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, 2024 December 31, 2023 ASSETS Current assets: Cash and cash equivalents $ 11,248 $ 30,317 Accounts receivable, net of allowance for credit losses of $ 6,150 a nd $ 4,787 at September 30, 2024 and December 31, 2023, respectively 17,233 14,202 Inventory 233 155 Prepaid expenses and other current assets 4,586 3,471 Total current assets before funds held for clients 33,300 48,145 Funds held for clients 193,589 219,075 Total current assets 226,889 267,220 Property and equipment, net 18,490 14,517 Goodwill 94,724 86,011 Intangible assets, net 73,429 62,082 Operating lease assets, net 4,401 4,991 Other assets, net 10,176 9,047 Total assets $ 428,109 $ 443,868 LIABILITIES AND STOCKHOLDERS ’ EQUITY Current liabilities: Current portion of notes payable $ — $ 27 Accounts payable 1,317 2,570 Accrued compensation and benefits 4,277 6,519 Operating lease liabilities, current 1,600 1,490 Other accrued liabilities 8,287 3,862 Deferred revenue 3,029 6,853 Total current liabilities before client fund obligations 18,510 21,321 Client fund obligations 193,951 220,019 Total current liabilities 212,461 241,340 Long-term liabilities: Deferred revenue 2,276 16 Deferred tax liability 2,116 1,728 Notes payable, net of current portion 7,506 4,282 Operating lease liabilities, noncurrent 3,832 4,638 Other liabilities 765 209 Total long-term liabilities 16,495 10,873 Total liabilities 228,956 252,213 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 authorized; 26,540 and 25,382 shares issued, 26,540 and 24,998 shares outstanding at September 30, 2024 and December 31, 2023, respectively 265 254 Treasury stock at cost, zero (1) and 384 shares at September 30, 2024 and December 31, 2023, respectively — ( 5,017 ) Additional paid-in capital 502,920 487,973 Accumulated deficit ( 304,022 ) ( 290,440 ) Accumulated other comprehensive loss ( 10 ) ( 1,115 ) Total stockholders’ equity 199,153 191,655 Total liabilities and stockholders’ equity $ 428,109 $ 443,868 (1) The aggregate Treasury stock of prior repurchases of the Company's own common stock was retired and subsequently issued effective January 1, 2024. See the Condensed Consolidated Statement of Changes in Stockholders' Equity for the impact of this transaction. 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, 2024 2023 2024 2023 Revenue: Recurring $ 28,626 $ 23,833 $ 85,950 $ 74,749 Professional services, hardware and other 678 5,501 3,050 18,069 Total revenue 29,304 29,334 89,000 92,818 Cost of Sales 9,600 8,054 27,821 25,120 Gross profit 19,704 21,280 61,179 67,698 Operating expenses: Sales and marketing 6,680 6,597 21,371 22,312 General and administrative 10,378 9,294 30,559 29,586 Research and development 1,973 1,803 5,704 5,107 Amortization of intangible assets 4,295 3,333 11,790 9,929 Total operating expenses 23,326 21,027 69,424 66,934 (Loss) income from operations ( 3,622 ) 253 ( 8,245 ) 764 Interest income 165 437 762 1,015 Interest expense ( 274 ) ( 1,219 ) ( 662 ) ( 5,336 ) Loss on extinguishment of debt — ( 1,517 ) — ( 1,517 ) Other (expense) income, net — ( 283 ) 10 ( 291 ) Loss from operations before income taxes ( 3,731 ) ( 2,329 ) ( 8,135 ) ( 5,365 ) Income tax expense (benefit) 170 ( 123 ) 434 267 Net loss ( 3,901 ) ( 2,206 ) ( 8,569 ) ( 5,632 ) Other comprehensive income (loss): Unrealized income (loss) on marketable securities 1,340 ( 201 ) 1,105 ( 213 ) Comprehensive loss $ ( 2,561 ) $ ( 2,407 ) $ ( 7,464 ) $ ( 5,845 ) Basic and diluted loss per share Basic $ ( 0.15 ) $ ( 0.10 ) $ ( 0.33 ) $ ( 0.27 ) Diluted $ ( 0.15 ) $ ( 0.10 ) $ ( 0.33 ) $ ( 0.27 ) Weighted average basic and diluted shares Basic 26,429 22,591 25,870 21,204 Diluted 26,429 22,591 25,870 21,204 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, 2023 24,998 $ 254 $ ( 5,017 ) $ 487,973 $ ( 290,440 ) $ ( 1,115 ) $ 191,655 Stock issued upon option exercise and vesting of restricted and performance stock units 301 3 — 173 — — 176 Stock issued for acquisitions 450 5 — 4,489 — — 4,494 Share based compensation — — — 1,902 — — 1,902 Retirement and reissuance of treasury shares — ( 4 ) 5,017 — ( 5,013 ) — — Net loss — — — — ( 308 ) — ( 308 ) Other comprehensive loss — — — — — ( 244 ) ( 244 ) Balance at March 31, 2024 25,749 $ 258 $ — $ 494,537 $ ( 295,761 ) $ ( 1,359 ) $ 197,675 Stock issued upon option exercise and vesting of restricted and performance stock units 58 — — 63 — — 63 Stock issued, ESPP 61 1 — 332 — — 333 Stock issued for acquisitions 50 — — 323 — — 