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 Certain statements in this Report represent forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors that may cause actual results of operations, levels of activity, economic performance, financial condition or achievements to be materially different from future results of operations, levels of activity, economic performance, financial condition or achievements as expressed or implied by such forward-looking statements. Asure has attempted to identify these forward-looking statements with the words “believe,” “estimate,” “continue," "seek," plan,” “expect,” "intend," “anticipate,” “may,” "will," “could” and other similar expressions. Although these forward-looking statements reflect management’s current plans and expectations, which we believe are reasonable as of the filing date of this report, they inherently are subject to certain risks and uncertainties. These risks and uncertainties include — but are not limited to — our ability to achieve or sustain profitability; the impact of COVID-19 on the US and global economy, including business disruptions, reductions in employment and a decrease in business failures, specifically among our clients; adverse changes in the economy, financial markets, and credit markets, including a continuing high unemployment rate and the impact of low interest rates on the interest we receive on our cash, cash equivalents and investments; delays or reductions in information technology spending; the development of the market for cloud-based workplace applications; product development; market acceptance of new products and product improvements; changes in the forgiveness provisions for loans under the Paycheck Protection Program; our ability to retain or increase our customer base; security breaches; errors, disruptions or delays in our services; privacy concerns and laws; changes in our sales cycle; competition, including pricing pressures, entry of new competitors, and new technologies; intellectual property enforcement and litigation; our ability to obtain additional capital; our ability to hire, retain and motivate employees; our ability to manage our growth; our ability to realize benefits from acquisitions; limited or single sources of supply of key components; the level of our indebtedness; changes in sales may not be immediately reflected in our operating results due to our subscription model; changes in U.S and foreign laws and regulations; changes in the Internet infrastructure; disruptions in computing and communication infrastructure; and changes in accounting standards. Please refer to Part II, Item IA, “Risk Factors” of this Form 10-Q and Part I, Item IA, “Risk Factors” of our most recently filed Annual Report on Form 10-K for a further description of these and other factors. Asure is under no obligation to update any of the forward-looking statements after the date of this Form 10-Q to conform such statements to actual results. OVERVIEW The following review of Asure’s financial position as of June 30, 2020 and December 31, 2019, and results of operations for the three and six months ended June 30, 2020 and 2019 should be read in conjunction with our 2019 Annual Report on Form 10-K filed with the Securities and Exchange Commission. Asure’s internet website address is http://www.asuresoftware.com. 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 Securities and Exchange Commission. Asure’s internet website and the information contained in our website or connected to our website is not incorporated into this Quarterly Report on Form 10-Q. Asure is a leading provider of cloud-based Human Capital Management (“HCM”) software and services and, until its divestiture in December 2019, Workspace Management software solutions. Asure helps small and mid-sized companies grow by helping them build better teams with skills that get them to the next level, stay compliant with ever changing federal, state, and local tax jurisdictions and labor laws, and better allocation of cash so they can spend their financial capital on growing their business rather than back-office overhead that suffocates growth. Asure’s Human Capital Management suite, named AsureHCM, includes cloud-based Payroll & Tax, HR, and Time & Attendance software as well as HR Services ranging from HR projects to completely outsourcing payroll and HR staff. We also offer these products and services through our network of reseller partners. Asure’s platform vision is to help clients grow their business and become the most trusted HCM resource to entrepreneurs everywhere. The Asure product strategy is driven by three primary challenges that prevent businesses from growing: HR complexity, allocation of both human and financial capital, and the ability to build great teams. The AsureHCM suite includes four product lines: AsurePayroll&Tax, AsureHR, AsureTime&Attendance, and AsureHRServices. For all of Asure’s product lines, support and professional services are key elements of our value proposition and overall solution. In addition to state-of-the-art hosting platforms and regular software upgrades and releases, Asure gives clients easy access to our skilled support team. Our services and support representatives are knowledgeable about Asure’s solutions and HR best practices as many staff have professional certifications in payroll (CPP) and human resources (PHR and SPHR). 