ASURE SOFTWARE INC 10-Q

ITEM 1. FINANCIAL STATEMENTS ASURE SOFTWARE, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in thousands) March 31, 2021 December 31, 2020 (unaudited) Assets Current assets: Cash and cash equivalents $ 24,290 $ 28,577 Accounts receivable, net of allowance for doubtful accounts of $ 1,909 and $ 2,194 at March 31, 2021 and December 31, 2020, respectively 3,873 3,354 Inventory 349 449 Prepaid expenses and other current assets 3,372 3,284 Total current assets before funds held for clients 31,884 35,664 Funds held for clients 254,492 321,069 Total current assets 286,376 356,733 Property and equipment, net 8,662 8,281 Goodwill 73,958 73,958 Intangible assets, net 61,646 64,552 Operating lease assets, net 6,354 6,450 Other assets, net 4,107 3,953 Total assets $ 441,103 $ 513,927 Liabilities and stockholders ’ equity Current liabilities: Current portion of notes payable $ 11,901 $ 12,310 Accounts payable 750 1,288 Accrued compensation and benefits 3,610 2,916 Operating lease liabilities, current 1,985 1,833 Other accrued liabilities 1,064 1,380 Contingent purchase obligation 3,880 3,880 Deferred revenue 1,605 4,343 Total current liabilities before client fund obligations 24,795 27,950 Client fund obligations 254,241 320,577 Total current liabilities 279,036 348,527 Long-term liabilities: Deferred revenue 86 111 Deferred tax liability 985 888 Notes payable, net of current portion 10,683 12,225 Operating lease liabilities, noncurrent 5,076 5,366 Other liabilities 586 1,157 Total long-term liabilities 17,416 19,747 Total liabilities 296,452 368,274 Commitments Stockholders’ equity: Preferred stock, $ 0.01 par value; 1,500 shares authorized; none issued or outstanding — — Common stock, $ 0.01 par value; 44,000 and 22,000 shares authorized; 19,405 and 19,354 shares issued, 19,021 and 18,970 shares outstanding at March 31, 2021 and December 31, 2020, respectively 194 193 Treasury stock at cost, 384 shares at March 31, 2021 and December 31, 2020 ( 5,017 ) ( 5,017 ) Additional paid-in capital 420,561 419,827 Accumulated deficit ( 271,552 ) ( 269,954 ) Accumulated other comprehensive income 465 604 Total stockholders’ equity 144,651 145,653 Total liabilities and stockholders’ equity $ 441,103 $ 513,927 The accompanying notes are an integral part of these condensed consolidated financial statements. 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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Amounts in thousands, except share and per share data) (Unaudited) Three Months Ended March 31, 2021 2020 Revenue: Recurring $ 19,242 $ 18,436 Professional services, hardware and other 560 511 Total revenue 19,802 18,947 Cost of Sales 7,310 7,840 Gross profit 12,492 11,107 Operating expenses: Sales and marketing 3,611 3,575 General and administrative 6,498 5,522 Research and development 1,124 1,174 Amortization of intangible assets 2,528 2,349 Total operating expenses 13,761 12,620 Loss from operations ( 1,269 ) ( 1,513 ) Interest expense and other, net ( 224 ) ( 235 ) Loss from operations before income taxes ( 1,493 ) ( 1,748 ) Income tax expense 105 19 Net loss ( 1,598 ) ( 1,767 ) Other comprehensive income: Unrealized (loss) gain on marketable securities ( 139 ) 65 Comprehensive loss $ ( 1,737 ) $ ( 1,702 ) Basic and diluted net loss per share Basic $ ( 0.08 ) $ ( 0.11 ) Diluted $ ( 0.08 ) $ ( 0.11 ) Weighted average basic and diluted shares Basic 19,007,000 15,727,000 Diluted 19,007,000 15,727,000 The accompanying notes are an integral part of these condensed consolidated financial statements. 4 Table of Contents ASURE SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (Amounts in thousands) (Unaudited) Common Stock Outstanding Common Stock Amount Treasury Stock Additional Paid-in Capital Accumulated Deficit Other Comprehensive Income (Loss) Total Stockholders' Equity Balance at December 31, 2020 18,970 $ 193 $ ( 5,017 ) $ 419,827 $ ( 269,954 ) $ 604 $ 145,653 Stock issued upon option exercise and vesting of restricted stock units 51 1 — 131 — — 132 Share based compensation — — — 626 — — 626 Share issuance costs — — — ( 23 ) — — ( 23 ) Net loss — — — — ( 1,598 ) — ( 1,598 ) Other comprehensive loss — — — — — ( 139 ) ( 139 ) Balance at March 31, 2021 19,021 $ 194 $ ( 5,017 ) $ 420,561 $ ( 271,552 ) $ 465 $ 144,651 Common Stock Outstanding Common Stock Amount Treasury Stock Additional Paid-in Capital Accumulated Deficit Other Comprehensive Income (Loss) Total Stockholders' Equity Balance at December 31, 2019 15,714 $ 161 $ ( 5,017 ) $ 396,102 $ ( 253,642 ) $ ( 25 ) $ 137,579 Stock issued upon option exercise and vesting of restricted stock units 29 — — 106 — — 106 Share based compensation — — — 438 — — 438 Net loss — — — — ( 1,767 ) — ( 1,767 ) Other comprehensive income — — — — — 65 65 Balance at March 31, 2020 15,743 $ 161 $ ( 5,017 ) $ 396,646 $ ( 255,409 ) $ 40 $ 136,421 The accompanying notes are an integral part of these condensed consolidated financial statements. 