323 Share based compensation — — — 1,488 — — 1,488 Net loss — — — — ( 4,360 ) — ( 4,360 ) Other comprehensive income — — — — — 9 9 Balance at June 30, 2024 25,918 $ 259 $ — $ 496,743 $ ( 300,121 ) $ ( 1,350 ) $ 195,531 Stock issued upon option exercise and vesting of restricted and performance stock units 97 1 — 329 — — 330 Stock issued for acquisitions 525 5 — 4,257 — — 4,262 Share based compensation — — — 1,591 — — 1,591 Net loss — — — — ( 3,901 ) — ( 3,901 ) Other comprehensive income — — — — — 1,340 1,340 Balance at September 30, 2024 26,540 $ 265 $ — $ 502,920 $ ( 304,022 ) $ ( 10 ) $ 199,153 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, 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. 4 Table of Contents ASURE SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (Unaudited) Nine Months Ended September 30, 2024 2023 Cash flows from operating activities: Net loss $ ( 8,569 ) $ ( 5,632 ) Adjustments to reconcile loss to net cash (used) in provided by operations: Depreciation and amortization 16,200 14,243 Amortization of operating lease assets 1,025 1,129 Amortization of debt financing costs and discount 531 548 Non-cash interest expense — 1,471 Net accretion of discounts on available-for-sale securities ( 273 ) ( 63 ) Provision for expected losses 111 2,004 Provision for deferred income taxes 388 111 Loss on extinguishment of debt — 1,208 Net realized gains on sales of available-for-sale securities ( 1,929 ) ( 1,645 ) Share-based compensation 4,981 4,170 Loss on disposals of long-term assets — 132 Change in fair value of contingent purchase consideration — 175 Changes in operating assets and liabilities: Accounts receivable ( 3,142 ) ( 5,014 ) Inventory ( 78 ) 159 Prepaid expenses and other assets ( 1,656 ) 4,031 Operating lease right-of-use assets — 473 Accounts payable ( 1,253 ) ( 498 ) Accrued expenses and other long-term obligations ( 1,052 ) 918 Operating lease liabilities ( 1,139 ) ( 895 ) Deferred revenue ( 4,539 ) ( 5,190 ) Net cash (used in) provided by operating activities ( 394 ) 11,835 Cash flows from investing activities: Acquisition of intangible asset ( 12,397 ) ( 697 ) Purchases of property and equipment ( 546 ) ( 1,365 ) Software capitalization costs ( 7,677 ) ( 5,029 ) Purchases of available-for-sale securities ( 10,914 ) ( 21,513 ) Proceeds from sales and maturities of available-for-sale securities 13,325 10,428 Net cash used in investing activities ( 18,209 ) ( 18,176 ) Cash flows from financing activities: Payments of notes payable ( 420 ) ( 35,627 ) Debt extinguishment costs — ( 468 ) Payments made on amounts due for the acquisition of intangible assets ( 658 ) — Net proceeds from issuance of common stock 902 45,986 Capital raise fees ( 47 ) ( 258 ) Net change in client fund obligations ( 26,068 ) ( 31,033 ) Net cash used in financing activities ( 26,291 ) ( 21,400 ) Net decrease in cash and cash equivalents ( 44,894 ) ( 27,741 ) Cash and cash equivalents, beginning of period 177,622 164,042 Cash and cash equivalents, end of period $ 132,728 $ 136,301 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, 2024 2023 Reconciliation of cash and cash equivalents to the Condensed Consolidated Balance Sheets Cash and cash equivalents $ 11,248 $ 32,787 Cash and cash equivalents included in funds held for clients 121,480 103,514 Total cash and cash equivalents $ 132,728 $ 136,301 Supplemental information: Cash paid for interest $ — $ 3,140 Cash paid for income taxes $ 15 $ 532 Non-cash investing and financing activities: Acquisition of intangible assets $ 6,918 $ 332 Notes payable issued for acquisitions $ 3,138 $ — Shares issued for acquisitions $ 9,125 $ 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, medium-sized and enterprise-level businesses. 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 these businesses can spend their financial capital on growing their business 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, Recruiting, 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 leverages technology and on-demand content 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 small, medium-sized (“SMBs”) and enterprise-level businesses. We target SMBs through less densely populated U.S. metropolitan cities where fewer of our competitors have a presence and have begun expansion of certain product lines to enterprise-level businesses. 