21 Table of Contents Our sales and marketing strategy includes both direct and indirect channels to target small and mid-sized businesses (SMBs) throughout the United States. Our direct sales and marketing efforts include marketing directly to SMBs and their trusted advisors which include CPAs, banks, and benefits brokers who frequently refer their clients to HCM vendors. Our indirect model licenses our HCM software to resellers that provide value-add HCM services to their clients. These resellers include pure-play payroll providers focused on a geographic or industry niche as well as CPAs, banks, and benefits brokers that want to expand relationships with their clients directly without referring those clients outside their business. Recent Developments The COVID-19 outbreak has disrupted businesses on a global scale. The rapid spread has resulted in authorities around the world implementing numerous measures to contain the virus, such as business shutdowns, quarantines, shelter-in-place orders and travel bans and restrictions. The pandemic and these containment measures have had, and are expected to continue to have, a substantial negative impact on businesses, especially SMBs. We expect a COVID-19 related decrease in customer demand across all our markets to negatively and materially impact our revenues for the remainder of 2020, with the most significant impact currently expected in the second and third quarters. We implemented cost-saving initiatives in the first quarter of 2020. In April 2020, we entered into a loan under the Paycheck Protection Program (“PPP”) offered by the U.S. Small Business Administration in a principal amount of $8,856. We did not record any asset impairments or bad debt reserves related to COVID-19 during the first two quarters of 2020, but future events may require such charges. We will continue to evaluate the nature and extent of the COVID-19 outbreak’s impact on our financial condition, results of operations and cash flows. RESULTS OF OPERATIONS ($ in thousands) Three and Six Months Ended June 30, 2020 Compared to Three and Six Ended June 30, 2019 The following table sets forth, for the fiscal periods indicated, the percentage of total revenues represented by certain items in Asure’s Condensed Consolidated Statements of Comprehensive Loss: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 2020 2019 Revenues 100 % 100 % 100 % 100 % Gross margin 57 59 58 65 Sales and marketing 20 18 19 15 General and administrative 37 38 35 39 Research and development 10 6 8 6 Amortization of intangible assets 17 14 14 13 Total operating expenses 83 76 76 73 Interest expense and other, net - (18 ) 2 (15 ) Loss from continuing operations before income taxes (25 ) (34 ) (16 ) (24 ) Loss from continuing operations (28 ) (36 ) (17 ) (26 ) 22 Table of Contents Revenue Our revenue was derived from the following sources: Three Months Ended June 30, Increase (Decrease) 2020 2019 % Recurring $ 13,733 $ 16,624 $ (2,891 ) (17.4 ) Professional services, hardware and other 382 650 (268 ) (41.2 ) Total $ 14,115 $ 17,274 $ (3,159 ) (18.3 ) Six Months Ended June 30, Increase (Decrease) 2020 2019 % Recurring $ 32,168 $ 36,415 $ (4,247 ) (11.7 ) Professional services, hardware and other 893 1,269 (376 ) (29.6 ) Total $ 33,061 $ 37,684 $ (4,623 ) (12.3 ) Total revenue represents our consolidated revenues, including sales of our payroll and tax services, time and attendance and human resource software, as well as complementary hardware devices to enhance our software products. Recurring revenue consists of cloud revenue, hardware as a service, maintenance and support revenue and interest earned on client funds. Professional services, hardware and other revenue consists of hardware revenue, on-premise software license revenue as well as installation services and other professional services revenue. Revenue mix varies by product. Revenue for the three months ended June 30, 2020 was $14,115, a decrease of $3,159, or 18.3%, from $17,274 for the three months ended June 30, 2019, which excludes revenue from discontinued operations. Recurring revenue decreased primarily due to the impact of COVID, the loss of one major client and lower interest rates. Revenue for the six months ended June 30, 2020 was $33,061, a decrease of $4,623, or 12.3%, from $37,684 for the six months ended June 30, 2019, which excludes revenue from discontinued operations. Recurring revenue decreased primarily due to the impact of COVID, the loss of one major client, and lower interest rates. Although our total customer base is widely spread across industries, our HCM sales are concentrated in small to mid-size businesses. We continue to target small and medium-sized businesses across industries as prospective customers. Geographically, we sell our HCM 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 June 30, 2020 was $8,107, a decrease of $2,108 or 20.6%, from $10,215 for the three months ended June 30, 2019. Gross margin as a percentage of revenue was 57.4% for the three months ended June 30, 2020 as compared to 59.1% for the three months ended June 30, 2019. Our decline in gross margin is primarily attributable to lower sales volumes, a growing investment in HCM service resources and personnel, a migration to secure cloud hosting services and an increase in the amortization of capitalized software costs. Consolidated gross profit for the six months ended June 30, 2020 was $19,213, a decrease of $5,158 or 21.2%, from $24,371 for the six months ended June 30, 2019. Gross margin as a percentage of revenue was 58.1% for the six months ended June 30, 2020 as compared to 64.7% for the six months ended June 30, 2019. Our decline in gross margin is attributable to lower sales volumes, a growing investment in HCM service resources and personnel, increased amortization of capitalized software costs as well as migration to secure cloud hosting services. 