5 Table of Contents ASURE SOFTWARE, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) (Unaudited) Three Months Ended March 31, 2021 2020 Cash flows from operating activities: Net loss $ ( 1,598 ) $ ( 1,767 ) Adjustments to reconcile loss to net cash (used in) provided by operations: Depreciation and amortization 3,862 3,516 Amortization of operating lease assets 421 386 Amortization of debt financing costs and discount 30 75 Provision for (recovery of) doubtful accounts 1 75 Provision for deferred income taxes 98 8 Gain on modification of debt — ( 36 ) Share-based compensation 626 438 Changes in operating assets and liabilities: Accounts receivable ( 210 ) 806 Inventory 44 84 Prepaid expenses and other assets ( 552 ) ( 900 ) Accounts payable ( 538 ) ( 982 ) Accrued expenses and other long-term obligations ( 195 ) ( 1,392 ) Operating lease liabilities ( 462 ) ( 405 ) Deferred revenue ( 2,762 ) ( 3,309 ) Net cash used in operating activities ( 1,235 ) ( 3,403 ) Cash flows from investing activities: Acquisition of intangible asset — ( 1,823 ) Purchases of property and equipment ( 48 ) ( 241 ) Software capitalization costs ( 1,233 ) ( 844 ) Net change in funds held for clients 66,439 27,714 Net cash provided by investing activities 65,158 24,806 Cash flows from financing activities: Payments of notes payable ( 1,981 ) ( 1,784 ) Debt financing fees — ( 20 ) Net proceeds from issuance of common stock 108 106 Net change in client fund obligations ( 66,337 ) ( 27,751 ) Net cash used in financing activities ( 68,210 ) ( 29,449 ) Net decrease in cash and cash equivalents ( 4,287 ) ( 8,046 ) Cash and cash equivalents at beginning of period 28,577 28,826 Cash and cash equivalents at end of period $ 24,290 $ 20,780 Supplemental information: Cash paid for: Interest $ 219 $ 99 Income taxes 183 — The accompanying notes are an integral part of these condensed consolidated financial statements. 6 Table of Contents ASURE SOFTWARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Amounts in thousands, except share and per share data unless otherwise noted) NOTE 1 – THE COMPANY AND BASIS OF PRESENTATION Asure Software, Inc., (“Asure”, the “Company”, “we” and “our”), a Delaware corporation, is a leading provider of cloud-based Human Capital Management (“HCM”) software solutions. We help small and mid-sized companies grow by assisting them in building better teams with skills that reach the next level, stay compliant with ever-changing federal, state, and local tax jurisdictions and labor laws, and better allocate cash so they can spend their financial capital on growing their business rather than back-office overhead expenses. Asure’s Human Capital Management suite, named Asure HCM, includes cloud-based Payroll, Tax Services, 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. Our platform vision is to help clients grow their business and become the most trusted HCM resource to entrepreneurs everywhere. Our 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 Asure HCM suite includes four product lines: Asure Payroll & Tax, Asure HR, Asure Time & Attendance, and Asure HRServices. We develop, market, sell and support our offerings nationwide through our principal office in Austin, Texas and from our processing hubs in California, Tennessee, Nebraska, New York, Florida, Vermont, and Washington. We have prepared the accompanying unaudited condensed consolidated financial statements in accordance with the rules and regulations of the Securities and Exchange Commission (the "SEC") and accordingly, they do not include all information and footnotes required under U.S. generally accepted accounting principles ("U.S. GAAP") for complete financial statements. Certain reclassifications were made to conform to the current period presentation in the condensed consolidated statements of comprehensive loss. In the opinion of management, these interim financial statements contain all adjustments, consisting of normal, recurring adjustments, necessary for a fair presentation of our financial position as of March 31, 2021 and the results of operations, statements of changes in stockholders' equity for the three months ended March 