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 six product lines: Asure Payroll & Tax, Asure Tax Management Solutions, Asure Time & Attendance, Asure Recruiting, Asure HR Compliance, and AsureMarketplace™. We develop, market, sell and support our offerings nationwide through our principal office in Austin, Texas and from our other office locations in Alabama, California, Florida, New Jersey, New York, Ohio, South Dakota, 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, 2024, comprehensive loss and changes in stockholders’ equity for the three and nine months ended September 30, 2024 and September 30, 2023, and cash flows for the nine months ended September 30, 2024 and September 30, 2023. 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, 2023 (our “2023 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 AND CASH EQUIVALENTS We consider all highly liquid investments with maturities of 90 days or less 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. RECENT ACCOUNTING PRONOUNCEMENTS In December 2023, the FASB issued ASU No. 2023-09, Improvements to Income Tax Disclosures (Topic 740), which requires companies to disaggregate information about their effective tax rate reconciliation as well as information on income taxes paid. The standard applies to all entities subject to income taxes. The standard becomes effective for public entities for annual periods beginning after December 15, 2024. We are currently evaluating this standard and the potential effects of these changes to our consolidated financial statements and will adopt this new standard in the fiscal year beginning January 1, 2025. In November 2023 , the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses for interim and annual periods. In addition, the standard requires public entities that have a single reportable segment to provide all the disclosures required by the standard and all existing segment disclosures in Topic 280. The standard is effective for fiscal years beginning after December 15, 2023, and for interim periods within fiscal years beginning after December 15, 2024. We are currently evaluating this standard and the potential effects of these changes to our consolidated financial statements and will adopt this new standard in the fiscal year ending December 31, 2024. ACCUMULATED OTHER COMPREHENSIVE INCOME & LOSS As of September 30, 2024 and December 31, 2023, accumulated other comprehensive income & loss consisted of net unrealized gains and losses on available-for-sale securities. 8 Table of Contents NOTE 3 - BUSINESS COMBINATIONS AND ASSET ACQUISITIONS 2024 Business Combinations Effective July 11, 2024, we purchased substantially all the assets of an applicant tracking technology company based out of South Dakota for an innovative hiring solution designed to streamline the recruitment process for small and mid-sized businesses. This strategic acquisition reinforces Asure’s commitment to delivering comprehensive, user-friendly tools that simplify people management. The aggregate purchase price paid for the business was $ 15,162 , consisting of $ 7,900 paid in cash on hand, $ 3,000 in the form of a promissory note ($ 1,716 net of discount), and 525 shares of Asure common stock, which had a fair value of $ 4,262 on the day of acquisition. As of September 30, 2024, the promissory note had an outstanding principal balance of $ 3,000 and matures on July 1, 2029. The purchase consideration was allocated among the acquired assets, which consist of a customer relationships intangible asset with fair value of $ 2,700 , and a developed technology intangible asset with a fair value of $ 3,200 . Additionally, we assumed $ 237 of deferred revenue and $ 498 of other accrued liabilities as part of the transaction. The intangible assets are being amortized on a straight-line basis over eight and five years , respectively. The remaining $ 8,713 of excess purchase consideration was allocated to goodwill, which is expected to be fully deductible for tax purposes. This represents the knowledge and experience of the employees retained as part of the transaction as well as the synergies and economies of scale expected from expanding the Midwest operating region to a national scale. The operations included in the Company’s financial statements for the three and nine month periods ended September 30, 2024, and pro forma revenue and earnings amounts on a combined basis as if this acquisition had been completed on January 1, 2023, are immaterial to the consolidated financial statements of the Company and have been excluded. Asset Acquisitions Effective April 30, 2024, we acquired certain assets