What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-03-11 compared with 2020-03-16 · 204 added, 148 removed, 157 unchanged (69% of the section changed)

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Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the risks and uncertainties described in this Report and in our other SEC filings.

Asure has attempted to identify these forward-looking statements with the words “believes,” “estimates,” “plans,” “expects,” “anticipates,” “may,” “will,” “could,” “should” and other similar expressions.

We have attempted to identify these forward-looking statements with the words “believes,” “estimates,” “plans,” “expects,” “anticipates,” “may,” “will,” “could,” “should” and other similar expressions.

Although these forward-looking statements reflect management’s current plans and expectations, which we believe reasonable as of the filing date of this Report, they inherently are subject to certain risks and uncertainties.

Additionally, Asure is under no obligation to update any of the forward-looking statements after the date of this Annual Report on Form 10-K to conform such statements to actual results.

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.

Asure’s platform vision is to help clients grow their business and become the most trusted Human Capital Management 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 AsureHR Services.

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).

Asure serves approximately 64,000 small and mid-sized businesses with approximately 16,000 of those being direct clients.

The remaining approximate 48,000 indirect clients contract directly with our HCM reseller partners.

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 to 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.

In December 2019, we completed the sale of the assets of our Workspace Management business.

We entered into an Asset and Equity Purchase Agreement (the “Purchase Agreement”) with FM:

Systems Group, LLC and FMS Bidco UK Limited (collectively, “Buyer”), pursuant to which, among other things, Buyer agreed to acquire all of the issued share capital of Asure Software UK Limited (UK) and OccupEye Limited (UK) (together, the “Purchased Subsidiaries”) and certain assets comprising our workspace solution business (“Purchased Assets”) and assume certain liabilities and obligations relating to the Purchased Assets or the workspace solution business, for an aggregate purchase price of $120 million in cash.

The purchase price is subject to a working capital adjustment.

For further information regarding the Purchase Agreement and the transactions contemplated thereby, see Note 12 to the accompanying Consolidated Financial Statements.

Under the continued guidance and direction of our directors and senior leadership, Asure will continue to implement its corporate strategy for growing its software and services business.

However, uncertainties and challenges remain and there can be no assurances that Asure can successfully integrate acquired business operations, grow its revenues or achieve profitability and positive cash flows during calendar year 2020.

Additionally, we are is under no obligation to update any of the forward-looking statements after the date of this Annual Report on Form 10-K to conform such statements to actual results.

We are a leading provider of cloud-based Human Capital Management (HCM) solutions, delivered as software-as-a-service (SaaS) for small and mid-sized businesses (SMBs).

From recruitment to retirement, our solutions help more than 80,000 SMBs across the United States grow their businesses.

About 10,000 of our clients are direct and the approximately 70,000 remaining are indirect as they have contracts with Reseller Partners that white label our solutions.

We strive to be the most trusted HCM resource to entrepreneurs and are focused on less densely populated U.S.

metropolitan cities where fewer of our competitors have a presence.

Our solution strategy solves 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 invested in, and we intend to continue to invest in, research and development to expand our solutions.

Asure HCM, our user-friendly solution, reduces the administrative burden on employers and increases employee productivity while managing the complete employment lifecycle.

The primary functions of our solutions address:

• Payroll and Tax - Asure Payroll & Tax is an integrated cloud-based solution that provides a foundation for our clients’ digital HR strategy.

We automate all the complex and ever-changing regulations associated with payroll and taxes in all U.S.

jurisdictions - from wages, benefits, overtime, and garnishments to tips, direct deposits, Fair Labor Standard Act ("FLSA"), and federal, state, and local payroll taxes.

• Human Resources - Asure HR’s cloud-based functionality handles HR complexities that SMBs face, including employee self-service so employees can access all their information (e.g., pay history and company documents).

With Asure HR’s dashboard, clients have convenient single-system access to every facet of the employee’s lifecycle.

This solution improves benefits management by syncing to carriers and integrating with employee self-managed enrollment and life-event change adjustments.

• Time and Attendance – Asure Time & Attendance is primarily cloud based and combines with complementary hardware (time clocks and data collection devices) to provide cost savings and potential ROI gains in the form of a more strategic use of labor dollars and the elimination of time theft.

Mobile time tracking helps executives better understand where and when their employees are working, providing insight into labor schedules and labor costs.

With our mobile solution, employees can punch in and out from remote locations, as geo-positioning verifies the physical coordinates.

Biometric time clocks, including facial recognition, reduce time theft and help combat "buddy punching." Automated system notifications, real-time dashboards, and flexible configuration options all work to streamline operations.

Finally, employees, supervisors and executives have real-time access to data and business intelligence to optimize labor costing, improve labor scheduling, and control labor costs.

• HR Services - Our recurring HR Services allows clients to focus on running their businesses because we take responsibility for all of the traditional payroll and HR functions.

We provide three core levels of HR services, ranging from a cloud-based online compliance library, to an on-demand call center for all HR questions, and to a fully outsourced HR function.

We also support discreet functions like payroll administration and the benefit enrollment process.

• Data Integration - Our solutions also enable data integration with related third-party systems, such as 401(k), benefits, and insurance provider systems.

In addition to state-of-the-art platforms that are hosted in Amazon AWS and regular upgrades and releases, we provide clients with easy access to our skilled support team.

Our services and support representatives are knowledgeable not just in the Asure solution, but also about best practices and change management strategies in the payroll and HCM industry.