31, 2021 and March 31, 2020, and our statements of cash flows for the three months ended March 31, 2021 and March 31, 2020. These condensed consolidated financial statements should be read in conjunction with our audited consolidated financial statements and notes thereto filed with the SEC in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (our "2020 Annual Report on Form 10-K"). The results for the interim periods are not necessarily indicative of results for a full fiscal year. NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES Preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities, the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates are subjective in nature and involve judgments. The more significant estimates made by management include the valuation allowance for the gross deferred tax assets, useful lives of fixed assets, the determination of the fair value of its long-lived assets, and the fair value of assets acquired and liabilities assumed during acquisitions. We base our estimates on historical experience and on various other assumptions management believes reasonable under the given circumstances. These estimates could be materially different under different conditions and assumptions. Additionally, the actual amounts could differ from the estimates made. Management periodically evaluates estimates used in the preparation of the consolidated financial statements for continued reasonableness. We make appropriate adjustments, if any, to the estimates used prospectively based upon such periodic evaluation. 7 Table of Contents ASURE SOFTWARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Amounts in thousands, except share and per share data unless otherwise noted) SIGNIFICANT RISKS AND UNCERTAINTIES The coronavirus ("COVID-19") pandemic has resulted in a global economic slowdown and disruptions that have and could continue to negatively impact our business. The pandemic and numerous measures implemented to contain the virus such as business shutdowns, shelter-in-place orders and travel bans and restrictions have caused businesses, especially small and medium sized businesses some of whom are our customers, to reduce headcount or cease operations as customer demand decreased. Given the economic slowdown and other risks and uncertainties associated with the pandemic, we expect that our business, financial condition, results of operations and growth prospects will be adversely affected in the future. Our business is impacted by employment levels as we have contracts that charge clients on a per-employee basis. In addition, the conditions caused by the COVID-19 pandemic could adversely affect our customers’ ability or willingness to purchase our offerings, delay prospective customers’ purchasing decisions, delay the provisioning of our offerings, lengthen payment terms, reduce the value or duration of customer subscription contracts, or affect attrition rates, all of which could adversely affect our future sales, operating results and overall financial performance. The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus, the extent and effectiveness of containment actions, including the administration of vaccinations and the impact of these and other factors on our employees, customers, partners and vendors. If we are not able to respond to and manage the impact of such events effectively, our business will be harmed. RECENT ACCOUNTING PRONOUNCEMENTS In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13, Fair Value Measurement (Topic 820). The new guidance modifies disclosure requirements related to fair value measurement. We adopted the standard on January 1, 2020. The adoption of this standard did not have an impact on our financial statements and disclosures. In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40). The new guidance reduces complexity for the accounting for costs of implementing a cloud computing service arrangement and aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). We adopted the standard on January 1, 2020 prospectively to all implementation costs incurred after the date of adoption. The effects of this standard on our financial position, results of operations and cash flows were not material. In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. The standard became effective for interim and annual periods beginning after December 15, 2020, with early adoption permitted. We adopted ASU 2019-12 during the quarter beginning January 1, 2021, using the prospective approach except for hybrid tax regimes, which we adopted using the modified retrospective approach. The adoption of ASU 2019-12 resulted in no material impact to the Company's financial statements. CONTINGENCIES Although we have been, and in the future may be, the defendant or plaintiff in various actions arising in the normal course of business, as of March 31, 2021, we were not a party to any pending legal proceedings that are material to our business. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) As of March 31, 2021 and December 31, 2020, accumulated other comprehensive income consisted of net unrealized gains and losses on available-for-sale securities. 8 Table of Contents ASURE SOFTWARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Amounts in thousands, except share and per share data unless otherwise noted) NOTE 3 – INVESTMENTS AND FAIR VALUE MEASUREMENTS As of March 31, 2021 and December 31, 2020, funds held for clients invested in available-for-sale securities consisting of government and commercial bonds, including mortgage-backed securities, amounted to $ 24,233 and $ 25,919 , respectively. As of March 31, 2021, and December 31, 2020, funds held for clients invested in money market funds and other cash equivalents amounted to $ 1,082 and $ 63,999 , respectively. Additionally, as of March 31, 2021 and December 31, 2020, we had $ 3,301 and $ 5,204 , respectively, of operating funds in money market funds, classified as cash equivalents. Investments classified as available-for-sale consisted of the following: March 31, 2021 Amortized Cost Gross Unrealized Gains (1) Gross Unrealized Losses (1) Aggregate Estimated Fair Value Funds Held for Clients (2) Certificates of deposit $ 7,119 $ 165 $ — $ 7,284 Corporate debt securities 8,894 213 ( 4 ) 9,103 Municipal bonds 7,254 99 — 7,353 US Government agency securities 500 — ( 7 ) 493 Asset-backed securities — — — — Total $ 23,767 $ 477 $ ( 11 ) $ 24,233 December 31, 2020 Amortized Cost Gross Unrealized Gains (1) Gross Unrealized Losses (1) Aggregate Estimated Fair Value Funds Held for Clients (2) Certificates of deposit $ 7,370 $ 204 $ — $ 7,574 Corporate debt securities 9,415 297 ( 1 ) 9,711 Municipal bonds 7,531 103 ( 1 ) 7,633 US Government agency securities 500 1 — 501 Asset-backed securities 499 1 — 500 Total $ 25,315 $ 606 $ ( 2 ) $ 25,919 (1) Unrealized gains and losses on available-for-sale securities are included as a component of comprehensive loss. As of March 31, 2021 and December 31, 2020, there were 63 and 69 securities, respectively, in an unrealized gain position and there were 2 and 2 securities, respectively, in an unrealized loss position. As of March 31, 2021, we had $( 11 ) in unrealized losses. As of March 31, 2021, these unrealized losses were less than$( 7 ) individually and $( 11 ) in the aggregate. As of December 31, 2020, these unrealized losses were less than $( 1 ) individually and $( 2 ) in the aggregate. No securities have been in a continuous unrealized loss position for more than 12 months. We do not intend to sell these investments and we do not expect to sell these investments before recovery of their amortized cost basis, which may be at maturity. We review our investments to identify and evaluate investments that indicate possible other-than-temporary impairment. Factors considered in determining whether a loss is other-than-temporary include the length of time and extent to which fair value has been less than the cost basis, the financial condition and near-term prospects of the investee, and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value. (2) At March 31, 2021 and December 31, 2020, none of these securities were classified as cash and cash equivalents on the accompanying condensed consolidated balance sheets. 9 Table of Contents ASURE SOFTWARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Amounts in thousands, except share and per share data unless otherwise noted) Expected maturities of available-for-sale securities as of March 31, 2021 are as follows: Expected Maturities Amount One year or less $ 4,228 After one year through five years 20,005 After five years through 10 years — After 10 years — $ 24,233 In July 2020, we acquired certain assets of a payroll tax business. The initial purchase price for the assets was $ 4,250 , which we paid cash at closing. The seller will be paid additional consideration for the assets based on the trailing twelve-month revenue at each of April 30, 2021 and October 31, 2021. Contingent purchase consideration, if any, will generally be made by May 30, 2021 and December 30, 2021. The payment of the contingent consideration paid will be contingent on certain thresholds set forth in the asset purchase agreement. We utilized a Monte Carlo simulation to determine the fair value of the contingent consideration. There was no adjustment to the fair value of the contingent consideration at March 31, 2021. Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures defines fair value, establishes a framework for measuring fair value in U.S. GAAP and expands disclosures about fair value measurements. ASC 820 establishes a three-tier fair value hierarchy, which is based on the reliability of the inputs used in measuring fair values. These tiers include: Level 1: Quoted prices in active markets for identical assets or liabilities; Level 2: Quoted prices in active markets for similar assets or liabilities; quoted prices in markets that are not active for identical or similar assets or liabilities; and model-driven valuations whose significant inputs are observable; and Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. 10 Table of Contents ASURE SOFTWARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Amounts in thousands, except share and per share data unless otherwise noted) The following table presents the fair value hierarchy for our financial assets and liabilities measured at fair value on a recurring basis as of March 31, 2021 and December 31, 2020, respectively: March 31, 2021 Total Carrying Value Quoted Prices in Active Market (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets: Cash equivalents Money market funds $ 3,301 $ 3,301 $ — $ — Funds held for clients Money market funds 1,082 1,082 — — Available-for-sale securities 24,233 — 24,233 — Total $ 28,616 $ 4,383 $ 24,233 $ — Liabilities: Contingent purchase consideration $ 3,880 $ — $ — $ 3,880 Total $ 3,880 $ — $ — $ 3,880 December 31, 2020 Total Carrying Value Quoted Prices in Active Market (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Assets: Cash equivalents Money market funds $ 5,204 $ 5,204 $ — $ — Funds held for clients Money market funds 63,999 63,999 — — Available-for-sale securities 25,919 — 25,919 — Total $ 95,122 $ 69,203 $ 25,919 $ — Liabilities: Contingent purchase consideration $ 3,880 $ — $ — $ 3,880 Total $ 3,880 $ — $ — $ 3,880 11 Table of Contents ASURE SOFTWARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Amounts in thousands, except share and per share data unless otherwise noted) NOTE 4 – GOODWILL AND OTHER INTANGIBLE ASSETS As of March 31, 2021 and December 31, 2020, goodwill was $ 73,958 . The Company evaluates the recoverability of goodwill annually and whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. As of March 31, 2021, there has been no impairment of goodwill based on the qualitative assessments performed by the Company. The gross carrying amount and accumulated amortization of our intangible assets as of March 31, 2021 and December 31, 2020 are as follows: March 31, 2021 Intangible Assets Weighted Average Amortization Period (in Years) Gross Accumulated Amortization Net Customer relationships 8.9 $ 88,310 $ ( 31,350 ) $ 56,960 Developed technology 6.6 12,001 ( 7,987 ) 4,014 Reseller relationships 7.0 853 ( 853 ) — Trade names 3.0 880 ( 379 ) 501 Noncompete agreements 5.2 1,032 ( 861 ) 171 8.6 $ 103,076 $ ( 41,430 ) $ 61,646 December 31, 2020 Intangible Assets Weighted Average Amortization Period (in Years) Gross Accumulated Amortization Net Customer relationships 8.9 $ 88,310 $ ( 28,898 ) $ 59,412 Developed technology 6.6 12,001 ( 7,608 ) 4,393 Reseller relationships 7.0 853 ( 853 ) — Trade names 3.0 880 ( 312 ) 568 Noncompete agreements 5.2 1,032 ( 853 ) 179 8.5 $ 103,076 $ ( 38,524 ) $ 64,552 We record amortization expenses using the straight-line method over the estimated useful lives of the intangible assets, as noted above. Amortization expenses recorded in Operating Expenses were $ 2,528 and $ 2,349 for the three months ended March 31, 2021 and 2020, respectively. Amortization expenses recorded in Cost of Sales were $ 379 and $ 431 for the three months ended March 31, 2021 and 2020, respectively. There is no impairment of intangibles during the three months ended March 31, 2021 based on the qualitative assessment performed by the Company. 