of an Ohio based reseller partner, which were used to provide payroll processing services. The aggregate purchase price paid for the acquisition of these assets was $ 3,000 , consisting of $ 2,300 paid in cash on hand, and $ 700 in the form of a promissory note, plus 50 shares of Asure common stock. The acquired customer relationships are recorded as an intangible asset and are being amortized on a straight-line basis over eight years . As of September 30, 2024, the promissory note had an outstanding principal balance of $ 700 and matures on October 30, 2025. Effective 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. The acquired customer relationships are recorded as an intangible asset and are being amortized on a straight-line basis over eight years . As of September 30, 2024, the promissory note had an outstanding principal balance of $ 963 and matures on February 22, 2026. 2023 Asset Acquisitions Effective 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 , consisting of $ 6,891 in cash, of which $ 6,545 was paid at closing, and the delivery of a promissory note in the amount of $ 1,500 . The acquired customer relationships are recorded as an intangible asset and are being amortized on a straight-line basis over eight years . As of September 30, 2024, the promissory note had an outstanding principal balance of $ 1,500 and matures on October 1, 2025. 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 for the periods presented below (in thousands): Total Carrying Value Level 1 Level 2 Level 3 September 30, 2024 Assets: Funds held for clients Money market funds $ 4,255 $ 4,255 $ — $ — Available-for-sale securities 72,109 — 72,109 — Total $ 76,364 $ 4,255 $ 72,109 $ — December 31, 2023 Assets: Funds held for clients Money market funds $ 3,431 $ 3,431 $ — $ — Available-for-sale securities 71,770 — 71,770 — Total $ 75,201 $ 3,431 $ 71,770 $ — 10 Table of Contents Cash equivalents and investments classified as available-for-sale within funds held for clients consisted of the following for the periods presented below (in thousands): Amortized Cost Gross Unrealized Gains (1) Gross Unrealized Losses (1) Aggregate Estimated Fair Value September 30, 2024 Cash equivalents $ 4,262 $ 1 $ ( 8 ) $ 4,255 Available-for-sale securities: Certificates of deposit 738 1 — 739 Corporate debt securities 65,241 528 ( 430 ) 65,339 Municipal bonds 3,716 — ( 119 ) 3,597 U.S. Government agency securities 2,422 30 ( 18 ) 2,434 Total available-for-sale securities 72,117 559 ( 567 ) 72,109 Total (2) $ 76,379 $ 560 $ ( 575 ) $ 76,364 December 31, 2023 Cash equivalents $ 3,447 $ — $ ( 16 ) $ 3,431 Available-for-sale securities: Certificates of deposit 845 2 ( 1 ) 846 Corporate debt securities 67,277 258 ( 1,090 ) 66,445 Municipal bonds 4,251 — ( 239 ) 4,012 U.S. Government agency securities 500 — ( 33 ) 467 Total available-for-sale securities 72,873 260 ( 1,363 ) 71,770 Total (2) $ 76,320 $ 260 $ ( 1,379 ) $ 75,201 (1) Unrealized gains and losses on available-for-sale securities are included as a component of comprehensive loss. As of September 30, 2024 and December 31, 2023, there were 82 and 54 securities, respectively, in an unrealized gain position and there were 80 and 113 securities in an unrealized loss position, respectively. As of September 30, 2024, these unrealized losses were less than $ 35 individually and $ 576 in the aggregate. As of December 31, 2023, these unrealized losses were less than $ 61 individually and $ 1,363 in the aggregate. We invest in high quality securities with roughly 70 % of our portfolio made up of A ratings and above with unrealized losses primarily attributable to macroeconomic factors rather than credit related. 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 possible 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, 2024 and December 31, 2023, 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 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 for the periods presented below (in thousands): September 30, 2024 December 31, 2023 Cash and cash equivalents held to satisfy client funds obligations $ 121,480 $ 147,305 Short-term marketable securities held to satisfy client funds obligations 10,654 10,042 Long-term marketable securities held to satisfy client funds obligations 61,455 61,728 Total funds held for clients $ 193,589 $ 219,075 11 Table of Contents Expected maturities of available-for-sale securities are as follows for the period presented below (in thousands): September 30, 2024 One