23 Table of Contents Sales and Marketing Expenses Sales and marketing expenses primarily consist of salaries and related expenses, including stock-based expenses, for sales and marketing staff, including commissions, as well as marketing programs, which include events, corporate communications and product marketing activities. Selling and marketing expenses for the three months ended June 30, 2020 were $2,769, a decrease of $289 from $3,058 for the three months ended June 30, 2019. The decline in sales and marketing is primarily attributable to reduced travel expenses as a result of travel restrictions due to the COVID-19 virus. Sales and marketing expenses as a percentage of revenue increased to 19.6% for the three months ended June 30, 2020 from 17.7% for the same period in 2019 primarily due to lower sales volumes. Selling and marketing expenses for the six months ended June 30, 2020 were $6,344, an increase of $581 from $5,763 for the six months ended June 30, 2019, primarily due to increased personnel costs as we focus on hiring direct sales personnel, We continue to expand and increase selling costs as we focus on hiring direct sales personnel, expanding recognition of our brand, and lead generation. Selling and marketing expenses as a percentage of revenue increased to 19.2% for the six months ended June 30, 2020 from 15.3% for the same period in 2019. We 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 June 30, 2020 were $5,193, a decrease of $1,425 from $6,618 for the three months ended June 30, 2019, primarily attributable to reduced personnel costs and reduced rent expenses associated with closures of certain facilities we had acquired due to acquisition. General and administrative expenses as a percentage of revenue decreased to 36.8% for the three months ended June 30, 2020 from 38.3% for the same period in 2019. General and administrative expenses for the six months ended June 30, 2020 were $11,646, a decrease of $3,161 from $14,807 for the six months ended June 30, 2019. The decline in general and administrative expenses is primarily attributable to a reduction in professional fees that were incurred in the six months ended June 30, 2019, as well as reduced rent expenses associated with closures of certain facilities, we had acquired due to acquisition. General and administrative expenses as a percentage of revenue decreased to 35.2% for the six months ended June 30, 2020 from 39.3% for the same period in 2019. We continue to drive efficiencies within our payroll operations and execute vendor rationalization with the sale of the Workspace Management business in the fourth quarter of 2019. 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 June 30, 2020 were $1,377, an increase of $408, or 42.1%, from $969 for the three months ended June 30, 2019. The increase in R&D expense is primarily attributable to increased personnel costs as well as COVID-19 related initiatives in order to comply with the CARES Act legislation. R&D expenses as a percentage of revenues increased to 9.8% for the three months ended June 30, 2020 from 5.6% for the same period in 2019. R&D expenses for the six months ended June 30, 2020 were $2,551, an increase of $261, or 11.4%, from $2,290 for the six months ended June 30, 2019. The increase in R&D expense is primarily attributable to COVID-19 related initiatives in order to comply with the CARES Act. R&D expenses as a percentage of revenues increased to 7.7% for the six months ended June 30, 2020 from 6.1% for the same period in 2019. 24 Table of Contents We will continue to enhance our products and technologies through expansion of our technological resources by increasing headcount and development partnership, as well as through organic improvements and acquired intellectual property. We will 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. We believe that our expanded investment in product, engineering, SaaS hosting, mobile and hardware technologies lays the groundwork for broader market opportunities and represents a key aspect of our competitive differentiation. Native mobile applications, QR Code integration, expanded web service integration and other technologies are all part of our initiatives. 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 dollars into compliance and certifications, including SOC I Type 2 and SOC II Type 2 certifications, GDPR, CCPA, and other initiatives. In the second quarter of 2020, we launched the new Simple Payroll Entry cloud solution for providing clients self-service payroll entry capabilities, with a modern user experience appropriate for small companies. For Asure HR, we developed a new product tier for Advanced HR called Essential HR. Asure Time & Attendance launched our next major release 12.4. Mid-Market HCM released the Asure Mobile app in the Google and Apple stores. The app provides employees quick access to key payroll and benefit information. Amortization of Intangible Assets Amortization expense for the three months ended June 30, 2020 of $2,349 was consistent with amortization expense of $2,403 for the three months ended June 30, 2019. Amortization expense as a percentage of revenue was 16.6% and 13.9% for the three months ended June 30, 2020 and 2019, respectively. Amortization expense for the six months