ASURE SOFTWARE INC 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS 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— the expiration of major revenue streams such as Employee Retention Tax Credits and the impact of the IRS recent measures regarding Employee Retention Tax Credits claims; 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 Russia 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; 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 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; technological developments; the nature of the Company’s business model; interest rates; competition; various financial aspects of the Company’s subscription model; impairment of intangible assets; 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; 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. Further information on these and other factors that could affect the Company’s financial results is included in the reports on Forms 10-K, 10-Q and 8-K, and in other filings we make with the SEC from time to time. These documents are available on the SEC Filings section of the Investor Information section of the Company’s website at investor.asuresoftware.com. Asure assumes no obligation and does not intend to update these forward-looking statements, except as required by law. OVERVIEW The following review of Asure’s financial position as of September 30, 2023 and December 31, 2022, and results of operations for the three and nine months ended September 30, 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. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available through the investor relations page of our internet website free of charge as soon as reasonably practicable after they are electronically filed, or furnished to, the SEC. 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’s internet website address is www.asuresoftware.com. 18 Table of Contents Our Business 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. 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. 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 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. Our solutions reduce the administrative burden on employers and increases employee productivity while managing the employment lifecycle. Acquisitions 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. The aggregate purchase price that the Company paid for these assets was $2,350, as follows: (i) $1,970 in cash at closing (including $31 of transaction costs) 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 connec tion with these acquisitions were two outstanding promissory notes payable. In September 2023, the Company paid he 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 paid in July 2023 through the issuance of 214 shares of the Company’s common stock in lieu of cash. As a result, no further contingent purchase obligation remains outstanding. 19 Table of Contents 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: Nine Months Ended September 30, 2023 2022 Revenues 100 % 100 % Gross profit 73 % 62 % Sales and marketing 24 % 21 % General and administrative 32 % 36 % Research and development 6 % 7 % Amortization of intangible assets 11 % 15 % Total operating expenses 72 % 80 % Interest expense (5) % (5) % (Loss) gain on extinguishment of debt (2) % — % Other (expense) income, net — % 2 % Loss from operations before income taxes (6) % (20) % Net loss (6) % (20) % Revenue Revenues are comprised of recurring revenues, professional services, hardware, and other revenues. We expect our revenues to increase as we introduce new applications, expand our client base and renew and expand relationships with existing clients. 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 80% of total revenue in nine months ended September 30, 2023, compared to 93% in nine months ended September 30, 2022. Our revenue was derived from the following sources (in thousands): Three Months Ended September 30, Variance 2023 2022 $ % Recurring $ 23,833 $ 19,959 $ 3,874 19 % Professional services, hardware and other 5,501 1,944 3,557 183 % Total $ 29,334 $ 21,903 $ 7,431 34 % Nine Months Ended September 30, Variance 2023 2022 $ % Recurring $ 74,749 $ 61,977 $ 12,772 21 % Professional services, hardware and other 18,069 4,559 13,510 296 % Total $ 92,818 $ 66,536 $ 26,282 40 % 20 Table of Contents Recurring Revenues 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. We do not require clients to enter into long-term contractual commitments for our services. Our billing period varies by client based on when each client pays its employees, which may be weekly, bi-weekly, semi-monthly or monthly. We also generate recurring revenues from our Reseller Partners that license our solutions. Because recurring revenues are based, in part, on fees for use of our applications and the delivery of checks and reports that are levied on a per-employee basis, our recurring revenues increase as our clients hire more employees. Recurring revenues are recognized in the period services are rendered. 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 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. We expect the seasonality of our revenue cycle to decrease to the extent clients utilize more of our non-payroll applications. Our revenue 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. We typically invest funds held for clients in money market funds, demand deposit accounts, commercial paper, fixed income securities and certificates of deposit until they are paid to the applicable tax or regulatory agencies or to client employees. The amount of interest we earn from the investment of client funds is also impacted by changes in interest rates. 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. In September 2023, the Internal Revenue Service (“IRS”) announced a moratorium on processing of new ERTC claims through the end of 2023 to allow it to add additional safeguards to prevent future fraudulent and ineligible claims of the tax credit, which may delay our processing services and thus our revenue generated from ERTC and related business lines. Please see “Risk Factors” in Part II, 1A. for more information about risks related to our ERTC business. Recurring revenue for the three months ended September 30, 2023 was $23,833, an increase of $3,874, or 19%, from $19,959 for the three months ended September 30, 2022. The increase is primarily due to an increase in HR compliance revenue, an increase in interest earned on funds held for clients, and an increase in revenue from AsureMarketplace™. Recurring revenue for the nine months ended September 30, 2023 was $74,749, an increase of $12,772, or 21%, from $61,977 for the nine months ended September 30, 2022. The increase is primarily due to a n increase of approximately $5,400 in interest earned on funds held for clients, an increase of $5,400 in HR compliance revenue, and an increase of $2,800 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, hardware devices to enhance our software products as well as ERTC revenues that are transactional in nature. Professional services, hardw are and other revenue increased $3,557, or 183%, for the three months ended September 30, 2023 from the similar period in 2022, primarily due to growth in non-recurring ERTC revenues. ERTC revenues are expected to wind down as ERTC tax credits under the CARES Act and such regulations will expire in 2025. Additionally, in September 2023, the IRS announced a moratorium through the end of the year on processing new ERTC claims due to concerns over questionable or fraudulent claims. The moratorium may potentially delay the processing and collections of previously filed ERTC claims. Professional services, hardware and other re venue increased $13,510, or 296%, for the nine months ended September 30, 2023 from the similar period in 2022, primarily due to growth in non-recurring ERTC revenues. 21 Table of Contents Although our total customer base is widely spread across industries, our sales are concentrated in SMBs. We continue to target SMBs across industries as prospective customers. Geographically, we sell our products primarily in the United States. In addition to continuing to develop our workforce solutions and release of new software updates and enhancements, we continue to actively explore other opportunities to acquire additional products or technologies to complement our current software and services. Gross Profit and Gross Margin Consolidated gross profit for the three months ended September 30, 2023, was $21,280, an increase of $7,633, or 56%, from $13,647 for the three months ended September 30, 2022. Gross margin as a percentage of revenue was 73% for the three months ended September 30, 2023 as compared to 62% for the three months ended September 30, 2022. The increase is primarily attributable to the increase in revenue and more efficient operations driven by consolidation and standardization efforts across the Company. Consolidated gross profit for the nine months ended September 30, 2023 was $67,698, an increase of $26,326, or 64%, from $41,372 for the nine months ended September 30, 2022. Gross margin as a percentage of revenue was 73% for the nine months ended September 30, 2023 as compared to 62% for the nine months ended September 30, 2022. The increase is primarily attributable to the increase in revenue and more efficient operations driven by consolidation and standardization efforts across the Company. Our cost of sales relates primarily to direct product costs, compensation for operations and related consulting expenses, hardware expenses, and the amortization of our purchased software development costs. We include intangible amortization related to developed and acquired technology within cost of sales. Sales and Marketing Expenses Sales and marketing expenses primarily consist of salaries and related expenses for sales and marketing staff, including stock-based expenses and commissions. Marketing programs includes events, corporate communications and product marketing activities. Sales and marketing expenses for the three months ended September 30, 2023 were $6,597, an increase of $1,845, or 39%, from $4,752 for the three months ended September 30, 2022. The increase is primarily due to an increase in direct sales personnel, higher sales commissions owing to increased revenues, and an increase in marketing initiatives. Sales and marketing expenses as a percentage of revenue remained flat at 22% for the three months ended September 30, 2023 from 22% for the same period in 2022. Sales and marketing expenses for the nine months ended September 30, 2023 were $22,312, an increase of $8,074, or 57%, from $14,238 for the nine months ended September 30, 2022. The increase is primarily due to an increase in direct sales personnel, higher sales commissions owing to increased revenues, and an increase in accounts receivable reserves. Sales and marketing expenses as a percentage of revenue increased to 24% for the nine months ended September 30, 2023 from 21% for the same period in 2022. We expect to continue to expand and increase selling costs as we focus on hiring direct sales personnel, expanding recognition of our brand, and lead generation. General and Administrative Expenses 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, 2023 were $9,294, an increase of $1,271, or 16%, from $8,023 for the three months ended September 30, 2022. The increase is primarily attributable to increased personnel and share-based compensation. General and administrative expenses as a percentage of revenue decreased to 32% for the three months ended September 30, 2023 from 37% for the same period in 2022. 22 Table of Contents General and administrative expenses for the nine months ended September 30, 2023 were $29,586, an increase of $5,382, or 22%, from $24,204 for the nine months ended September 30, 2022, primarily attributable to increased personnel, share-based compensation, and contracting costs. G eneral and administrative expenses as a percentage of revenue decreased to 32% for the nine months ended September 30, 2023 from 36% 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, 2023 were $1,803, an increase of $573, or 47%, from $1,230 for the three months ended September 30, 2022. The increase is primarily attributable to an increase in personnel costs, partially offset by an increase in capitalized software expenses driven by continued investments in development of our products. R&D expenses as a percentage of revenue remained flat at 6% for the three months ended September 30, 2023 from 6% for the same period in 2022. R&D expenses for the nine months ended September 30, 2023 were $5,107, an increase of $584, or 13%, from $4,523 for the nine months ended September 30, 2022. R &D expenses as a percentage of revenue decreased to 6% for the nine months ended September 30, 2023 from 7% for the same period in 2022. We plan to continue to enhance our products and technologies by leveraging the latest technology stack, Robotic Process Automation (“RPA”), and artificial intelligence (“AI”), and development partnerships. We expect that our expanded investment in product, engineering, SaaS hosting, mobile and hardware technologies will lay the groundwork for broader market opportunities and represent a key aspect of our competitive differentiation. We also plan to expand our technological resources through organic improvements and acquired intellectual property. We expect to 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. Our initiatives include providing our customers with more accurate and efficient automation powered by an informed knowledge base. Consistent with that effort, our engineering team utilizes an AI development Copilot to increase their productivity and efficiency. Our operations team utilizes a digital assistant to allow for a more efficient and accurate way to automate repetitive tasks, which we believe will free up our time for more strategic work and reducing the risk of errors. We are committed to providing the best-in-class solutions. Our development efforts for future releases and enhancements are driven by feedback received from our existing and potential customers and by gauging market trends. We believe we have the appropriate development team to design and enhance our solution suite and integrated platform. We have also made significant investments outside of core R&D into compliance and certifications, including SOC I Type 2 and SOC II Type 2 certifications, BIPA, CCPA, and other initiatives. Amortization of Intangible Assets Amortization expense for the three months ended September 30, 2023 was $3,333, a decrease of $17, or 1%, from $3,350 for the three months ended September 30, 2022. Amortization expense as a percentage of revenue decreased to 11% for the three months ended September 30, 2023 from 15% for the same period in 2022. Amortization expense for the nine months ended September 30, 2023 was $9,929, a decrease of $205, or 2%, from $10,134 for the nine months ended September 30, 2022. Amortization expense as a percentage of revenue decreased to 11% for the nine months ended September 30, 2023 from 15% for the same period in 2022. Interest Expense, Net Interest expense, net for the three months ended September 30, 2023 was $782 compared to $1,122 for the three months ended September 30, 2022. Interest expense, net as a percentage of revenue was 3% for the three months ended September 30, 2023, compared to 5% for the three months ended September 30, 2022 . The decrease in interest expense, net in the three months ended September 30, 2023 is primarily due to an increase in interest income compared to the prior period. Interest expense, net for the nine months ended September 30, 2023 was $4,321 compared to $3,006 for the nine months ended September 30, 2022. Interest expense, net as a percentage of revenue was 5% for the nine months ended September 30, 2023 and September 30, 2022 . The increase in interest expense, net in the nine months ended September 30, 2023 is primarily due to the interest rates on our borrowings under our credit facility with Structural Capital Investments II LP, partially offset by an increase in interest income. 23 Table of Contents Other (Expense) Income, Net Other (expense) income, net for the three months ended September 30, 2023 was $(283) compared to $399 for the three months ended September 30, 2022. Other (expense) income, net as a percentage of revenue was negligible for the three months ended September 30, 2023, compared to 2% for the three months ended September 30, 2022 . For the three months ended September 30, 2023, the amounts in other (expense) income, net primarily consisted of losses on disposal of assets. For the three months ended September 30, 2022, the amounts in other (expense) income, net primarily consisted of a fair value adjustment on contingent purchase consideration in connection with the acquisition of a payroll business in September 2021. Other (expense) income, net for the nine months ended September 30, 2023 was $(291) compared to $1,349 for the nine months ended September 30, 2022. Other (expense) income, net as a percentage of revenue was negligible for the nine months ended September 30, 2023, and 2% for the nine months ended September 30, 2022 . For the nine months ended September 30, 2023, the amounts in o ther (expense) income, net primarily consisted of losses on disposal of assets. F or the nine months ended September 30, 2022, the amounts in o ther (expense) income, net primarily consisted of a fair value adjustment on contingent purchase consideration in connection with the acquisition of a payroll business in September 2021. (Loss) Gain on Extinguishment of Debt (Loss) gain on extinguishment of debt for the three months ended September 30, 2023 was $(1,517) compared to no (loss) gain on extinguishment of debt recognized for the three months ended September 30, 2022. (Loss) gain on extinguishment of debt as a p ercentage of revenue was 5% for the three months ended September 30, 2023. For the three months ended September 30, 2023, the amount in (loss) gain on extinguishment of debt consisted of loss recognized as a result of the termination of our credit facility with Structural Capital Investments III LP (“Structural”). (Loss) gain on extinguishment of debt for the nine months ended September 30, 2023 was $(1,517) compared to $180 for the nine months ended September 30, 2022. (Loss) gain on extinguishment of debt as a percentage of revenue was 2% for the nine months ended September 30, 2023, and was negligible for the nine months ended September 30, 2022. For the nine months ended September 30, 2023 , the amount in (loss) gain on extinguishment of debt consisted of loss recognized as a result of the termination of our credit facility with Structural. For the nine months ended September 30, 2022, the amounts in (loss) gain on extinguishment of debt consisted primarily of a gain recognized as a result of an adjustment to one of the Company’s subordinated notes payable . Income Taxes For the three months ended September 30, 2023 and 2022, we recorded income tax benefit attributable to continuing operations of $123 and expense of $102, respectively, a decrease of $225. For the nine months ended September 30, 2023 and 2022, w e recorded income tax expense attributable to continuing operations of $267 and $206, respectively, an increase of $61 or 30%. Net Loss We incurred a loss of $2,206, or $0.10 per share, during the three months ended September 30, 2023, compared to a loss of $4,533, or $0.22 per share, during the three months ended September 30, 2022. Loss as a percentage of total revenues was 8% and 21% for the three months ended September 30, 2023 and 2022, respectively. We incurred a loss of $5,632, or $0.27 per share, during the nine months ended September 30, 2023, compared to a loss of $13,410, or $0.67 per share, during the nine months ended September 30, 2022. Loss as a percentage of total revenues was 6% and 20% for the nine months ended September 30, 2023 and 2022, respectively. LIQUIDITY AND CAPITAL RESOURCES (in thousands) September 30, 2023 December 31, 2022 Cash, cash equivalents and restricted cash (1) $ 32,787 $ 17,010 (1) This balance excludes cash equivalents in funds held for clients 24 Table of Contents Working Capital . We had working capital of $31,634 at September 30, 2023, an increase of $23,541 from working capital of $8,093 at December 31, 2022. Working capital as of September 30, 2023 and December 31, 2022 includes $3,392 and $8,461 of short-term deferred revenue, respectively. Deferred revenue is an obligation to perform future services. We expect that deferred revenue will convert to future revenue as we perform our services, but this does not represent future payments. Deferred revenue can vary based on seasonality, expiration of initial multi-year contracts and deals that are billed after implementation rather than in advance of service delivery. Operating Activities . Net cash provided by operating activities of $11,835 for the nine months ended September 30, 2023 was primarily driven by non-cash adjustments to our net loss of approximately $23,483, primarily due to depreciation and amortization. This was offset by changes in operating assets and liabilities, which resulted in a use of $6,016 in cash. Net cash provided by operating activities of $6,957 for the nine months ended September 30, 2022 was driven by non-cash adjustments to our net loss of approximately $16,590, primarily due to depreciation and amortization, offset by our net loss of $13,410. For the nine months ended September 30, 2022, changes in operating assets and liabilities resulted in cash provided of $3,777. Investing Activities . Net cash used in investing activities of $18,176 for the nine months ended September 30, 2023 is primarily due to purchases of available-for-sale securities and maturities of $21,513, offset by proceeds from sales and maturities of available-for-sale securities of $10,428. Net cash used in investing activities of $33,991 for the nine months ended September 30, 2022 is primarily due to purchases of available-for-sale securities and maturities of $33,454. Financing Activities . Net cash used in financing activities was $21,400 for the nine months ended September 30, 2023, which primarily consisted of payments of notes payable of $35,627 and a net decrease in client fund obligations of $31,033, offset by net proceeds from the issuance of common stock of $45,986. 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. 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. On September 12, 2023, we terminated the Loan and Security Agreement (the “Loan Agreement”) dated September 10, 2021, with Structural, and Ocean II PLO LLC, as administrative and collateral agent for the Lenders (“Agent”), and the secured promissory note (the “Note”) with Agent evidencing the Company’s obligations under the Loan Agreement. In connection with the termination, we paid an aggregate amount of $30,927 (the “Payoff Amount”) in full payment of the outstanding obligations under the Loan Agreement and Note. The Payoff Amount represented $30,617 of outstanding principal and interest on the unpaid principal balance, a prepayment fee in the amount of $306 and an immaterial amount of fees and other expenses due to Agent. The Company also has an outstanding promissory note in connection with a payroll business acquired in September 2021 in the amount of $4,200 as of September 30, 2023. The outstanding promissory note matures on September 30, 2026. Sources of Liquidity . 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 do 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. 25 Table of Contents CRITICAL ACCOUNTING POLICIES We have prepared our Condensed Consolidated Financial Statements in accordance with U.S. generally accepted accounting principles and included the accounts of our wholly owned subsidiaries. We have eliminated all significant intercompany transactions and balances in the consolidation. Preparation of the Condensed Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles 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 financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are subjective in nature and involve judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at fiscal year-end and the reported amounts of revenues and expenses during the fiscal year. The more significant estimates made by management include the valuation allowance for our gross deferred tax asset, the determination of the fair value of our long-lived assets. We base our estimates on historical experience and on various other assumptions that management believes are reasonable under the given circumstances. These estimates could be materially different under different conditions and assumptions. Additionally, the actual amounts could differ from the estimates made. Management periodically evaluates estimates used in the preparation of our financial statements for continued reasonableness. We prospectively apply appropriate adjustments, if any, to our estimates based upon our periodic evaluation. 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. ITEM 3. 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.