Many of Asure’s staff have professional certifications in payroll (Certified Payroll Professionals, CPPs) and human resources (Professional in Human Resources, PHR, and Senior Professional in Human Resource, SPHR, certifications).

From installation to training and post-live support, our professional services team delivers a proficient client experience on a national scale.

We sell our solutions through both direct and partner models.

Prospective clients learn about Asure in a variety of ways, including advertising, web site searches, sales calls, public relations, referral channels, direct marketing, and social media.

When prospective clients show an interest in Asure, they are connected with a sales representative, who works to close the sale, via Asure’s web site, phone, or a face-to-face meeting by discussing solutions that meet their needs.

We track our marketing and sales activities to provide immediate insights into activities, leads and pipeline opportunities.

Our account management teams also work with clients to promote and sell additional solutions that are relevant for each client.

We supplement our direct sales efforts with partner programs.

By working with partners, we gain access to opportunities in various geographic and industry niches.

Asure has two distinct levels of partners:

Reseller Partners and Referral Partners.

Reseller Partners.

Reseller Partners pay us recurring license fees to white label our solutions and then they focus on providing value-add services to their clients (our indirect clients).

There are generally two types of Reseller Partners:

regional payroll providers and SMB trusted advisors (CPA, regional banks, and benefit brokers).

Regional payroll providers typically focus on a specific geographic area or industry.

They have proven to be attractive alternatives for SMBs’ payroll and HCM needs versus the one-size-fits-all national payroll companies that do not necessarily understand the local needs of many businesses.

Since trusted advisors are relied on by entrepreneurs and executives at SMBs to advise on payroll and HR decisions, white labeling our solutions allows them to provide additional solutions directly to their clients.

This deepens their client relationships and grows their revenue.

Asure’s Reseller Partners are also the primary source of Asure’s acquisitions.

Since they already white label Asure’s solutions, technology integration risk is lessened.

By acquiring Reseller Partners, we gain a presence in specific geographic (typically less densely populated U.S.

metropolitan cities) and industry niches.

These acquisitions help Asure gain scale by assuming all of the Reseller Partner's revenue instead of just a recurring licensing fees (which is typically a small percentage of their total revenue).

Reseller Partners can continue to license our solutions with the opportunity to expand their available solutions, or they can come under the Asure umbrella.

Referral Partners.

Referral Partners are typically the aforementioned trusted advisors (e.g., regional banks, CPAs, and benefit brokers) that provide us with SMB leads but do not resell our solutions.

Since SMBs rely on their trusted advisors to guide them in selecting payroll and HCM solutions, we have found this to be a fruitful source of leads.

Referral Partners provide qualified leads that convert to clients at a higher rate than non-referral leads.

We have been successful in nurturing some Referral Partners to become Reseller Partners over time as the referral relationships develop and they become more comfortable in the HCM space.

We generate revenues from (i) fixed amounts charged per billing period plus a fee per employee or transaction processed and (ii) fixed amounts charged per billing period.

We do not require clients to enter into long-term contractual commitments with us.

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 serve a diverse client base in terms of industry and geography.

None of our clients constituted more than one-half of one percent of our revenues and no industry represented over 10% of our revenue for the year ended December 31, 2020.

Our revenues are generated through our salesforce that solicits new clients and our client relations representatives who sell new applications to existing clients as well as Reseller Partner recurring license fees.

Our continued growth depends on attracting new clients through further penetration of our existing markets and geographic expansion into new markets by strategically acquiring Reseller Partners, targeting a high degree of client employee usage across our solution, and introducing new applications to our existing client base.

We believe our ability to continue to develop new applications and to improve existing applications will enable us to increase revenues in the future.

Furthermore, we believe the challenges of managing the ever-changing complexity of payroll and human resources will continue to drive companies to turn to outsourced providers for help with their HCM needs.

The HCM industry historically has been driven, in part, by legislation and regulatory action, including COBRA, changes to the minimum wage laws or overtime rules, and legislation from federal, state or municipal taxation authorities.

The implementation of the Affordable Care Act (the “ACA”) is an example of legislation that has created demand in the HCM industry.

We generate ACA-related revenues (i) on an annual basis in connection with processing and filing Forms 1094 and 1095 on behalf of clients and (ii) from clients who have purchased our Enhanced ACA application as part of the fixed, bundled price charged per billing period.

While we were incorporated in 1985 and became publicly traded in 1992, we view ourselves as a young pure-play SaaS HCM provider with the appropriate people, processes, and technology to execute on our strategy.

Our primary source of revenue is derived from Payroll & Tax solutions, which came with the acquisitions of Mangrove Software in 2016 and iSystems in 2017.

Beginning in 2016, we rolled-up approximately 15 of our Reseller Partners that white labeled Mangrove and iSystems’ solutions.

With our sale of our Workspace Management business in December 2019 and the subsequent transition services agreement that ended in June 2020, we became a pure-play SaaS HCM provider.

Impact of the COVID-19 Pandemic

On March 11, 2020, the World Health Organization declared the COVID-19 outbreak to be a global pandemic.

In response, federal, state and local governments imposed various restrictions on social and commercial activity to promote social distancing in an effort to slow the spread of the disease, and many such restrictions remain in place.

Beginning in February 2020, we took various actions in order to minimize the risk of COVID-19 to our employees, our clients, and the communities in which we operate, and in March 2020, we prohibited all business-related travel until further notice and began transitioning our employees to work-from-home arrangements.