year or less $ 10,654 After one year through five years 61,455 Total $ 72,109 NOTE 5 - GOODWILL AND OTHER INTANGIBLE ASSETS December 31, 2023 Acquisitions September 30, 2024 Goodwill $ 86,011 $ 8,713 $ 94,724 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, 2024, there has been no impairment of goodwill based on the qualitative assessments performed by the Company. Gross Intangible Assets December 31, 2023 Acquisitions September 30, 2024 Customer relationships $ 127,843 $ 20,087 $ 147,930 Developed technology 12,001 3,200 15,201 Trade names 880 — 880 Non-compete agreements 1,032 — 1,032 Total $ 141,756 $ 23,287 $ 165,043 The gross carrying amount and accumulated amortization of our intangible assets are as follows for the periods presented below (in thousands, except weighted average periods): Weighted Average Amortization Period (in Years) Gross Accumulated Amortization Net September 30, 2024 Customer relationships 8.6 $ 147,930 $ ( 78,805 ) $ 69,125 Developed technology 6.5 15,201 ( 10,991 ) 4,210 Trade names 4.3 880 ( 880 ) — Non-compete agreements 5.2 1,032 ( 938 ) 94 8.3 $ 165,043 $ ( 91,614 ) $ 73,429 December 31, 2023 Customer relationships 8.5 $ 127,843 $ ( 67,165 ) $ 60,678 Developed technology 6.9 12,001 ( 10,701 ) 1,300 Trade names 4.3 880 ( 880 ) — Non-compete agreements 5.2 1,032 ( 928 ) 104 8.3 $ 141,756 $ ( 79,674 ) $ 62,082 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 $ 11,790 and $ 9,929 for the nine months ended September 30, 2024 and 2023, respectively. Amortization expenses recorded in cost of sales were $ 150 and $ 368 for the nine months ended September 30, 2024 and 2023, respectively. There was no impairment of intangibles during the nine months ended September 30, 2024 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 for the period presented below (in thousands): September 30, 2024 2024 $ 4,439 2025 16,896 2026 13,781 2027 11,586 2028 10,141 2029 7,978 Thereafter 8,608 $ 73,429 NOTE 6 - NOTES PAYABLE The following table summarizes our outstanding debt as of the dates indicated (in thousands): Maturity Cash Interest Rate September 30, 2024 December 31, 2023 Notes Payable – Acquisitions (1) 10/01/25 - 07/01/29 2.00 % - 5.00 % $ 9,943 $ 5,700 Gross Notes Payable $ 9,943 $ 5,700 (1) See Note 3 — Business Combinations and Asset Acquisitions and 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 Unamortized Debt Discount Net Notes Payable September 30, 2024 Current portion of notes payable $ 378 $ ( 378 ) $ — Notes payable, net of current portion 9,565 ( 2,059 ) 7,506 Total $ 9,943 $ ( 2,437 ) $ 7,506 December 31, 2023 Current portion of notes payable $ 420 $ ( 393 ) $ 27 Notes payable, net of current portion 5,280 ( 998 ) 4,282 Total $ 5,700 $ ( 1,391 ) $ 4,309 13 Table of Contents The following table summarizes the future principal payments related to our outstanding debt for the period presented below (in thousands): September 30, 2024 2024 $ — 2025 2,578 2026 4,365 2027 — 2028 — 2029 3,000 Total $ 9,943 Notes Payable - Acquisitions In July 2024, we purchased substantially all of the assets of an applicant tracking technology company based out of South Dakota. In connection with the business combination, we delivered a promissory note to the seller. As of September 30, 2024, the promissory note had an outstanding principal balance of $ 3,000 and matures on July 1, 2029. In April 2024, we acquired certain assets of an Ohio based reseller partner, which were used to provide payroll processing services. In connection with the acquisition, we delivered a promissory note to the seller. As of September 30, 2024, the promissory note had an outstanding principal balance of $ 700 and matures on October 30, 2025. In February 2024, we acquired certain assets of a payroll processing and benefits brokerage servicer based in New Jersey. In connection with the acquisition, we delivered a promissory note to the seller. As of September 30, 2024, the promissory note had an outstanding principal balance of $ 963 and matures on February 22, 2026. In October 2023, we acquired certain assets of an Alabama based reseller partner, which were used to provide payroll processing services. In connection with the acquisition, we delivered a promissory note to the seller. As of September 30, 2024, the promissory note had an outstanding principal balance of $ 1,500 and matures on October 1, 2025. In April 2023, we 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, 2024, the promissory note had an outstanding principal