 14,238 General and administrative 9,294 8,023 29,586 24,204 Research and development 1,803 1,230 5,107 4,523 Amortization of intangible assets 3,333 3,350 9,929 10,134 Total operating expenses 21,027 17,355 66,934 53,099 Income (loss) from operations 253 ( 3,708 ) 764 ( 11,727 ) Interest expense, net ( 782 ) ( 1,122 ) ( 4,321 ) ( 3,006 ) (Loss) gain on extinguishment of debt ( 1,517 ) — ( 1,517 ) 180 Other (expense) income, net ( 283 ) 399 ( 291 ) 1,349 Loss from operations before income taxes ( 2,329 ) ( 4,431 ) ( 5,365 ) ( 13,204 ) Income tax (benefit) expense ( 123 ) 102 267 206 Net loss ( 2,206 ) ( 4,533 ) ( 5,632 ) ( 13,410 ) Other comprehensive loss: Unrealized loss on marketable securities ( 201 ) ( 1,243 ) ( 213 ) ( 2,802 ) Comprehensive loss $ ( 2,407 ) $ ( 5,776 ) $ ( 5,845 ) $ ( 16,212 ) Basic and diluted loss per share Basic $ ( 0.10 ) $ ( 0.22 ) $ ( 0.27 ) $ ( 0.67 ) Diluted $ ( 0.10 ) $ ( 0.22 ) $ ( 0.27 ) $ ( 0.67 ) Weighted average basic and diluted shares Basic 22,591 20,219 21,204 20,092 Diluted 22,591 20,219 21,204 20,092 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 Stock issued upon option exercise and vesting of restricted stock units 99 1 — 479 — — 480 Shares issued, net of issuance costs 4,047 40 — 45,484 — — 45,524 Share based compensation — — — 1,251 — — 1,251 Net loss — — — — ( 2,206 ) — ( 2,206 ) Other comprehensive loss — — — — — ( 201 ) ( 201 ) Balance at September 30, 2023 24,851 $ 252 $ ( 5,017 ) $ 485,981 $ ( 286,858 ) $ ( 2,696 ) $ 191,662 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 Stock issued upon option exercise and vesting of restricted stock units 18 — — — — — — Share based compensation — — — 798 — — 798 Net loss — — — — ( 4,533 ) — ( 4,533 ) Other comprehensive loss — — — — — ( 1,243 ) ( 1,243 ) Balance at September 30, 2022 20,160 $ 205 $ ( 5,017 ) $ 432,445 $ ( 280,170 ) $ ( 2,901 ) $ 144,562 The accompanying notes are an integral part of these Condensed Consolidated Financial Statements. 4 Table of Contents ASURE SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) Nine Months Ended September 30, 2023 2022 Cash flows from operating activities: Net loss $ ( 5,632 ) $ ( 13,410 ) Adjustments to reconcile loss to net cash provided by operations: Depreciation and amortization 14,243 14,018 Amortization of operating lease assets 1,129 1,268 Amortization of debt financing costs and discount 548 531 Non-cash interest expense 1,471 — Net accretion of discounts and amortization of premiums on available-for-sale securities ( 63 ) 279 Provision for doubtful accounts 2,004 304 Provision for deferred income taxes 111 163 Loss (gain) on extinguishment of debt 1,208 ( 180 ) Net realized gains on sales of available-for-sale securities ( 1,645 ) ( 808 ) Share-based compensation 4,170 2,341 Loss on disposals of long-term assets 132 1 Change in fair value of contingent purchase consideration 175 ( 1,350 ) Adjustment to Intangibles — 23 Changes in operating assets and liabilities: Accounts receivable ( 5,014 ) ( 1,816 ) Inventory 159 ( 85 ) Prepaid expenses and other assets 4,031 2,855 Operating lease right-of-use assets 473 ( 3,489 ) Accounts payable ( 498 ) 738 Accrued expenses and other long-term obligations 918 2,637 Operating lease liabilities ( 895 ) 2,298 Deferred revenue ( 5,190 ) 639 Net cash provided by operating activities 11,835 6,957 Cash flows from investing activities: Acquisition of intangible asset ( 697 ) ( 2,289 ) Purchases of property and equipment ( 1,365 ) ( 2,188 ) Software capitalization costs ( 5,029 ) ( 3,219 ) Purchases of available-for-sale securities ( 21,513 ) ( 33,454 ) Proceeds from sales and maturities of available-for-sale securities 10,428 7,159 Net cash used in investing activities ( 18,176 ) ( 33,991 ) Cash flows from financing activities: Payments of notes payable ( 35,627 ) ( 1,688 ) Debt extinguishment costs ( 468 ) — Payments of contingent purchase consideration — ( 9 ) Net proceeds from issuance of common stock 45,986 192 Capital raise fees ( 258 ) — Net change in client fund obligations ( 31,033 ) ( 32,527 ) Net cash used in financing activities ( 21,400 ) ( 34,032 ) Net decrease in cash, cash equivalents, restricted cash, and restricted cash equivalents ( 27,741 ) ( 61,066 ) Cash, cash equivalents, restricted cash and restricted cash equivalents, beginning of period 164,042 198,641 Cash, cash equivalents, restricted cash and restricted cash equivalents, end of period $ 136,301 $ 137,575 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) Nine Months Ended September 30, 2023 2022 Reconciliation of cash, cash equivalents, restricted cash, and restricted cash equivalents to the Condensed Consolidated Balance Sheets Cash and cash equivalents $ 32,787 $ 10,885 Restricted cash and restricted cash equivalents included in funds held for clients 103,514 126,690 Total cash, cash equivalents, restricted cash, and restricted cash equivalents $ 136,301 $ 137,575 Supplemental information: Cash paid for interest $ 3,140 $ 2,247 Cash paid for income taxes $ 532 $ 246 Non-cash investing and financing activities: Acquisition of intangible