As of December 31, 2020, more than 90% of our employees were working remotely.

We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our employees and clients.

In addition, the COVID-19 pandemic has disrupted the operations of our clients and client prospects and may continue to do so for an indefinite period of time.

Across many industries, temporary and permanent business closures as well as business occupancy limitations have resulted in significant layoffs and employee furloughs since late March 2020.

Because we charge our clients on a per-employee basis for certain services we provide, decreases in headcount at our clients as of the onset of the pandemic negatively impacted our recurring revenue during 2020, and we expect that our recurring revenue in future periods will continue to be negatively impacted by such headcount reductions until employment levels among such client base return to pre-pandemic levels.

Further, at the onset of the COVID-19 pandemic, a limited number of new clients temporarily delayed service implementation.

As the COVID-19 pandemic continues to create uncertainty and the potential for ongoing business disruptions, we may experience similar client-driven delays in service implementation in the future.

During 2019, interest earned on funds held for clients contributed to growth in recurring revenue, due to both higher average interest rates and an increased average funds held for clients balance.

Between August 2019 and March 2020, the Federal Open Market Committee reduced the target range for short-term interest rates several times, with the most significant rate cut occurring in March 2020 to support the economy and potentially reduce the impacts of the COVID-19 pandemic.

Further, a provision in the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) allowed employers to delay the payment of the employer’s share of Social Security taxes to a future date.

To the extent our clients made such an election, we collected less money from them to hold and then remit to the appropriate taxing authorities, which adversely affected our average funds held for clients balance and, consequently, interest earned on funds held for clients.

During 2020, despite the growth in the number of clients in our base, employee headcount reductions at our clients as well as clients electing to defer payment of their share of Social Security taxes under the CARES Act resulted in nominal growth in our average funds held for clients balance, relative to 2019.

Due to significantly lower average interest rates in 2020 and, to a lesser extent, the lack of growth of our average funds held for clients balance, interest earned on funds held for clients for the year ended December 31, 2020 decreased from the year ended December 31, 2019, which had a negative effect on recurring revenue growth.

The balance of funds held for clients was approximately $321,069 at December 31, 2020, compared with approximately $126,625 at December 31, 2019.

Much of this increase was due to acquisitions in 2020.

In 2020, we continued to aggressively invest in sales and marketing and in research and development to drive future growth and expand our market share.

Lower headcount at our clients and the other pandemic-related factors described above, which had and may continue to have, a negative impact on recurring revenue, combined with increased sales and marketing and research and development expenses, resulted in a decrease in net income for the year ended December 31, 2020 as compared to the year ended December 31, 2019.

We expect net income to be negatively affected by the impact of the pandemic on our recurring revenue and our deliberate, increased level of investment in sales and marketing and research and development to drive the growth of our business.

Prior to the COVID-19 pandemic, our sales force historically traveled frequently to sell our solution.

The current remote work environment presents a unique opportunity for our sales force, in that each sales employee is able to meet virtually with a greater number of client prospects in a given day than he or she would if conducting in-person meetings.

Although we have not experienced such challenges to date, if clients and client prospects are not as willing or available to engage by video conference and teleconference, the shift from in-person to virtual sales meetings could negatively affect our sales efforts, impede client acquisition and lengthen our sales cycles, which would negatively impact our business and results of operations and could impact our financial condition in the future.

We are unable to estimate the full impact that the COVID-19 pandemic could have on our business and results of operations in the future due to numerous uncertainties, including the severity of the disease, the duration of the outbreak, actions that may be taken by governmental authorities, the impact it may have on the business of our clients and other factors identified in Part I, Item 1A “Risk Factors” in this Form 10-K.

Given this, the effect of the ongoing COVID-19 pandemic may not be fully reflected in our results of operations and overall financial performance until future periods.

Operating Segment

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RESULTS OF OPERATIONS

The following discussions of our results of continuing operations exclude the results related to the Workspace Management business.

The following discussions of our results of continuing operations exclude the results related to the Workspace Management business which was sold in 2019.

This business has been segregated from continuing operations and is reflected as a discontinued operation.

The following table sets forth, for the fiscal periods indicated, the percentage of total revenues represented by certain items in Asure’s Consolidated Statements of Comprehensive Loss:

The following table sets forth, for the fiscal periods indicated, the percentage of total revenues represented by certain items in Asure’s Consolidated Statements of Comprehensive Income (Loss):

Revenues 100.0 % 100.0 %

Gross margin 58.2 59.2

Selling, general and administrative 55.5 56.8

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Comparison of Fiscal 2020 to 2019

Basis of Presentation

Revenues are comprised of recurring revenues, and implementation and other revenues.

We expect our revenues to increase as we introduce new applications, expand our client base and renew and expand relationships with existing clients.

As a percentage of total revenues, we expect our mix of recurring revenues, and implementation and other revenues to remain relatively constant.

Recurring Revenues

Recurring revenues include fees for our payroll, payroll tax, time and labor management, and other Asure HCM solutions as well as fees charged for form filings and delivery of client payroll checks and reports.

These revenues are derived from (i) fixed amounts charged per billing period plus a fee per employee or transaction processed or (ii) fixed amounts charged per billing period.

We do not require clients to enter into long-term contractual commitments with us.

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 revenues are based, in part, on fees for use of our applications and the delivery of checks and reports that are levied on a per-employee basis, our recurring revenues increase as our clients hire more employees.

Recurring revenues are recognized in the period services are rendered.