ended June 30, 2020 of $4,698 was consistent with amortization expense of $4,821 for the six months ended June 30, 2019. Amortization expense as a percentage of revenue was 14.2% and 12.8% for the six months ended June 30, 2020 and 2019, respectively. Interest Expense and Other, net Interest expense and other, net for the three months ended June 30, 2020 was a gain of $14 compared to a loss of $3,069 for the three months ended June 30, 2019. Interest expense and other as a percentage of revenue was at 0.1% and (17.8%) for the three months ended June 30, 2020 and June 30, 2019, respectively. Interest expense and other for the three months ended June 30, 2020 is composed of income from the transition services agreement with FM:Systems in relation to the sale of the Workspace business in 2019, offset by interest expense on notes payable. Interest expense and other for the three months ended June 30, 2019 is composed primarily of interest expense on notes payable. Interest expense and other, net for the six months ended June 30, 2020 was a gain of $710 compared to a loss of $5,783 for the six months ended June 30, 2019. Interest expense and other as a percentage of revenue was at 2.1% and (15.3%) for the six months ended June 30, 2020 and June 30, 2019, respectively. Interest expense and other for the six months ended June 30, 2020 is composed of income from the transition services agreement with FM:Systems in relation to the sale of the Workspace business in 2019, offset by interest expense on notes payable. Interest expense and other for the six months ended June 30, 2019 is composed primarily of interest expense on notes payable. Income Taxes For the three months ended June 30, 2020 and 2019, we recorded an income tax expense attributable to continuing operations of $377 and $396, respectively, a decrease of $19, or 4.8%. For the six months ended June 30, 2020 and 2019, we recorded an income tax expense attributable to continuing operations of $395 and $642, respectively, a decrease of $247, or 38.4%, primarily attributable to a reduction in our deferred tax liabilities. 25 Table of Contents Loss From Continuing Operations We incurred a loss from continuing operations of $3,944, or $0.25 per share, during the three months ended June 30, 2020, compared to a loss from continuing operations of $6,298, or $0.41 per share, during the three months ended June 30, 2019. Loss from continuing operations as a percentage of total revenues was 27.9% and 36.5% for the three months ended June 30, 2020 and 2019, respectively. We incurred a loss from continuing operations of $5,711, or $0.36 per share, during the six months ended June 30, 2020, compared to a loss from continuing operations of $9,735, or $0.63 per share, during the six months ended June 30, 2019. Loss from continuing operations as a percentage of total revenues was 17.3% and 25.8% for the six months ended June 30, 2020 and 2019, respectively. We intend to continue to implement our corporate strategy for growing our software and services business by modestly investing in areas that directly generate revenue and positive cash flows for the Company. However, uncertainties and challenges remain, including the effects of COVID-19, and there can be no assurance that we can successfully grow our revenues or achieve profitability during the remainder of fiscal year 2020. LIQUIDITY AND CAPITAL RESOURCES (Amounts in thousands) June 30, 2020 December 31, 2019 Working capital $ 10,513 $ 17,854 Cash and cash equivalents 29,259 28,826 Six Months Ended June 30, 2020 2019 Net cash provided by (used in) operating activities $ (4,131 ) $ 2,842 Net cash provided by investing activities 29,891 21,396 Net cash used in financing activities (25,327 ) (25,042 ) Working Capital . We had working capital of $10,513 at June 30, 2020, a decrease of $7,341 from working capital of $17,854 at December 31, 2019. Working capital as of June 30, 2020 and December 31, 2019 includes $3,766 and $5,500 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. The decrease in working capital is primarily due to a $9,750 reclassification of outstanding principal on our credit facility from current to short term. Operating Activities . Net cash used in operating activities of $4,131 for the six months ended June 30, 2020 was primarily driven by a net loss of $5,711. Non-cash adjustments to our net loss by approximately $881 due to a reduction in the amortization of our deferred financing costs and adjustments made to our allowance for doubtful accounts. Changes in operating assets and liabilities resulted in an increased use of cash of $8,242. Investing Activities . Net cash provided by investing activities of $29,891 for the six months ended June 30, 2020 is primarily due to the net change in funds held for clients. Net cash provided by investing activities of $21,396 for the six months ended June 30, 2019 is primarily due to the net change in funds held for clients offset by the acquisition of Payroll Maxx in the first quarter of 2019. Financing Activities . Net cash used in financing activities was $25,327 for the six months ended June 30, 2020, which primarily consisted of a net decrease in client fund obligations of $32,370 and payments of notes payable of $2,359 offset by proceeds of notes payable of $8,856. Net cash used in financing activities was $25,042 for the six months ended June 30, 2019. We incurred $8,000 of indebtedness, resulting in a source of cash. This was offset by debt financing fees of $1,102 and the net change in client fund obligations of $32,238. 