balance of $ 3,780 . See Note 3 — Business Combinations and Asset Acquisitions for further discussion regarding the issuance of notes payable related to acquisitions. Senior Credit Facility with Structural Capital Investments III, LP On September 12, 2023, we terminated the Loan and Security Agreement (the “Loan Agreement”), among the Company, Structural Capital Investments III, LP (“Structural” and together with the other lenders that were parties thereto, the “Lenders”), and Ocean II PLO LLC, as administrative and collateral agent for the Lender and repaid the outstanding balance on the secured promissory note issued under the Loan Agreement (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, 2024, there are no further amounts due or owing under the Facility. On August 7, 2023, we entered into an amendment to the Loan Agreement, 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 Loan Agreement. We also paid the Lenders a breakup fee equal to $ 250 . 14 Table of Contents NOTE 7 – CONTRACTS WITH CUSTOMERS AND REVENUE CONCENTRATION Receivables Receivables from contracts with customers, net of allowance for credit losses of $ 6,150 , w ere $ 17,233 at September 30, 2024. Receivables from contracts with customers, net of allowance for credit losses of $ 4,787 , were $ 14,202 at December 31, 2023. We had a provision for expected losses of $ 111 , write-offs charged against the allowance for credit losses of $ 16 , and recoveries on previously written off receivables of $ 1,267 during the nine months ended September 30, 2024. No customer represented more than 10% of our net accounts receivable balance as of September 30, 2024 or December 31, 2023. Deferred Commissions Deferred commission costs from contracts with customers w ere $ 11,958 and $ 10,302 at September 30, 2024 and December 31, 2023 , respectively. The amount of amortization recognized for the three and nine months ended September 30, 2024 was $ 689 and $ 1,548 , respectively, and for the three and nine months ended September 30, 2023 was $ 1,029 and $ 2,176 , respectively. Deferred Revenue During the three and nine months ended September 30, 2024, revenue of $ 286 and $ 6,409 , respectively, and during the three and nine months ended September 30, 2023, revenue of $ 924 and $ 6,650 , 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, 2024, approximately $ 67,318 of revenue is expected to be recognized from remaining performance obligations. We expect to recognize revenue on approximately 34 % of these remaining performance obligations over the next 12 months, with the balance recognized thereafter. These amounts exclude remaining performance obligations related to contracts for professional services for tax and payroll offerings whose remaining contractual term is less than one year as of September 30, 2024. During the nine months ended September 30, 2024, various multi-year license arrangement was finalized primarily driving the increase in our deferred revenue balances as of September 30, 2024 when compared to December 31, 2023. The arrangement is also driving the decrease in our transaction price estimated to be recognized during the next 12 months from 87 % as of December 31, 2023 to 34 % as of September 30, 2024. Revenue Concentration During the nine months ended September 30, 2024 and 2023, 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 are as follows for the periods presented below (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Operating lease cost $ 501 $ 481 $ 1,454 $ 1,896 Sublease income — ( 5 ) ( 4 ) ( 13 ) Net rent expense $ 501 $ 476 $ 1,450 $ 1,883 15 Table of Contents 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 % as of September 30, 2024 and December 31, 2023. The weighted average remaining lease term is four years and five years as of September 30, 2024 and December 31, 2023, respectively. Supplemental cash flow information related to operating leases are as follows for the periods presented below (in thousands): Nine Months Ended September 30, 2024 2023 Cash paid for amounts included in the measurement of lease liabilities: Operating cash outflows from operating leases $ 1,560 $ 1,998 Non-cash operating activities: Operating lease assets obtained or removed in exchange for new, modified or terminated operating lease liabilities $ 419 $ ( 473 ) Future minimum commitments over the life of all operating leases, which exclude variable rent payments, are as follows for the period presented below (in thousands): September 