Recurring revenues include revenues relating to the annual processing of payroll forms, such as Form W-2 and Form 1099, and revenues from processing unscheduled payroll runs (such as bonuses) for our clients.

Because payroll forms are typically processed in the first quarter of the year and many of our clients are subject to ACA form filing requirements in the first quarter, 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.

Therefore, we expect the seasonality of our revenue cycle to decrease to the extent clients utilize more of our non-payroll applications.

Professional Services, Hardware and Other Revenues

Professional Services, Hardware and Other Revenues represents implementation fees, one-time consulting projects, on premise maintenance, and hardware devices to enhance our software products.

This revenue line also includes interest earned on funds held for clients.

We collect funds 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.

Our revenue was derived from the following sources (Amounts in thousands):

Increase (Decrease)

Revenue 2020 2019 Increase (Decrease) %

Recurring revenue 63,315 $ 70,066 $ (6,751) (9.6)

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Excluding revenue from discontinued operations, our total revenue in 2020 was $65,507 as compared to $73,150 in 2019.

Total revenue increased by $9,524 , or 15.0 %, in 2019 as compared to 2018.

Recurring revenue comprised the majority of the increase with an increase of $11,176 , or 19.0 %.

Hardware and professional services revenue trended slightly downward, offset by an increase in on premise software license revenue.

Total revenue decreased by $(7,643), or (10.4)%, in 2020 as compared to 2019.

Recurring revenue comprised the majority of the decrease with a decrease of $(6,751), or (9.6)%.

Recurring revenue decreased primarily due to the impact of COVID and lower interest rates.

Hardware and professional services revenue trended downward, partially offset by an increase in on premise software license revenue.

Although our total customer base is widely spread across industries, our HCM sales are concentrated in small to mid-size businesses.

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Gross Profit and Gross Margin

Consolidated gross profit was $43,314 in 2019 and $ 39,504 in 2018, a decrease of $ 3,810 , or 9.6% .

Consolidated gross profit was $38,093 in 2020 as compared to $43,314 in 2019, a decrease of $5,221, or (12.1)%.

Gross margin as a percentage of revenues was 58.2% for 2020 and 59.2% for 2019.

Gross margin decreased due to our growing investment in HCM service resources and migration to secure cloud hosting services.

Our cost of sales relates primarily to direct product costs, compensation and related consulting expenses, hardware expenses, facilities and related expenses and the amortization of our purchased software development costs.

Our decline in gross margin is attributable to lower sales volumes primarily due to COVID, a growing investment in HCM service resources and personnel, maintaining COVID related tax codes, increased amortization of capitalized software costs as well as migration to secure cloud hosting services.

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.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses were $ 42,093 in 2019 and $ 36,765 in 2018, an increase of $ 5,328 , or 14.5% .

Selling, general and administrative (“SG&A”) expenses were $36,340 in 2020 as compared to $41,535 in 2019, a decrease of $5,195, or (12.5)%.

SG&A expenses as a percentage of revenues were 55.5% and 56.8% for 2020 and 2019, respectively.

SG&A increased due to a full year of 2018 acquisition and integration related expenses and 2019 acquisition related expenses, as well as increased headcount as we continue to expand and increased selling costs as we focus on expanding recognition of our brand.

Additionally, we have invested into a new ERP system and resources to improve the financial reporting process.

SG&A decreased due to selling of our Workspace business in 2019.

Our other professional services, legal fees and rent decreased partially offset from the transition services agreement with FM:Systems in relation to the sale of the Workspace business in 2019,

We may incur significant additional legal expenses and/or professional services-related expenses in the future if we pursue further acquisitions of products or businesses, even if we ultimately do not consummate any acquisition.

Research and Development Expenses

Research and development (“R&D”) expenses were $ 5,351 in 2019 and $ 5,998 in 2018, a decrease of $ 647 , or 10.8% .

Research and development (“R&D”) expenses were $5,959 in 2020 as compared to $5,351 in 2019, an increase of $608, or 11.4%.

R&D expenses as a percentage of revenues were 9.1% and 7.3% for 2020 and 2019, respectively.

Key 2019 product highlights include:

Asure Payroll&Tax SMB:

In 2019 we made a significant stride forward in unifying our solutions with the release of our Payroll & Tax and Time & Labor integration.

The unified solution uses a single point of entry for employee demographic data, and worked hours flow from Time & Labor to Payroll & Tax for paying employees.

We also modernized the web user interface to give it a current look and feel for market relevance and expected user experience.

We broadened our third-party integrations footprint with key national providers of HCM-adjacent services with two initiatives in 2019:

1) Asure’s new integration with Hartford XactPay® was released in 2019 for depth with pay-as-you-go workers’ compensation, and 2) In late 2019 we developed a general ledger integration with QuickBooks Online ®, for Beta and general release in 2020.

In 2019 we also made significant progress in developing our new Simple Payroll Entry module, which enables clients to have direct access to enter their hours for payroll, with an elegant and modern user experience, served up in mobile-ready web pages.

Because Simple Payroll Entry is being developed and launched on our new cloud-based platform, this is a significant step forward in developing our next-generation solution ecosystem.

Simple Payroll Entry is part of a broader Simple Client Operations solution that will increase operational efficiencies for both Asure and our resellers, and will also drive new business growth with a market-leading solution for payroll client self-service.

Development will be complete on Simple Payroll Entry in early second quarter of 2020, followed by a Beta period and general release.