26 Table of Contents Sources of Liquidity . As of June 30, 2020, Asure’s principal sources of liquidity consisted of approximately $29,259 of cash and cash equivalents, cash generated from operations of our business over the next twelve months, and $9,500 available for borrowing under our Wells Fargo revolver. Our cash and cash equivalents is offset by $33,882 in notes payable. Accordingly, after reviewing the terms of the Third Restated Credit Agreement and in light of the impact of COVID-19 on our business and the related need to support our operations, we entered into a loan with Pinnacle Bank under the Paycheck Protection Program (the “PPP Loan”) offered by the U.S. Small Business Administration amounting to $8,856 pursuant to Title 1 of the Coronavirus Aid, Relief and Economic Security Act (the “Cares Act”). The PPP Loan proceeds are available to be used to pay for payroll costs, including salaries, commissions, and similar compensation, group health care benefits, and paid leaves. . Under the Cares Act, the PPP loan may be forgiven if certain criteria are satisfied. The amount that will be forgiven will be calculated in part with reference to the Company’s full time headcount during the twenty-four week period following the funding of the PPP Loan. Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of the loans granted under the Cares Act. The PPP Loan is subject to forgiveness to the extent proceeds are used for payroll costs, including payments required to continue group health benefits, and certain rent, utility, and mortgage interest expenses (collectively, “Qualifying Expenses”), pursuant to the terms and limitations of the Cares Act. The Company intends to use a significant majority of the PPP Loan amount for Qualifying Expenses. However, we make no assurances that we will obtain forgiveness of the PPP Loan in whole or in part. Due to the effects of Covid-19 on our business, we were not in compliance with our minimum EBITDA financial covenant as of March 31, 2020 and June 30, 2020 and do not expect to be in compliance with the minimum EBITDA financial covenants as set forth in the Third Restated Credit Agreement in future quarters. These covenants were set in December 31, 2019, before the Covid-19 pandemic and its possible effects on our business were known to our senior lender or us. On August 10, 2020, we entered into a waiver and amendment to our Third Restated Credit Agreement and our Amended and Restated Guaranty and Security Agreement (the “Fourth Amendment”). As amended by the Fourth Amendment, the Third Restated Credit Agreement reduced our facility from $30,000 to $15,000, consisting of $10,000 in term loans and a $5,000 revolver. As a result, we were required to make a principal payment of $9,750 on our outstanding term loans. The Fourth Amendment provides for an accordion feature to our term loan that would allow us to borrow up to an additional $15,000 in term loans subject to certain conditions following the Covenant Conversion Date, which is described below. The Fourth Amendment also reset our financial covenants and added a new financial covenant for minimum recurring revenue. The Fourth Amendment does not require that we meet our fixed charge ratio or leverage ratio covenant until the Covenant Conversion Date. For this purpose, the Coverage Conversion Date is the earlier of August 10, 2022 or the date in which we have satisfied the fixed charge coverage ratio and leverage ratio for two consecutive reporting periods. Until such time, we are only obligated to comply with our minimum EBITDA and minimum recurring revenue covenants. In addition to the requirement that we pay $9,750 on our outstanding term loans, we were also required to pay our senior lender an amendment fee of $225. Our senior lender waived the payment of default interest that had accrued since May 11, 2020 and stopped assessing default interest as of August 10, 2020. Our senior lender further waived any prepayment penalty that would have otherwise been due on the $9,750 payment toward our term loan and agreed that we would not owe a prepayment penalty if we were to refinance our facility before December 31, 2021. Finally, as a condition to the amendment, our senior lender required that we agree to obtain lender consent for any acquisitions until the later of August 10, 2021 or the Covenant Conversion Date. Previously certain types of acquisitions were deemed permitted acquisitions, which did not require our lender’s consent. We do not anticipate an issue with obtaining consent from our lender for accretive acquisitions. We had sufficient cash on hand to make the required payment of $9,750 in connection with the Fourth Amendment and expect to have enough cash on hand to meet our future business needs. Further, we expect to comply with our financial covenants in future quarters under the Third Restated Credit Agreement, as amended by the Fourth Amendment. 27 Table of Contents OFF-BALANCE SHEET ARRANGEMENTS As of June 30, 2020, we did not have any off-balance sheet arrangements, as defined in the rules and regulations of the Securities and Exchange Commission. COMMITMENTS AND CONTINGENCIES None. CRITICAL ACCOUNTING POLICIES Information regarding recent accounting pronouncements is provided in Note 2, Significant Accounting Policies , to the Condensed Consolidated Financial Statements. Such information is incorporated by reference herein. 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 2019 Annual Report on Form 10-K.