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 Quarterly Report on 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 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, our 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 (“ERTC”) and the impact of the Internal Revenue Service (“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 [economic] environment; 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; privacy concerns and laws and other regulations may limit the effectiveness of our applications; 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; interruptions to supply chains and extended shut down of businesses; issues in the use of artificial intelligence in our HCM products and services; political unrest, including the current issues between Russia and Ukraine and the ongoing conflict between Israel and Hamas; reductions in employment and an increase in business failures, specifically among our clients; 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 eligib ility for such programs; domestic and international regulatory developments, including changes to or applicability to our business of privacy and data securities laws; 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 Securities and Exchange Commission (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 March 31, 2024 and December 31, 2023, and results of operations for the three months ended March 31, 2024 and 2023 should be read in conjunction with our 2023 Annual Report on Form 10-K filed with the SEC on February 26, 2024. 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. 17 Table of Contents Our Business We are 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 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. Our 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 and are focused on 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 sell our solutions through both direct and partner channels. We supplement our direct sales efforts with partner programs that afford us access to opportunities in various geographic and industry niches. We have two types of partners: reseller partners that white label our products while providing value-added services to their clients (or indirect clients) and referral partners that provide us with SMB leads but do no resell our solutions. We have and will continue to invest in research and development to expand our solutions. Our solutions reduce the administrative burden on employers and increase employee productivity while managing the employment lifecycle. Acquisitions On April 30, 2024, we acquired certain assets of a reseller partner, which were used to provide payroll processing services. The partner is located in Ohio. The aggregate purchase price that we paid for these assets was $3,000, consisting of $2,300 paid in cash on hand, $700 in the form of a promissory note with the principal balance due on October 30, 2025, and 50 shares of Asure common stock. On February 22, 2024, we acquired certain assets of a payroll processing and benefits brokerage servicer based in New Jersey. The aggregate purchase price paid for the acquisition of these assets was $6,000, consisting of $500 paid in cash on hand, 450 shares of Asure common stock, having an agreed value of $4,500, and the remaining $1,000 in the form of a promissory note. As of March 31, 2024, the promissory note had an outstanding balance of $1,000 and matures on February 22, 2026. On October 1, 2023, we acquired certain assets of an Alabama based reseller partner, which were used to provide payroll processing services. The aggregate purchase price 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. As of March 31, 2024, the promissory note had an outstanding balance of $1,500 and matures on October 1, 2025. 18 Table of Contents RESULTS OF OPERATIONS (in thousands) The following table sets forth, for the fiscal periods indicated, the percentage of total revenue represented by certain items in the Company’s Condensed Consolidated Statements of Comprehensive (Loss) Income: Three Months Ended March 31, 2024 2023 Revenue 100 % 100 % Gross profit 71 % 74 % Sales and marketing 25 % 22 % General and administrative 32 % 30 % Research and development 6 % 6 % Amortization of intangible assets 11 % 10 % Total operating expenses 73 % 68 % Interest income 1 % 1 % Interest expense (1) % (7) % Other income, net — % — % (Loss) income from operations before income taxes (1) % — % Net (loss) income (1) % 1 % Revenue Revenue is comprised of recurring revenue, professional services, hardware, and other revenue. We expect our revenue to increase as we introduce new applications, expand our client base and renew and expand relationships with existing clients. As a percentage of total revenue, we expect our mix of recurring revenue, and professional services, hardware and other revenue to remain relatively constant. While revenue mix varies by product, recurring revenue represented over 95% of total revenue in three months ended March 31, 2024, compared to 84% in three months ended March 31, 2023. Our revenue was derived from the following sources (in thousands): Three Months Ended March 31, Variance 2024 2023 $ % Recurring $ 30,273 $ 27,956 $ 2,317 8 % Professional services, hardware and other 1,379 5,108 (3,729) (73) % Total $ 31,652 $ 33,064 $ (1,412) (4) % Recurring Revenue Recurring revenue includes 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 revenue from our reseller partners that license our solutions. Because recurring revenue is 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 revenue increases as our clients hire more employees. Recurring revenue is recognized in the period services are rendered. 