In our continuing commitment to keep our clients compliant, we also released a product update to reflect the revamped 2020 W-4 income tax withholding announced by the IRS in 2019.

AsureTime&Attendance :

We expanded our clock hardware offering by adding two new devices.

The AsureTC Basic brings a low-cost clock to our SMB market and the AsureTC Elite brings new technology to time clocks offering a 10.1-inch touch screen and a full suite of employee self-service and supervisor functions.

We continued to expand our flagship product to be in line with our new hardware offerings and brought remote clock management tools to the hands of our clients.

In 2019 we launched the integration with our SMB Payroll product bringing us closer to a single-source solution.

We continued improvements to our web product with a messaging system to alert clients of important events such as upgrades and outage windows, a redesigned bulk hour time card, and expanded reporting capabilities with our Advanced reports powered by Izenda.

We spent the first quarter of 2019 developing and releasing a new Direct Deposit functionality for employees, which allowed them to make changes to existing direct deposits without needing the approval of an administrator, providing operational efficiencies to service bureaus and better experience to employees.

This feature (like the rest of the features developed later in the year), was focused on based on data that came to us through

customer surveys as to what the customers wanted.

While running a beta program during the second quarter of 2019 for Direct Deposit and making adjustments, we also began the development of e-signature integration with HelloSign, which was released to beta at the end of the second quarter and publicly released in the third quarter of 2019.

This functionality allowed employees to e-sign company documents upon new hire onboarding.

In the third quarter of 2019, we worked mostly on benefits related functionality and released seven new benefit plans, in addition to carrier feeds integration with eBN.

During the last quarter of the year, we worked on the 2020 W-4 (added it to New Hire Onboarding, taxes screens and allowed for mid-year changes in the form through the product), and also kept improving benefits and e-signature, based on feedback that came from the users after the public releases of these features in the third quarter of 2019.

AsureHCM Mid-Market:

We enhanced our landing page for Employee Self Service users.

By doing this, we have put information important to employees on the main screen upon entering the employee website.

We also invested in infrastructure improvements and updates to our conversion tool for our network of bureaus and partners.

We continued to improve and expand our API and End-Point sets that serve as the basis of our first HCM-native mobile application.

The mobile app for Apple and Android will hit the app stores in April 2020.

In addition, we are committed to keeping up with all compliance demands and delivered the new EEOC-component 2 reporting as well as the new 2020 Federal W-4 form.

Infrastructure & Automation:

We continued to consolidate our infrastructure into Amazon Web Services ("AWS"), migrating more platforms into AWS for increased availability, scalability, and performance.

Asure also invested heavily on DevOps and infrastructure automation to increase efficiency in deployment, monitoring and provisioning of products and services to our customers.

Security, Compliance & Certifications:

Asure has also made significant investment outside of core R&D dollars into compliance and certifications, including SOC 1 Type 2 for AsureHCM in Q2, SOC 1 Type 2 for our hubs in Q3, SOC 2 Type 2 for our hosted applications in Q4, FedRAMP certification in Q3, and other initiatives.

Coinciding with our move to AWS, we continued to invest in improved security tools and enhancements to our products to address the evolving cybersecurity and fraud threats in the HCM and payroll industries.

Our development efforts for future releases and enhancements are driven by feedback received from our existing and potential customers and by gauging market trends.

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Amortization of Intangible Assets

Amortization expenses in 2019 were $ 11,765 , an increase of $ 4,284 , or 57.3% , as compared to $7,481 in 2018.

Amortization expenses in 2020 were $9,547, a decrease of $(2,218), or (18.9)%, as compared to $11,765 in 2019.

Amortization expenses as a percentage of revenues were 14.6% and 16.1% for 2020 and 2019, respectively.

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Impairment of Goodwill

There was no goodwill impairment recognized in 2020.

During fiscal 2019, we determined that the estimated fair value of our HCM reporting unit was less than its carrying value.

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A non-cash, before-tax impairment charge of $35,060 was recognized to reduce the carrying amount of the goodwill to its estimated fair value as of December 31, 2019.

There was no goodwill impairment recognized in 2018.

Interest Expense and Other, net

Interest expense and other, net was $(2,221) for the year ended 2020 as compared to $(16,005) in the year ended 2019.

Interest expense and other, net is primarily comprised of loss from our extinguishment of debt and interest expense which increased in 2019 due the to the higher debt balances due from acquisitions.

At December 31, 2019, we had federal net operating loss carryforwards of approximately $33,700 , Federal R&D credit carryforwards of approximately $3,739 and alternative minimum tax credit carryforwards of approximately $31 .

The net operating

loss and Federal R&D credit carryforwards will expire in varying amounts from 2020 through 2038, if not utilized.

Federal net operating losses generated in 2018 and after are carried forward indefinitely.

Income tax benefit attributable to continuing operations increased from $7,982 in 2018 to $24,111 in 2019, a $ 16,129 , or 202.1% , increase.

Interest expense and other, net is primarily comprised of interest expense on notes payable.

Interest expense and other for the year ended 2019 is composed primarily of interest expense on notes payable.

At December 31, 2020, we had federal net operating loss carryforwards of approximately $48,435, and research and development (R&D) credit carryforwards of approximately $3,579.

The net operating loss and R&D credit carryforwards will expire in varying amounts from 2021 through 2040, if not utilized.

Income tax expense attributable to continuing operations increased from $(24,111) in 2019 to $337 in 2020, a $(24,448), or (101.4)%, decrease.