assets $ 332 $ — Notes payable issued for acquisitions $ — $ 411 Shares issued to settle contingent consideration $ 2,543 $ — 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 September 30, 2023, comprehensive loss and changes in stockholders’ equity for the three and nine months ended September 30, 2023 and September 30, 2022, and cash flows for the nine months ended September 30, 2023 and September 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 September 30, 2023, the Company had no restricted cash. LIQUIDITY 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 the filing of our current S-3). The shelf registration statement relating to these securities became effective on April 21, 2021. As of September 30, 2023, there is $ 104,000 available under the shelf registration statement. On August 21, 2023, we completed an underwritten public offering in which we sold an aggregate of 3,333 newly issued shares of our common stock at a public offering price of $ 12.00 per share, and realized net proceeds of $ 37,475 , after deducting underwriting discounts and offering expenses of $ 2,525 . Additionally, on August 30, 2023, the Underwriters exercised their option to purchase an additional 500 shares of our common stock, and we realized net proceeds of $ 5,507 , after deducting underwriting discounts and offering expenses of $ 493 . As of September 30, 2023, the Company’s principal sources of liquidity consisted of approximately $ 32,787 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; however we believe that we have sufficient liquidity to support our business operations for at least the next twelve months. Future business demands may lead to cash utilization at levels greater than recently experienced or expected. We may need to raise additional capital in the future in order to grow our existing software operations and to seek additional strategic acquisitions in the near future. Currently the Company does not have a credit facility or access to a line of credit. Further, we cannot assure that we will be able to raise additional capital on acceptable terms, or at all. 8 Table of Contents 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 September 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 September 30, 2023, there are no further amounts due or owing under the subordinated promissory note. 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 were two outstanding promissory notes payable. In September 2023, the Company paid the remaining balance of $ 2,312 on one of the promissory notes, consisting of $ 2,223 in principal and $ 89 in accrued interest. The second promissory note also includes contingent consideration for which the Company calculated the final value to be $ 587 . The contingent consideration was added as an increase to the principal balance due on the promissory note during the second quarter of 2023. As of September 30, 2023, the second promissory note had an outstanding balance of $ 4,200 and matures on September 30, 2026. 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. As a result, the outstanding contingent consideration of $ 2,299 was extinguished with the issuance of 214 shares of the Company’s common stock. As of September 30, 2023, no further contingent purchase obligation remains. 9 Table of Contents 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. The following table presents the fair value hierarchy for our financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022, respectively (in thousands): Total Carrying Value Level 1 Level 2 Level 3 September 30, 2023 Assets: Funds held for clients Money market funds $ 4,704 $ 4,704 $ — $ — Available-for-sale securities 68,989 — 68,989 — Total $ 73,693 $ 4,704 $ 68,989 $ — 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 September 30, 2023 Restricted cash equivalents $ 4,711 $ — $ ( 7 ) $ 4,704 Available-for-sale securities: Certificates of deposit 973 3 ( 2 ) 974 Corporate debt securities 65,946 17 ( 2,341 ) 63,622 Municipal bonds 4,262 — ( 325 ) 3,937 U.S. Government agency securities 500 — ( 44 ) 456 Total available-for-sale securities 71,681 20 ( 2,712 ) 68,989 Total (2) $ 76,392 $ 20 $ ( 2,719 ) $ 73,693 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 September 30, 2023 and December 31, 2022, there were 7 and 3 securities, respectively, in an unrealized gain position and there were 159 and 124 securities in an unrealized loss position, respectively. As of September 30, 2023, these unrealized losses were less than $ 79 individually and $ 2,719 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 September 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): September 30, 2023 December 31, 2022 Restricted cash and cash equivalents held to satisfy client funds obligations $ 103,514 $ 147,032 Restricted short-term marketable securities held to satisfy client funds obligations 9,297 9,174 Restricted long-term marketable securities held to satisfy client funds obligations 59,692 47,382 Total funds held for clients $ 172,503 $ 203,588 11 Table of Contents Expected maturities of