19 Table of Contents Recurring revenue includes 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. This revenue line also includes interest earned on funds held for clients. 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. Recurring revenue for the three months ended March 31, 2024 was $30,273, an increase of $2,317, or 8%, from $27,956 for the three months ended March 31, 2023. 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™. Professional Services, Hardware and Other Revenue Professional services, hardware and other revenue represents implementation fees, one-time consulting projects, on-premise maintenance, hardware devices to enhance our software products as well as revenue generated for provisioning and filing for ERTC. Professional services, hardw are and other revenue decreased $3,729, or 73%, for the three months ended March 31, 2024 from the similar period in 2023, primarily due to a decrease in non-recurring ERTC revenue. ERTC revenue was originally expected to expire during 2024 and 2025; however, it is possible that the government could make changes to or revoke the program prior to its scheduled expiration. For example, in January 2024, the United States House of Representatives passed the Tax Relief for American Families Act of 2024, which set an expiration date of January 31, 2024, on additional claims for ERTC that can potentially apply retroactively. If approved by other branches of government, this will have an effect on our ERTC revenue and cash collections. 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. Refer to “Risk Factors” previously disclosed in our Annual Report on Form 10-K, filed with the SEC on February 26, 2024, for more information about risks related to our ERTC business. 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 March 31, 2024, was $22,607, a decrease of $1,793, or 7%, from $24,400 for the three months ended March 31, 2023. Gross margin as a percentage of revenue was 71% for the three months ended March 31, 2024 as compared to 74% for the three months ended March 31, 2023. The decrease is primarily attributable to the decrease in professional services, hardware and other revenue during the period. Our cost of sales relates primarily to direct product costs, compensation for operations and related consulting expenses, hardware expenses, facilities and related expenses and the amortization of our purchased software development costs. We include intangible amortization related to developed and acquired technology within cost of sales. 20 Table of Contents Sales and Marketing Expenses Sales and marketing expenses primarily consist of salaries and related expenses for sales and marketing staff, including stock-based expenses, commissions, as well as marketing programs, which include events, corporate communications and product marketing activities. Sales and marketing expenses for the three months ended March 31, 2024 were $7,767, an increase of $567, or 8%, from $7,200 for the three months ended March 31, 2023. The increase is primarily due to an increase in direct sales personnel, and an increase in marketing initiatives; partially offset by a decrease in referral fees and bad debt expense. Sales and marketing expenses as a percentage of revenue increased to 25% for the three months ended March 31, 2024 from 22% for the same period in 2023. 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 March 31, 2024 were $10,063, an increase of $107, or 1%, from $9,956 for the three months ended March 31, 2023. The increase is primarily attributable to increased personnel and share-based compensation expenses, partially offset by a decrease in bonus expense in 2024. General and administrative expenses as a percentage of revenue increased to 32% for the three months ended March 31, 2024 from 30% for the same period in 2023. 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 March 31, 2024 were $1,769, a decrease of $210, or 11%, from $1,979 for the three months ended March 31, 2023. The decrease is primarily attributable to an increase in capitalized software expenses driven by continued investments in the development of our products, partially offset by an increase in personnel costs. R&D expenses as a percentage of revenue remained flat at 6% for the three months ended March 31, 2024 compared to the same period in 2023. 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 reduce 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. 21 Table of Contents Amortization of Intangible Assets Amortization expense for the three months ended March 31, 2024 was $3,449, an increase of $147, or 4%, from $3,302 for the three months ended March 31, 2023. Amortization expense as a percentage of revenue increased to 11% for the three months ended March 31, 2024 from 10% for the same period in 2023. The increase in amortization expense in the three months ended March 31, 2024 is primarily due to new asset acquisitions in the fourth quarter of 2023. Interest Income and Expense Interest income for the three months ended March 31, 2024 was $336 compared to interest income of $349 for the three months ended March 31, 2023. Interest income as a percentage of revenue was 1% for the three months ended March 31, 2024 and 2023 . Interest expense for the three months ended March 31, 2024 was $180 compared to interest expense of $2,293 for the three months ended March 31, 2023. Interest expense as a percentage of revenue was 1% for the three months ended March 31, 2024 compared to 7% for the three months ended March 31, 2023. The decrease in interest expense in the three months ended March 31, 2024 is primarily due to our payoff of the outstanding debt under the credit facility with Structural Capital Investments II LP in the third quarter of 2023. Other Income, Net Other income, net for the three months ended March 31, 2024 was $10 compared to $83 for the three months ended March 31, 2023. Other income, net as a percentage of revenue was negligible for the three months ended March 31, 2024, and for the three months ended March 31, 2023 . Income Taxes For the three months ended March 31, 2024 and 2023, we recorded income tax expense attributable to continuing operations of $33 and an income tax benefit of $237, respectively, a decrease of $270. Net (Loss) Income We incurred a loss of $308, or $0.01 per share, during the three months ended March 31, 2024, compared to income of $339, or $0.02 per share, during the three months ended March 31, 2023. Loss and income as a percentage of total revenue was 1% and 1% for the three months ended March 31, 2024 and 2023, respectively. LIQUIDITY AND CAPITAL RESOURCES (in thousands) March 31, 2024 December 31, 2023 Cash and cash equivalents $ 23,166 $ 30,317 (1) This balance excludes cash equivalents in funds held for clients. Working Capital . We had working capital of $24,040 at March 31, 2024, a decrease of $1,840 from working capital of $25,880 at December 31, 2023. Working capital as of March 31, 2024 and December 31, 2023 includes $3,547 and $6,853 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 used in operating activities of $3,947 for the three months ended March 31, 2024 was primarily driven by non-cash adjustments to our net loss of approximately $6,579, primarily due to depreciation and amortization and share-based compensation. This was offset by changes in operating assets and liabilities, which resulted in a use of $10,218 in cash. Net cash provided by operating activities of $4,588 for the three months ended March 31, 2023 was driven by non-cash adjustments to our net income of approximately $7,787, primarily due to depreciation and amortization and share-based compensation. For the three months ended March 31, 2023, changes in operating assets and liabilities resulted in a use of $3,538 in cash. Investing Activities . Net cash used in investing activities of $4,495 for the three months ended March 31, 2024 is primarily due to purchases of available-for-sale securities and maturities of $3,516, offset by proceeds from sales and maturities of available-for-sale securities of $2,406. Net cash used in investing activities of $6,647 for the three months ended March 31, 2023 is primarily due to purchases of available-for-sale securities and maturities of $10,189. 22 Table of Contents Financing Activities . Net cash provided by financing activities was $21,062 for the three months ended March 31, 2024, which primarily consisted of a net increase in client fund obligations of $21,122. Net cash provided by financing activities was $21,128 for the three months ended March 31, 2023, which primarily consisted of a net increase in client fund obligations of $19,372. We have an outstanding promissory note in connection with a payroll business acquired in September 2021 in the amount of $4,200 as of March 31, 2024. The outstanding promissory note matures on September 30, 2026. We also have an outstanding promissory note in connection with a payroll business acquired in October 2023 in the amount of $1,500 as of March 31, 2024 . The outstanding promissory note matures on October 1, 2025. We also have an outstanding promissory note in connection with a payroll processing and benefits brokerage servicer acquired in February 2024 in the amount of $1,000 as of March 31, 2024 . The outstanding promissory note matures on February 22, 2026. Sources of Liquidity . As of March 31, 2024, the Company’s principal sources of liquidity consisted of approximately $23,166 of cash and cash equivalents, together with cash generated from operations of our business over the next twelve months. We cannot ensure 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, we do not have a credit facility or access to a line of credit. Further, we cannot ensure that we will be able to raise additional capital on acceptable terms, or at all, or at the time we need it. CRITICAL ACCOUNTING POLICIES AND ESTIMATES 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, 2023. 23 Table of Contents 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 2023 Annual Report on Form 10-K.