12 Table of Contents ASURE SOFTWARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Amounts in thousands, except share and per share data unless otherwise noted) The following table summarizes the future estimated amortization expense relating to our intangible assets as of March 31, 2021: Calendar Years Amount 2021 (April to December) $ 8,695 2022 11,068 2023 9,942 2024 9,682 2025 8,896 Thereafter 13,363 $ 61,646 NOTE 5 – NOTES PAYABLE The following table summarizes our outstanding debt as of the dates indicated: 1 Maturity Stated Interest Rate March 31, 2021 December 31, 2020 Subordinated Notes Payable – acquisitions 7/1/2021 – 7/1/2022 2.00 % - 3.00 % $ 4,263 $ 6,182 PPP Loan – Pinnacle Bank 1 4/15/2022 1.00 % 8,856 8,856 Term Loan – Wells Fargo Syndicate Partner 12/31/2024 5.25 % 9,813 9,875 Total Notes Payable $ 22,932 $ 24,913 Short-term Notes Payable 12,024 12,388 Long-term Notes Payable $ 10,908 $ 12,525 (1) Information presented in each of the tables this Note 5 includes principal and interest due under the terms of a promissory note with Pinnacle Bank. This loan was issued to us in connection with the Paycheck Protection Program pursuant to Title I of the Coronavirus Aid, Relief and Economic Security Act ("the PPP"). Under the terms of the PPP, the principal balance and interest due under the promissory note will be forgiven if we meet certain conditions related to the use of the loan proceeds. Under the terms of our promissory note with Pinnacle Bank, we would have been required to make payments on this promissory note in November 2020; however, the Small Business Administration ("the SBA") issued guidance, prior to that date, that deferred all payments that would be owed on this loan until after the SBA makes a decision on our loan forgiveness application. While we expect that the entire loan will be forgiven, we cannot be certain that the SBA will grant forgiveness of our entire loan or a significant portion of the loan. If we do not receive forgiveness of our entire loan, we will be obligated to start making payments on the portion of the principal and interest that is not forgiven so that it will be fully repaid no later than April 15, 2022, unless we are able to negotiate new payment terms with Pinnacle Bank. We filed our initial application for forgiveness in December 2020, and completed our application in early February 2021. 13 Table of Contents ASURE SOFTWARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Amounts in thousands, except share and per share data unless otherwise noted) The following table summarizes the debt issuance costs as of the dates indicated: March 31, 2021 Gross Notes Payable Debt Issuance Costs and Debt Discount Net Notes Payable Notes payable, current portion 1 $ 12,024 $ ( 123 ) $ 11,901 Notes payable, net of current portion 2 10,908 ( 226 ) 10,682 Total $ 22,932 $ ( 349 ) $ 22,583 (1) Net Notes Payable includes $ 8,358 of Gross Notes Payables and $ 0 Debt Issuance Cost and Debt Discount related to our PPP loan with Pinnacle Bank, all or a portion of which we expect will be forgiven and for which we are not obligated to make any payments until the Small Business Administration has made a decision regarding our application for loan forgiveness. (2) Net Notes Payable, includes $ 498 of Gross Notes Payables and $ 0 Debt Issuance Cost and Debt Discount related to our PPP loan with Pinnacle Bank, all or a portion of which we expect will be forgiven and for which we are not obligated to make payments until the SBA has made a decision regarding our application for loan forgiveness. December 31, 2020 Gross Notes Payable Debt Issuance Costs and Debt Discount Net Notes Payable Notes payable, current portion 1 $ 12,388 $ ( 78 ) $ 12,310 Notes payable, net of current portion 2 12,525 ( 300 ) 12,225 Total $ 24,913 $ ( 378 ) $ 24,535 (1) Net Notes Payable includes $ 6,866 of Gross Notes Payables and $ 0 Debt Issuance Cost and Debt Discount related to our PPP loan with Pinnacle Bank, all or a portion of which we expect will be forgiven and for which we are not obligated to make any payments until the SBA has made a decision regarding our application for loan forgiveness. (2) Net Notes Payable, includes $ 1,989 of Gross Notes Payables and $ 0 Debt Issuance Cost and Debt Discount related to our PPP loan with Pinnacle Bank, all or a portion of which we expect will be forgiven and for which we are not obligated to make payments until the SBA has made a decision regarding our application for loan forgiveness. The following table summarizes the future principal payments related to our outstanding debt as of March 31, 2021: Year Ending Amount 2021 (remainder) $ 10,407 2022 3,400 2023 500 2024 8,625 2025 — Total $ 22,932 14 Table of Contents ASURE SOFTWARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Amounts in thousands, except share and per share data unless otherwise noted) Senior Credit Facility with Wells Fargo N.A. 