30, 2024 2024 $ 545 2025 1,866 2026 1,302 2027 1,089 2028 1,023 2029 683 Thereafter 235 Total minimum lease payments 6,743 Less: imputed interest ( 1,311 ) Total lease liabilities $ 5,432 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 4,748 shares. We have an aggregate of 2,525 options, restricted stock units (“RSUs”) and performance stock units (“PSUs”) granted and outstanding pursuant to the 2018 Plan as of September 30, 2024. As of September 30, 2024, the number of shares available for future grant under the 2018 Plan is 972 . Share based compensation for our stock option plans for the three and nine months ended September 30, 2024 was $ 1,591 and $ 4,981 , respectively, and for the three and nine months ended September 30, 2023 was $ 1,251 and $ 4,170 , respectively . Issuance of common stock related to the exercise of stock options, the vesting of restricted stock units, and the vesting of restricted stock units converted from performance stock units are as follows for the period presented below (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2024 2023 2024 2023 Common stock issued - options 51 66 86 349 Common stock issued - RSU 46 40 261 164 Common stock issued - PSU — — 109 — 16 Table of Contents Effective January 1, 2024, the Compensation Committee of the Board of Directors (the “Compensation Committee”) approved the grant of PSUs pursuant to a PSU Award Grant Notice and PSU Award Agreement (the “2024 PSU Award Agreement”) under the 2018 Plan to our executive officers payable in the form of RSUs. The number of RSUs into which the PSUs convert for each executive officer is a sliding scale between 0 % to 200 % of the target amount based on the Company’s achievement of certain performance metrics tied to the Company’s recurring revenue and gross profit for 2024. Effective January 1, 2023, the Compensation Committee approved the grant of PSUs pursuant to a PSU Award Grant Notice and PSU Award Agreement (the “2023 PSU Award Agreement”) under the 2018 Plan to our executive officers payable in the form of RSUs. The number of RSUs into which the PSUs converted for each executive officer was a sliding scale between 0 % to 200 % of the target amount based on the Company’s achievement of certain performance metrics tied to the Company’s recurring revenue and gross profit for 2023. On February 26, 2024, the PSUs converted to RSUs at 200 % of target based on the achievement of set performance metrics, and we paid out a total of 325 RSUs to our executive officers. 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. 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, 2024 2023 2024 2023 Basic: Net loss $ ( 3,901 ) $ ( 2,206 ) $ ( 8,569 ) $ ( 5,632 ) Weighted-average shares of common stock outstanding 26,429 22,591 25,870 21,204 Basic loss per share $ ( 0.15 ) $ ( 0.10 ) $ ( 0.33 ) $ ( 0.27 ) Diluted: Net loss $ ( 3,901 ) $ ( 2,206 ) $ ( 8,569 ) $ ( 5,632 ) Weighted-average shares of common stock outstanding 26,429 22,591 25,870 21,204 Diluted loss per share $ ( 0.15 ) $ ( 0.10 ) $ ( 0.33 ) $ ( 0.27 ) NOTE 11 - SUBSEQUENT EVENTS On October 31, 2024, the Company entered into a Sales Agreement (the “Sales Agreement”) with Roth Capital Partners, LLC ("Roth”). The Sales Agreement provides for the offer and sale of up to $ 25,000 of the Company’s newly issued Common Stock, par value $ 0.01 per share (the “Common Stock”), from time to time through an “at the market offering” program. The Company will specify the parameters for the sale of the shares of Common Stock, including the number of shares to be issued, the time period during which sales are requested to be made, any limitation on the number of shares that may be sold in any one trading day and any minimum price below which sales may not be made. The Company may offer and sell up to $ 25,000 of shares of Common Stock pursuant to the Sales Agreement. Actual sales of Common Stock under the Sales Agreement will depend on a variety of factors including, among other things, market conditions, the trading price of the Common Stock and potential funding needs. As a result, the full amount of capital may not be fully realized. The Company intends to use the net proceeds from these at-market offerings, if any, for general corporate purposes. The Company's general corporate purposes include, but are not limited to, repayment or refinancing of debt, capital expenditures, funding possible acquisitions, working capital and satisfaction of other obligations. 17 Table of Contents