These figures represent an effective tax rate of (2.1)% and 36.3% in 2020 and 2019, respectively.

In 2019, we recorded income tax benefits from continuing operations primarily related to the utilization of current year losses and losses previously offset by valuation allowance to offset the tax provision attributable to discontinued operations.

In addition, we recognized a deferred tax benefit due to the creation of an indefinite life deferred tax asset related to impairment of goodwill.

The creation of this additional indefinite deferred tax asset provided an ability to offset such deferred tax asset against our previously recognized indefinite life deferred tax liability related to tax deductible goodwill.

Because we have not generated domestic net income in any period to date, we have recorded a full valuation allowance against our domestic net deferred tax assets, exclusive of any remaining tax deductible goodwill after application of indefinite life deferred tax assets.

Realization of any of our domestic deferred tax assets depends upon future earnings, the timing and amount of which are uncertain.

In 2020, we recorded income tax expense from continuing operations primarily due to deferred taxes on the amortization of goodwill for tax purposes.

As a result of our various acquisitions in prior years, utilization of the net operating losses and credit carryforwards may be subject to a substantial annual limitation due to the “change in ownership” provisions of Section 382 of the Internal Revenue Code of 1986.

The annual limitation may result in the expiration of net operating losses before utilization.

Due to the uncertainty surrounding the timing of realizing the benefits of our favorable tax attributes in future tax returns, we have placed a valuation allowance against our net deferred tax asset, exclusive of jurisdictions in which we have net deferred tax liabilities.

During 2019, we decreased the valuation allowance attributable to continuing operations by approximately $14,849 due primarily to operations and acquisitions.

have net deferred tax liabilities.

During 2020, we increased the valuation allowance by approximately $1,688 due primarily to operations.

LIQUIDITY AND CAPITAL RESOURCES (Amounts in thousands)

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Cash, cash equivalents and short-term investments 28,577 28,826

Net cash used in operating activities

Net cash provided by (used in) operating activities (1,707) (4,117)

Net cash provided by (used in) investing activities (201,134) 85,632

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Working Capital .

We had working capital of $ 17,854 at December 31, 2019, an increase of $ 6,411 from $ 11,443 at December 31, 2018.

We had working capital of $8,208 at December 31, 2020, a decrease of $9,646 from $17,854 at December 31, 2019.

We attribute the increase in our working capital primarily to an increase in cash and cash equivalents due to the divestiture of our Workspace Management business.

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Net cash used in operating activities was $1,707 in 2020.

The $1,707 of cash provided by operating activities during 2020 was primarily driven by our net loss of $16,311 and increases in deferred revenue of $128, and decreases in accrued expenses and other long-term obligations of $4,596.

This was offset by non-cash adjustments of $20,908, decreases in accounts receivable of $1,118 and increases in inventory of $11, and decreases in accounts payable of $448 and $911 of prepaid expenses and other assets.

Net cash used in operating activities was $(4,117) in 2019.

The $(4,117) of cash used in operating activities during 2019, including discontinued operations, was primarily driven by our net income of $30,001 and increases in deferred revenue of $5,662, and accrued expenses and other long-term obligations of $5,649.

This was offset by non-cash adjustments of $(35,215), increases in accounts receivable of $1,446 and inventory of $1,581, and a decrease in accounts payable of $3,174.

Net cash used in operating activities was $7,129 in 2018.

The $7,129 of cash used in operating activities during 2018 was primarily driven by our net loss of $7,548, increases in inventory and accounts receivable of $2,948 and $1,719, respectively, and a decrease in accrued expenses of $2,410, offset by non-cash adjustments of $8,571.

Investing Activities .

Net cash provided by investing activities during 2019 was $ 96,942 , which was primarily driven by the proceeds from the sale of discontinued operations.

Cash used in investing activities during 2018 was $107,228.

The cash used in investing activities in 2018 is primarily comprised of the 2018 acquisitions.

Net cash used in investing activities during 2020 was $(201,134), primarily due to the net change in funds held for clients and our acquisitions of three payroll processing and payroll tax businesses during the year.

Cash provided by investing activities during 2019 was $85,632.

The cash provided by investing activities in 2019 is primarily driven by the proceeds from the sale of discontinued operations.

Financing Activities .

Net cash provided by financing activities of $202,592 in 2020 was primarily due to the net change in client funds of $184,823, net proceeds from issuance of our common stock of $21,392, and proceeds from note payable of $8,856, partial offset by payments of our note payables of $12,234.

Net cash used in financing activities of $(68,018) in 2019 was primarily due to the payments of our notes payable and debt financing costs.

Net cash provided by financing activities of $101,788 in 2018 was primarily due to an increase of $36,750 in our indebtedness and net proceeds of approximately $39,449 from the issuance of our common stock in an underwritten public offering we completed in June 2018, partially offset by payments on debt of $11,645 and debt financing fees of $1,693.

Sources of Liquidity .

As of December 31, 2020, Asure’s principal sources of liquidity consisted of approximately $28,577 of cash and cash equivalents, future cash generated from operations of our business over the next twelve months, and $4,500 available for borrowing under our Wells Fargo revolver.

Based on current internal projections, we believe that we have and/or will generate sufficient cash for our operational needs, including any required debt payments, for at least the next twelve months from issuance of this Annual Report on Form 10-K.

Based on current internal projections, we believe that we have and/or will generate sufficient cash for our operational needs for at least the next twelve months from issuance of this Annual Report on Form 10-K.