available-for-sale securities as of September 30, 2023 are as follows (in thousands): One year or less $ 9,297 After one year through five years 59,692 Total $ 68,989 NOTE 5 - GOODWILL AND OTHER INTANGIBLE ASSETS December 31, 2022 Acquisitions September 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 September 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 September 30, 2023 Customer relationships $ 116,971 $ — $ 116,971 Developed technology 12,001 — 12,001 Reseller relationships 1,344 1,029 2,373 Trade names 880 — 880 Non-compete agreements 1,032 — 1,032 $ 132,228 $ 1,029 $ 133,257 The gross carrying amount and accumulated amortization of our intangible assets as of September 30, 2023 are as follows (in thousands, except weighted average periods): Weighted Average Amortization Period (in Years) Gross Accumulated Amortization Net September 30, 2023 Customer relationships 8.7 $ 116,971 $ ( 62,498 ) $ 54,473 Developed technology 6.9 12,001 ( 10,651 ) 1,350 Reseller relationships 6.4 2,373 ( 985 ) 1,388 Trade names 4.3 880 ( 872 ) 8 Non-compete agreements 5.2 1,032 ( 925 ) 107 8.5 $ 133,257 $ ( 75,931 ) $ 57,326 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 $ 9,929 and $ 10,134 for the nine months ended September 30, 2023 and 2022, respectively. Amortization expenses recorded in Cost of Sales were $ 368 and $ 889 for the nine months ended September 30, 2023 and 2022, respectively. There was no impairment of intangibles during the nine months ended September 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 September 30, 2023 (in thousands): 2023 $ 3,389 2024 13,522 2025 12,736 2026 9,621 2027 7,426 2028 5,957 Thereafter 4,675 $ 57,326 NOTE 6 - NOTES PAYABLE The following table summarizes our outstanding debt as of the dates indicated (in thousands): Maturity Cash Interest Rate September 30, 2023 December 31, 2022 Subordinated Notes Payable – Acquisitions (1) 12/31/2022 – 9/30/2026 2.00 % - 3.00 % $ 4,200 $ 6,947 Senior Credit Facility 10/1/2025 14.25 % — 30,607 Gross Notes Payable $ 4,200 $ 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 September 30, 2023 Current portion of notes payable $ 420 $ ( 225 ) $ 195 Notes payable, net of current portion 3,780 ( 1,147 ) 2,633 Total $ 4,200 $ ( 1,372 ) $ 2,828 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 September 30, 2023 (in thousands): 2023 $ — 2024 420 2025 378 2026 3,402 Total $ 4,200 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. As of September 30, 2023, 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. As of September 30, 2023, the promissory note had an outstanding balance of $ 4,200 . 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 September 30, 2023, there are no further amounts due or owing under the subordinated note payable. In September 2023, the Company paid the outstanding balance of a subordinated note payable in connection with the acquisition of certain assets of a payroll business that took place in 2021. As a result, the Company paid the remaining balance of $ 2,312 on the promissory note consisting of $ 2,223 in principal and $ 89 in accrued interest. As of September 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 Lender (“Agent”), under the terms of which the Lenders 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. The Company also entered into a secured promissory note with the Agent evidencing our obligations under the Facility. On August 7, 2023, the Company entered into an amendment to the Facility, 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 Fee 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 Company also paid the Lenders a fee equal to $ 250 to be credited against any reimbursable expenses owed to the Lenders in a future refinancing of the Facility if it occurs prior to December 31, 2024. On September 12, 2023, the Company opted to terminate the Loan Agreement and repay the outstanding balance on the secured promissory note (the “Note”). In connection with the termination, the Company paid the Agent for the benefit of the Lenders an aggregate amount of $ 30,927 (the “Payoff Amount”) in full payment of our outstanding obligations under the Loan Agreement. The Payoff Amount represented $ 30,617 of outstanding principal and interest on the unpaid principal balance, a 1.0 % prepayment fee in the amount of $ 306 and $ 5 for the accrued non-utilization fee and lender expenses associated with the extinguishment. As of September 30, 2023, there are no further amounts due or owing under the Facility. NOTE 7 – CONTRACTS WITH CUSTOMERS AND REVENUE CONCENTRATION Receivables Receivables from contracts with customers, net of allowance for doubtful accounts of $ 1,186 , w ere $ 15,133 at September 30, 2023. Receivables from contracts with customers, net of allowance for doubtful accounts of $ 3,248 , were $ 12,123 at December 31, 2022. The decrease in the allowance for doubtful accounts balance during the three and nine months ended September 30, 2023 is primarily due to the removal of fully reserved receivable balances. The increase in the receivable balance during the first nine 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 September 30, 2023 and December 31, 2022, respectively. 