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. The Credit Agreement has been amended and restated multiple times, with the most recent amendment and restatement effective December 31, 2019. As described below, the Credit Agreement was amended during 2020, with the most recent amendment effective August 10, 2020. Following the amendment, the Credit Agreement provided for $ 10,000 in term loans and a $ 5,000 revolver and provided for new applicable margin rates for determining the interest payable on loans and amended certain of our financial covenants as described in our Form 10-K filed with the SEC on March 9, 2021. We expect to be in compliance with these amended financial covenants over the next twelve months. As of March 31, 2021 and December 31, 2020, no amount was outstanding and $ 4,500 , respectively, was available for borrowing under the revolver. PPP Loan 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 PPP 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 SBA, which administers loans issued under the PPP, has issued guidance, deferring all payments that would be owed on this loan until the SBA makes a decision on our loan forgiveness application. While we expect that the entire loan will be forgiven, we cannot be certain that the SBA will forgive 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 filed our initial application for forgiveness of this loan in December 2020, and completed our application in early February 2021. Given this timing, we expect that payments we may owe, if any, would not start until second or third quarter of 2021. Under U.S. 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 PPP. NOTE 6 – CONTRACTS WITH CUSTOMERS AND REVENUE CONCENTRATION Receivables Receivables from contracts with customers, net of allowance for doubtful accounts of $ 1,909 were $ 3,873 at March 31, 2021. Receivables from contracts with customers, net of allowance for doubtful accounts of $ 2,194 were $ 3,354 at December 31, 2020. As of March 31, 2021, one customer represented 5 % of our net accounts receivable balance. No customers represented more than 10% of our net accounts receivable balance as of December 31, 2020. 15 Table of Contents ASURE SOFTWARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Amounts in thousands, except share and per share data unless otherwise noted) Deferred Commissions Deferred commission costs from contracts with customers were $ 4,128 and $ 3,792 at March 31, 2021 and December 31, 2020, respectively. The amount of amortization recognized for the three months ended March 31, 2021 and for the three months ended March 31, 2020 was $ 232 and $ 249 , respectively. Deferred Revenue During the three months ended March 31, 2021 and 2020, revenue of $ 3,406 and $ 2,704 was recognized from the deferred revenue balance at the beginning of each period. Transaction Price Allocated to the Remaining Performance Obligations As of March 31, 2021, approximately $ 24,563 of revenue is expected to be recognized from remaining performance obligations. We expect to recognize revenue on approximately 65 % of these remaining performance obligations over the next 12 months, with the balance recognized thereafter. Revenue Concentration During the three months ended March 31, 2021 and 2020, there were no customers that individually represented 10% or more of consolidated revenue. NOTE 7 – LEASES We have entered into office space lease agreements, which qualify as operating leases under ASU No. 2016-02, “Leases (Topic 842)”. Under such leases, the lessors receive annual minimum (base) rent. The leases have original terms (excluding extension options) ranging from one to ten years . Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We record base rent expense under the straight-line method over the term of the lease. In the accompanying condensed consolidated statements of comprehensive loss, rent expense is included in operating expenses under selling, general and administrative expenses. The components of the rent expense for the three months ended March 31, 2021 and 2020 were as follows: Three Months Ended March 31, 2021 2020 Operating lease cost $ 570 $ 552 Sublease income ( 11 ) ( 48 ) Net rent expense $ 559 $ 504 For purposes of calculating the operating lease assets and lease liabilities, extension options are not included in the lease term unless it is reasonably certain we will exercise the option, or the lessor has the sole ability to exercise the option. The weighted average discount rate of our operating leases is 8 % and 9 % as of March 31, 2021 and December 31, 2020, respectively. The weighted average remaining lease term is five and six years as of March 31, 2021 and December 31, 2020, respectively. Supplemental cash flow information related to operating leases for the three months ended March 31, 2021 and 2020 follow: 16 Table of Contents ASURE SOFTWARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Amounts in thousands, except share and per share data unless otherwise noted) Three Months Ended March 31, 2021 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash outflows from operating leases $ 609 $ 573 Non-cash operating activities: Operating lease assets obtained in exchange for new operating lease liabilities $ 325 $ — Future minimum commitments over the life of all operating leases, which exclude variable rent payments, are as follows: Year Ending December 31 Operating Leases 2021 (remainder) $ 1,854 2022 1,949 2023 1,256 2024 1,037 2025 828 Thereafter 1,803 Total minimum lease payments 8,727 Less imputed interest ( 1,666 ) Total lease liabilities $ 7,061 NOTE 8 – SHARE-BASED COMPENSATION We have one active equity plan, the 2018 Incentive Award Plan (the “2018 Plan”). The 2018 Plan, approved by our shareholders, replaced our 2009 Equity Incentive Plan, as amended (the “2009 Plan”), however, the terms and conditions of the 2009 Plan continue to govern any outstanding awards previously granted under the 2009 Plan. The number of shares available for issuance under the 2018 Plan is equal to the sum of (i) 2,350,000 shares, and (ii) any shares subject to issued and outstanding awards under the 2009 Plan as of the effective date of the 2018 Plan that expire, are canceled or otherwise terminate following the effective date of the 2018 Plan. We have outstanding options to purchase 1,465,985 shares at a weighted average exercise price of $ 7.89 . During the three months ending March 31, 2021 we issued 307,500 of employee stock options. The weighted average exercise price of these awards was $ 7.53 for the three months ended March 31, 2021. These awards will vest over a three-year period. We also had 388,273 outstanding restricted stock units as of March 31, 2021. As of March 31, 2021, we had 1,008,506 shares available for grant pursuant to the 2018 Plan. Share based compensation for our stock option plans for the three months ended March 31, 2021 and March 31, 2020 were $ 626 and $ 438 , respectively. We issued 19,709 and 19,317 shares of common stock related to exercises of stock options for the three months ended March 31, 2021 and 2020, respectively. We issued 34,920 and 9,944 shares of common stock related to the issuance of vested restricted stock units for the three months ended March 31, 2021 and 2020, respectively. NOTE 9 – NET LOSS PER SHARE We compute net loss per share based on the weighted average number of common shares outstanding for the period. Diluted net loss per share reflects the maximum dilution that would have resulted from incremental common shares issuable upon the exercise of stock options. We compute the number of common share equivalents, which includes stock options, using the treasury stock method. We have excluded stock options and restricted stock units of approximately 1,854,000 17 Table of Contents ASURE SOFTWARE, INC. NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Amounts in thousands, except share and per share data unless otherwise noted) and 1,264,000 shares for the three months ended March 31, 2021 and 2020, respectively, from the computation of the diluted shares because the effect of including the stock options and restricted stock units would have been anti-dilutive. The following table sets forth the computation of basic and diluted net loss per common share for the three months ended March 31, 2021 and March 31, 2020: Three Months Ended March 31, 2021 2020 Net loss $ ( 1,598 ) $ ( 1,767 ) Weighted-average shares of common stock outstanding, basic and diluted 19,007,000 15,727,000 Basic and diluted loss per share $ ( 0.08 ) $ ( 0.11 ) NOTE 10 – SUBSEQUENT EVENTS We evaluated subsequent events through the date of the filing of this Quarterly Report on Form 10-Q with the SEC, to ensure that this filing includes appropriate disclosure of events both recognized in the condensed consolidated financial statements as of March 31, 2021, and events which occurred subsequent to March 31, 2021 but were not recognized in the condensed consolidated financial statements. Based on this evaluation, we have determined there were no subsequent events to report. 18 Table of Contents