We continue to be focused on growing our existing software operations and seeking accretive and complimentary strategic acquisitions as part of our growth strategy.

We believe the available sources of liquidity described above will be sufficient to fund such growth activities but may raise additional capital or incur additional indebtedness to supplement those sources as we execute on our growth plan.

Shelf Registration

In April 2018, we filed a universal shelf registration statement on Form S-3 with the Securities and Exchange Commission (“SEC”) to provide access to additional capital, if needed.

Pursuant to the shelf registration statement, we may from time to time offer to sell in one or more offerings shares of our common stock or other securities having an aggregate value of up to $175,000 (which includes approximately $60,000 of unsold securities that were previously registered on our currently effective registration statements).

The shelf registration statement relating to these securities became effective on April 16, 2018.

In June 2018, we completed an underwritten public offering in which we sold an aggregate of 2,375,000 shares of our common stock at a public offering price of $17.50 per share.

We realized net proceeds of approximately $38,900 after deducting underwriting discounts and estimated offering expenses.

As of December 31, 2018, there is approximately $133,400 remaining available under the shelf registration statement.

Underwriting Agreement

In December 2020, we completed an underwritten public offering 2,990,000 shares of our common stock at a public offering price of $7.25.

We realized gross proceeds of approximately $21,700 before deducting underwriting discounts and estimated offering expenses.

Credit Agreement

In March 2014, we entered into a credit agreement (the “Credit Agreement”) with Wells Fargo, as administrative agent, and the lenders that are party thereto.

The Credit Agreement contains customary events of default, including, among others, payment defaults, covenant defaults, judgment defaults, bankruptcy and insolvency events, cross defaults to certain indebtedness, incorrect representations or warranties, and change of control.

In some cases, the defaults are subject to customary notice and grace period provisions.

In March 2014 and in connection with the Credit Agreement, we and our wholly-owned active subsidiaries entered into a Guaranty and Security Agreement with Wells Fargo Bank.

Under the Guaranty and Security Agreement, we and each of our wholly-owned active subsidiaries have guaranteed all obligations under the Credit Agreement and granted a security interest in substantially all of our and our subsidiaries’ assets.

In December 2019, we entered into a third amended and restated credit agreement (the “Third Restated Credit Agreement”) with Wells Fargo Bank, as agent and lender, amending and restating the terms of the Second Amended and Restated Credit Agreement dated as of March 2018.

The Third Restated Credit Agreement provides for $20,000,000 in term loans and a $10,000,000 revolver.

The Third Restated Credit Agreement amends the applicable margin rates for determining the interest rate payable on the loans as follows:

Leverage Ratio

Applicable Margin Relative

to Base Rate Loans

Applicable Margin Relative to

LIBOR Rate Loans

2.25% percentage points

3.25% percentage points

≤ 3.00:1.00, and ≥ 2.00:1.00

2.75% percentage points

3.75% percentage points

3.25% percentage points

4.25% percentage points

The outstanding principal amount of the term loan is payable as follows:

$125,000 beginning on March 31, 2020 and the last day of each fiscal quarter thereafter through and including December 31, 2021;

$250,000 beginning on March 31, 2022 and the last day of each fiscal quarter thereafter.

The outstanding principal balance and all accrued and unpaid interest on the term loans is due on December 31, 2024.

The Third Restated Credit Agreement also:

adds a covenant that requires that we achieve EBITDA of at least $3,750,000 at March 31, 2020, $4,850,000 at June 30, 2020 and $5,950,000 at September 30, 2020, which covenant is in lieu of a leverage covenant calculated at March 31, 2020, June 30, 2020 and September 30, 2020;

amends our leverage ratio covenant to decrease the maximum ratio to 3.50:1.00 at December 31, 2020, 3.25:1.00 at March 31, 2021 and June 30, 2021 and 2.50:1.00 at September 30, 2021 and each quarter-end thereafter;

amends our fixed charge coverage ratio to be no less than 1.00:1.00 at March 31, 2020, and each quarter end thereafter through and including December 31, 2021, 1.50:1.00 at March 31, 2022, 1.60:1.00 at June 30, 2022, and 2.00:1:00 at September 30, 2022 and each quarter end thereafter.

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.

This covenant was 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 July 10, 2020, our senior lender issued a reservation of rights letter related to our failure to comply with the minimum EBITDA financial covenant, along with other technical defaults.

Following this default, we negotiated and entered a waiver and amendment to our Credit Agreement and our Amended and Restated Guaranty and Security Agreement (the “Amendment”) on August 10, 2020.

The Amendment 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 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 Amendment also reset our financial covenants and added a new financial covenant for minimum recurring revenue.

The Amendment does not require that we meet our fixed charge ratio or leverage ratio covenant until the Covenant Conversion Date.

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 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, 2020.

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 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 Credit Agreement, as amended by the Amendment.

Also, due to the effects of Covid-19 on our business and the related need to support our operations, we applied for and received a loan from Pinnacle Bank under the Paycheck Protection Program during the second quarter of 2020.

Under the terms of our note with Pinnacle Bank, principal payments would have begun in November 2020.

However, the Small Business Administration, who administers loans issued under the Paycheck Protection Program, has issued guidance, deferring all payments that would be owed on this loan until the Small Business Administration makes a decision on our loan forgiveness application.

While we expect that the entire loan will be forgiven, we cannot be certain that the Small Business Administration will grant forgiveness of our entire loan.