14 Table of Contents Deferred Commissions Deferred commission costs from contracts with customers w ere $ 9,155 and $ 6,660 at September 30, 2023 and December 31, 2022 , respectively. The amount of amortization recognized for the three and nine months ended September 30, 2023 was $ 1,029 and $ 2,176 , respectively, and for the three and nine months ended September 30, 2022 was $ 412 and $ 1,192 , respectively. Deferred Revenue During the three and nine months ended September 30, 2023, revenue of $ 924 and $ 6,650 , respectively, an d during the three and nine months ended September 30, 2022, revenue of $ 156 and $ 3,362 , respectively, was recognized from the deferred revenue balance at the beginning of each period. Transaction Price Allocated to the Remaining Performance Obligations As of September 30, 2023, approximately $ 18,891 of revenue is expected to be recognized from remaining performance obligations. We expect to recognize revenue on approximately 81 % of these remaining performance obligations over the next 12 months, with the balance recognized thereafter. Revenue Co ncentration During the three and nine months ended September 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 nine months ended September 30, 2023 and 2022 are as follows (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Operating lease cost $ 481 $ 610 $ 1,896 $ 1,759 Sublease income ( 5 ) ( 15 ) ( 13 ) ( 84 ) Net rent expense $ 476 $ 595 $ 1,883 $ 1,675 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 10 % and 8 % as of September 30, 2023 and December 31, 2022, respectively. The weighted average remaining lease term is five years as of September 30, 2023 and December 31, 2022. Supplemental cash flow information related to operating leases for the nine months ended September 30 are as follows (in thousands): Nine Months Ended September 30, 2023 2022 Cash paid for amounts included in the measurement of lease liabilities: Operating cash outflows from operating leases $ 1,998 $ 1,561 Non-cash operating activities: Operating lease assets obtained or removed in exchange for new, modified or terminated operating lease liabilities $ ( 473 ) $ 2,221 15 Table of Contents Future minimum commitments over the life of all operating leases, which exclude variable rent payments, are as follows (in thousands): 2023 $ 551 2024 1,883 2025 1,649 2026 1,194 2027 1,001 2028 993 Thereafter 743 Total minimum lease payments 8,014 Less: imputed interest ( 1,548 ) Total lease liabilities $ 6,466 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 stockholders, replaced our 2009 Equity Incentive Plan, as amended (the “2009 Plan”), however, the terms and conditions of the 2009 Plan will continue to govern any outstanding awards granted thereunder. The number of shares reserved for issuance under the 2018 Plan is 4,350 shares. We have an aggregate of 2,306 options, RSUs and PSUs granted and outstanding pursuant to the 2018 Plan as of September 30, 2023. As of September 30, 2023, the number of shares available for future grant under the 2018 Plan is 1,737 . Share based compensation for our stock option plans for the three months ended September 30, 2023, and September 30, 2022, was $ 1,251 and $ 799 , respectively, and for the nine months ended September 30, 2023, and September 30, 2022, was $ 4,170 and $ 2,341 , respectively. We issued 66 and 349 shares of common stock related to exercises of stock options for the three and nine months ended September 30, 2023, and issued no shares of common stock related to exercises of stock options for the three and nine months ended September 30, 2022. We issued 40 and 164 shares of common stock upon the vesting of restricted stock units for the three and nine months ended September 30, 2023, and issued 22 and 95 shares of common stock upon the vesting of restricted stock units for the three and nine months ended September 30, 2022 . 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 periods presented below (in thousands, except per share amounts): Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Basic: Net loss $ ( 2,206 ) $ ( 4,533 ) $ ( 5,632 ) $ ( 13,410 ) Weighted-average shares of common stock outstanding 22,591 20,219 21,204 20,092 Basic loss per share $ ( 0.10 ) $ ( 0.22 ) $ ( 0.27 ) $ ( 0.67 ) Diluted: Net loss $ ( 2,206 ) $ ( 4,533 ) $ ( 5,632 ) $ ( 13,410 ) Weighted-average shares of common stock outstanding 22,591 20,219 21,204 20,092 Diluted loss per share $ ( 0.10 ) $ ( 0.22 ) $ ( 0.27 ) $ ( 0.67 ) 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 On October 1, 2023, the Company acquired certain assets of a Reseller Partner, which were used to provide payroll processing services. The Partner is located in the southeastern United States. The aggregate purchase price that the Company paid for these assets was $ 8,391 , paid as follows: (i) $ 6,891 in cash of which $ 6,545 was paid at closing and (ii) the delivery of a promissory note in the amount of $ 1,500 . 17 Table of Contents