If we do not receive forgiveness of our entire loan, we will be obligated to begin repaying the portion of the principal and interest that is not forgiven such that it is fully paid no later than April 15, 2022, unless we are able to negotiate new payment terms with Pinnacle Bank.

Further, if the portion of the PPP Loan that is not forgiven (the “Unforgiven Debt”) exceeds $3,250 or requires monthly payments of principal and interest in excess of $185, it is likely we will be in default under our Credit Agreement unless we obtain a waiver from our senior lender or are otherwise able to negotiate acceptable terms with our senior lender and Pinnacle Bank.

We applied our initial application for forgiveness of this loan in December 2020 and completed this application in early Febuary 2021.

Given this, we expect that payments we may owe, if any, would not start until second quarter of 2021.

Under GAAP, we are required to report this entire loan as outstanding debt in our financial statements and further identify the current portion of this debt (e.g.

amounts which would be payable in the next 12 months) with reference to the actual terms of our note with Pinnacle Bank.

Notwithstanding how this loan is reported in our financial statements, we do not expect to make any payments on this note until at least second quarter of 2021, and then only to the extent that any portion of this note is not forgiven in accordance with the terms of the Paycheck Protection Program.

As of December 31, 2020 and December 31, 2019, no amount was outstanding and $4,500 and $10,000, respectively, was available for borrowing under the revolver.

As of December 31, 2019 , compliance with certain financial covenants was not yet required under the Third Restated Credit Agreement and all payments remain current.

As of December 31, 2020, we are in compliance with our financial covenants under the Amendment and all payments remain current.

We expect to be in compliance or be able to obtain compliance through debt repayments with available cash on hand or cash we expect to generate from the ordinary course of operations over the next twelve months.

See Note 6 - Notes Payable in the accompanying consolidated financial statements for more information about the Credit Agreement and Guaranty and Security Agreement.

See Note 6 - Notes Payable in the accompanying consolidated financial statements for more information about the Credit Agreement.

We cannot assure that we can grow our cash balances or limit our cash consumption and thus maintain sufficient cash balances for our planned operations or future acquisitions.

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However, we cannot assure that we will be able to raise additional capital on acceptable terms, or at all.

Subject to the foregoing, management believes that we have sufficient capital and liquidity to fund and cultivate the growth of our current and future operations for at least the next twelve months and to maintain compliance with the terms of our debt agreements and related covenants or to obtain compliance through debt repayments made with our available cash on hand or anticipated for receipt in the ordinary course of operations.

CRITICAL ACCOUNTING POLICIES

We have prepared our consolidated financial statements in accordance with U.S.

generally accepted accounting principles and included the accounts of Asure’s wholly owned subsidiaries.

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.

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Revenue Recognition

Our revenue consists of software-as-a-service (“SaaS”) offerings and time-based software subscription license arrangements that also, typically include hardware, maintenance/support, and professional services elements.

Our revenue consists of software-as-a-service (“SaaS”) offerings and time-based software subscription license agreements that also, typically include hardware, maintenance/support, and professional services elements.

We recognize revenue on an output basis when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

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For such arrangements, we allocate revenue to each performance obligation based on its relative standalone selling price.

We determine standalone selling prices based on the amount that we believe the market is willing to pay determined through

historical analysis of sales data as well as through use of the residual approach when we can estimate the standalone selling price for one or more, but not all, of the promised goods or services.

We determine standalone selling prices based on the amount that we believe the market is willing to pay determined through historical analysis of sales data as well as through use of the residual approach when we can estimate the standalone selling price for one or more, but not all, of the promised goods or services.

Effective January 1, 2018, we adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) , and ASU 2015-14, Revenue from Contracts with Customers (Topic 606):

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Under the new standard, these costs are now capitalized as deferred commissions and amortized over the estimated customer life of five to ten years.

SaaS arrangements and time-based software subscriptions typically have an initial term ranging from one to three years and are renewable on an annual basis.

The terms of our contracts with customers range from month to month for some Asure HCM direct clients to longer terms ranging from one to three years, some of which are renewable for successive terms.

A typical SaaS/software subscription arrangement will also include hardware, setup and implementation services.

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Initial maintenance/support terms are typically one to three years and are renewable on an annual basis.

Revenue recognized from maintenance/support are reported as Maintenance and support revenue on the Consolidated Statement of Comprehensive Loss.

Revenue recognized from maintenance/support are reported as Maintenance and support revenue on the Consolidated Statement of Comprehensive Income (Loss).

We do not recognize revenue for agreements with rights of return, refundable fees, cancellation rights or substantive acceptance clauses until these return, refund or cancellation rights have expired or acceptance has occurred.

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Our payment terms vary by the type of customer and the customer’s payment history and the products or services offered.

The term between invoicing and when payment is due is not significant and as such our contracts do not include a significant

financing component.

The term between invoicing and when payment is due is not significant and as such our contracts do not include a significant financing component.

The transaction prices of our contracts do not include consideration amounts that are variable and do not include noncash consideration.

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We test goodwill for impairment on an annual basis in the fourth fiscal quarter of each year, and between annual tests if indicators of potential impairment exist, using a fair-value-based approach.

In 2019, we recognized an impairment loss on goodwill.

There has been no impairment of goodwill in 2020.

In 2019, we recognized an impairment loss on goodwill.

See Notes 4 and 5 in the accompanying consolidated financial statements for additional information regarding goodwill.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis